Issue #14                                                                                              February 2020
What are the implications of the Sustainable Development Goals (SDG) for corporate governance? 
by Professor Pascual Berrone

Over the past decades, the world has experienced unprecedented economic growth. Despite evidence of prosperity, progress has been uneven. Climate change, gender inequality, poor labor conditions are just a few of the many social ills that need solutions. The good news is that we, humankind, have a plan: the sustainable development goals (SDGs). Adopted in September 2015, backed by all 193 United Nations Member States, and set to be achieved by 2030, the SDGs are 17 goals aimed at ending poverty, protecting the planet, and ensuring prosperity for all. It is a comprehensive plan for the future of our world. The SDGs are what we want to become in 2030.
Naturally, this poses the question about what the implications for business are and, consequently, how boards of directors should address them.  There are at least three clear implications. One is the cost of inaction and its associated risks. These may come in different shapes and sizes. For instance, companies may face regulatory risks, as many governments are passing legislation along the lines of the SDGs. Firms may also face social acceptance risks since non-profits and activists are targeting CEOs for their lack of consistency between words and actions when it comes to environmental and social issues, putting them between a rock and a hard place. This risk can also stem from inside the company. For example, in September 2019, thousands of Amazon employees walked out for a strike in protest the company’s inaction on climate change.
The second implication has a more positive connotation for businesses. In solving humanity’s greatest challenges, new market opportunities may emerge. In its report “Better Business Better World,”, the Business and Sustainable Development Commission estimated an annual value from delivering solutions to the SDGs in the area of $12 trillion. Of course, to materialize these opportunities in full, firms need a tremendous amount of creativity and an equal amount of initiatives.
Finally, pressures for a more sustainable world is shifting our perception of the role of organizations in society. Previously in this newsletter, my colleagues commented on the debate between the notion of shareholder primacy as opposed to a multi-stakeholder conception of the firm. This new conception requires a deep rethinking of the purpose of the organization and the responsibility they have with society beyond being profitable. Some companies seem to be taking action in this regard. A recent example is Microsoft’s pledge and multi-million dollar commitment to become “carbon negative” to offset all the carbon it has emitted to the environment since its founding in 1975. 
Why is this relevant for boards? Because risk management, the seizure of opportunities, and the social purpose of a firm fall within boardroom duties. But, are boards using the SDGs as a framework to deal with them? Some of them are. A notable example is the Danish company Novozymes. In 2015, the board approved the proposal made by its CEO Peder Nielsen to use the SDGs to craft its new strategy “Partnering for Impact.” Since then, Novozymes screens and prioritizes its innovations, products, partners, and business model, assessing their impact on different SDGs. This new strategy was coupled with changes in the company’s structure. Novozymes set up two new executive boards focused on the SDGs. In parallel, they also set up incentive systems tied to sustainability targets. The result was strong financial indicators, a strong patent portfolio, and good results in several sustainability-related indicators. Part of its success was a committed, supportive, and vigilant board (anecdotally, Novozymes’ board met 7 times in 2016 with 100% attendance). 
If we want to achieve the SDGs by 2030, we need a higher number of companies making bold commitments towards them. Here, a few questions that can help board members to think about how SDGs can be integrated into their firm strategies. Is your board aware of the Sustainable Development Goals (SDGs)? Does your firm discuss the SDGs and their implications at the board level? Has your company mapped your business activities into the SDGs? Have you considered whether or not the SDGs can be integrated into the purpose and strategy to attract a greater breadth of investors, talent, and other key stakeholders? Have you considered the opportunity costs associated with not embracing the SDGs? How can you leverage the SDG to provide a competitive advantage? Answers to these questions can help boards of directors to fully understand the implications, responsibilities, and opportunities that SDGs entail. 
Can we end hunger, achieve gender equality, halt climate change, and assure sustainable and inclusive economic models in the next 10 years? I sincerely hope so. 

Pascual Berrone
Professor of Strategic Management
IESE Center for Corporate Governance
IESE CCG-ECGI Corporate Governance Conference

The IESE Center for Corporate Governance (IESE CCG) and the European Corporate Governance Institute (ECGI) co-organized the “Corporate Governance and Ownership with Diverse Shareholders” conference, which took place at IESE's Barcelona Campus on October 25-26, 2019. The high-level event gathered the leading scholars in the field, CEOs and top executives, chairs of boards, investors, regulators, and multilateral organizations.

Check out the highlights of the conference in this video summary:

A detailed report of the conference is available here

A summary article of the event is also available here

Get access to all conference papers and discussions on the conference website (under the section “program”)

Corporate Governance News

New Davos Manifesto places stakeholder value at the core of economic activity
The World Economic Forum (WEF) summit celebrated on January 21-24, 2020, gave way to the signing of the new manifesto “Universal Purpose of a Company in the Fourth Industrial Revolution”… read more
What it takes to materialize stakeholder capitalism
According to the article’s authors, departure from shareholder primacy and recognition of environmental, social, governance and data stewardship (ESG&D) is not enough, and more specifically board of directors need to reconcile and integrate shareholder value with stewardship and ESG&D factors… read more
Sustainability at the center of BlackRock’s new investment approach
The largest investment fund manager on the planet announced a new investment strategy that places sustainability at its core. As a first step, BlackRock has joined Climate Action 100+ and has removed companies which obtain over 25% of revenues from thermal coal production from its active investment portfolio… read more
Microsoft to become “carbon negative” by 2030
Microsoft announced it will remove more carbon than it emits by 2030 and by 2050 the company will remove from the environment all the carbon it has emitted either directly or by electricity consumption since it was founded in 1975… read more
Investors pressure translates into large clean energy purchases by corporations
Corporations clean energy contracts now rival those of world’s biggest utilities. 2019 set a new record, as corporations accounted for over 10% of total clean energy consumption globally… read more
Emerging topics resulting from the changes in the business environment
The author of the article recommends boards reflect on a series of emerging issues such as human capital, talent development, corporate purpose, risk and compliance, and digital transformation… read more
UK regulator offers clear insight for better corporate governance reporting 
Last January 7, the British regulatory authority released its annual review of UK corporate governance code. The review shows poor reporting among early adopters (that is, more of a “ticking the box exercise” rather than a commitment to the spirit of the code)… read more

In Case You're Interested...

Ownership Type Implications for Corporate Governance

President of IESE CCG, Prof. Jordi Canals, Prof. Colin Mayer (Oxford), and Prof. John C. Coffee (Columbia) discuss implications of corporate ownership for corporate governance design… watch here

Some Takeaways on Climate Governance at Davos

With the occasion of the World Economic Forum Annual Meeting Davos 2020, IESE professor and WEF agenda contributor Mireia Giné presents some implications of the climate and sustainability agenda for corporate governance… watch here

A Fundamental Reshaping of Finance

In his annual letter to CEOs of public companies, BlackRock CEO Larry Fink argues how today we are witnessing a major structural change in finance, and that we are at the edge of a paramount capital reallocation, through which sustainability and, more importantly, climate change, are at the center of the new investment approach… read more

Annual Review of the UK Corporate Governance Code

This report has two purposes: to give an assessment of corporate governance in the UK by considering the quality of reporting against the 2016 UK Corporate Governance Code; and to comment on any ‘early adoption’ by FTSE 100 companies of the 2018 UK Corporate Governance Code. The report warns against the “tick box” approach to compliance that many companies have shown… read more

We Are Nowhere Near Stakeholder Capitalism

This Harvard Business Review article addresses the question of whether corporations have fundamentally changed their raison d’être from creating value for shareholders to benefiting society-at-large. The author’s answer? No… read more

Navigating the Rising Tide of Uncertainty: 23rd Annual Global CEO Survey

PwC released the results of its 23rd Annual Global CEO Survey, which captured views from nearly 1,600 CEOs in 83 territories. CEOs were surveyed on a variety of topics, including growth, technology regulation, upskilling and climate change… read more

IESE's Recent Research on Corporate Governance 

“Disclosure Regulation and Corporate Acquisitions”

Journal article (Forthcoming)

Journal: Journal of Accounting Research
Authors: Bonetti, Pietro; Duro, Miguel; Ormazabal, Gaizka
Read summary

“Political Connections and the Informativeness of Insider Trades”

Journal article (Forthcoming)

Journal: Journal of Finance
Authors: Jagolinzer, Alan D.; Larcker, David F.; Ormazabal, Gaizka; and Taylor, Daniel J.
Read summary

Upcoming Research Seminars

“Cost Shielding in Executive Bonus Plans”

Prof. Brandon Lee Gipper, Stanford Graduate School of Business
February 10, 2020 – 12:30-14:00 pm
Barcelona: Q-101 & Madrid: Room 131

Distinguished research seminar

Prof. Alex Edmans, London Business School
March 23, 2020 – 12:30 - 14:00 pm
Barcelona: Q-302 & Madrid: Room 131

Upcoming Programs

Executive Program: “Value Creation Through Effective Boards”

Date: May 18-21, 2020
Location: IESE, Barcelona Campus

Visit the program website
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