May 18, 2021 – Companies adopt more socially and ecologically sustainable practices when their boards include women and environmental experts and when younger members are elected to board leadership, according to a newly released report by Egon Zehnder and the University of Göttingen, Germany.
“Corporate sustainability must be anchored more firmly within boards,” said Carsten Wundrack, head of the German industrial practice at Egon Zehnder. He noted that statistical analysis shows the effectiveness of the board is measurably related to key aspects of diversity. “Companies’ business practices align more closely with environmental and social criteria when the board includes an above-average proportion of women and the average age is lower than usual,” he said. The proverbial “breath of fresh air” also has a positive effect: According to Dr Wundrack, the balance shifts toward sustainability when the board is diverse and includes proven sustainability expertise.
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What factors impact corporate sustainability?
The research team examined large volumes of data, spanning a total of 13 years, related to environmental, social and corporate governance issues. The study found that the gender, age and length of tenure of the board members, as well as relevant experience in sustainability, all have an impact on corporate sustainability, also commonly referred to as “ES performance.” This was the conclusion reached by Egon Zehnder and the scientists under the project leadership of professor Michael Wolff and Katharina Kemmerich of the University of Göttingen, based on data from 534 listed European companies encompassing around 4,100 data points.
Corporate sustainability on the board agenda.
The researchers underscore the statistically significant link between the makeup of the board and the development of corporate sustainability. This means that the trends are not coincidental, but that there is a verifiable relationship between the composition of the board and ES performance. The companies with the highest proportion of women on the board have an ES performance that is six percentage points higher than average within the random sample. The same applies to age and board tenure: Boards with the youngest members and the shortest board tenure perform better by more than seven percentage points each. It also emerges that the existence of a sustainability committee with the relevant expertise has a significant impact of more than 13 percentage points on the corporate sustainability of the companies analyzed. In the coming weeks, Egon Zehnder notes that the findings of the study will be discussed with boards and explored in greater depth.
Additional hypotheses have already been put forward for discussion and further analysis. For example, it is assumed that due to the corporate sustainability factor, companies with younger and more diverse boards will be better equipped to face the future and that the capital market will show a preference for such companies. Dr. Wundrack attributes this to the growing importance of sustainability to commercial success. “Pressure from both the general public and investors, as well as a clear desire on the part of companies to align themselves with environmental and social criteria, has risen steadily over the past few years,” he said.
Dr. Wundrack sees this as a major opportunity for boards to systematically engage with this issue and establish a strategic dialog with the executive management of their companies. “After all,” he said, “this often goes hand in hand with a fundamental realignment of business models, not to mention substantial investments.”
Related: The State of Gender Equity on Boards
In other European countries, efforts have been made to reflect this priority by boards setting up sustainability committees. And indeed, according to the study, this has a “positive impact on corporate sustainability – especially when such committees are invested with specific sustainability expertise,” said Ms. Kemmerich.
Good corporate governance fosters sustainability.
The study indicates that boards should focus more intensively on sustainability as a strategic issue, thereby giving the topic higher priority and enabling companies to meet the demands of environmental protection and social responsibility even more effectively. “This would enable the board to have a significant positive impact on the company’s long-term competitiveness,” said Dr. Wolff. “The study shows that the board can play a decisive role in driving the transformation process in dialog with executive management.”
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Part of a research partnership between Egon Zehnder and the chair of management and controlling at the University of Göttingen, the “Boards and Sustainability Study” analyzed data from 534 companies in Europe encompassing around 4,100 data points. Using systematically compiled empirical data that were then subject to many different econometric analyses, it was possible to draw conclusions about factors in the composition of the board that impact on the ES performance of companies. The underlying data was obtained from databases that are widely used in the scientific community (e.g. Thomson Reuters, Datastream, BoardEx) as well as from the companies’ annual reports.
Through more than 3,600 international board-consulting assignments in the past five years, Egon Zehnder’s board advisory practice has accumulated insight on a broad range of topics that boards will encounter. With 68 global offices in 40 countries, Egon Zehnder is able to identify, assess, and develop director candidates all over the world.
Dr. Wundrack leads Egon Zehnder’s industrial practice in Germany, Austria and Switzerland and is active in the CEO succession and the diversity practices. He has particularly deep experience advising clients from the chemical industry on executive search, leadership succession, organizational design as well as on transformational change programs. He also engages in projects for the broader industrial sector and ventures frequently out in neighboring fields, such as the consumer or life science. Dr. Wundrack has been designated as a fellow of the Institute of Coaching at Harvard for his deep development work with executives, executive teams and boards.
“I believe in the unparalleled potential of the industrial segment in Germany,” Dr. Wundrack said. “In co-creation with our clients, I am inspired to advice on their modernization towards ‘green economy,’ a higher level of diversity and agility.”
Contributed by Scott A. Scanlon, Editor-in-Chief; Dale M. Zupsansky, Managing Editor; and Stephen Sawicki, Managing Editor – Hunt Scanlon Media