ESG Viewed as a Family Business Opportunity

The 2020 Penn Mutual family business survey identified the underperformance of family employees (and over-involvement of non-employee family members) as a “top 3” challenge. Employees begrudge working with non-productive, entitled family members; family members with no outside experience who abuse the privilege of ownership, and; family members with a weak work ethic. Yet, 88% of those surveyed still believe being part of a family business is the differentiator, and 82% agree it’s essential to remain family-owned. Clearly, despite some resentment, general agreement family businesses can thrive when a cohesive culture is defined, consistently supported, and widely communicated. ESG is the ideal framework for building a culture that resonates with all employees and improves business outcomes.

Environmental, social, and governance (ESG) topics have been around for a long time. ESG is not a fad, political statement, or more regulation. Family businesses should frame ESG matters as a business opportunity and deploy them smartly to gain a strategic advantage.  Let me give you an example from my time as a CEO. The Sarbanes-Oxley (SOX) Act brought strict reforms to public company financial reporting to improve disclosures and reduce fraud. Most CEOs and board directors saw it as over-regulation.

Alternatively, I saw it as an opportunity to drive greater efficiency. SOX compliance requires documented internal controls. I used this situation (never let a crisis go to waste)  as a business opportunity to map out current business processes and identify waste (i.e., time, redundancy, and elimination of paperwork), then document faster, more straightforward methods. We installed key performance indicators (KPIs) like days to close to measure progress and reward employees. The first SOX audit was a breeze, and more importantly, key business metrics like cash flow, DPO, DSO, and employee engagement improved. ESG lacks the SOX regulatory mandate but offers a more compelling opportunity to improve business performance.

ESG started from the environmental movement. Sustainability is ingrained in our social fabric and is increasing in importance. Family businesses need to recast sustainability as an opportunity to improve efficiency and employee engagement. The board directors should see an annual business sustainability report with KPIs. These reports should flow from automated data collection, so they don’t increase employee workloads.

The business should have time-series data on water and electricity consumption, solid waste collection, and air quality measurements just like it gathers data on scrap, safety measures, cost of quality, and on-time delivery. The business uses this environmental data to pursue reduction initiatives, which will improve business performance. The management team can consider adding higher-order metrics in time. Examples include % of materials used from recycled input materials, energy consumption by source, energy saved by conservation, ozone-depleting emissions by weight, and total direct and indirect greenhouse gas emissions by weight.

Family businesses should consider formal certification programs to demonstrate their commitment to environmental stewardship. Initial pushback is that such programs take employee time and are expensive. From my experience, I would agree. However, having implemented ISO certification a few times, the payback is substantially positive financially and employee engagement. Further, certification programs demonstrate proficiency to stakeholders, improving operating discipline, and commitment to continuous environmental improvement. Board directors should challenge management on environmental matters and seek policies, procedures, and analytical data to demonstrate progress. The board of directors also needs to realize that family businesses with robust environmental programming will be more attractive to job seekers and certainly stand out in their community. With customers, many of whom are requiring sustainability reports. The board of directors should embrace environmental initiatives and encourage management teams to invest in data collection systems to report progress and connect it to business performance.

Social matters are culturally challenging for business owners and board directors because many factors come into play. Political, generational, psychological, and cultural factors compound and interfere with understanding the business implications. Terms like “progressive” and “socially-conscious leadership” seem loaded and come off as politically motivated, especially for more conservatively run family businesses. Properly addressing and capitalizing on social issues requires confidence, courage, trust, and respect between management, stakeholders, and board directors. The social matters discussion is frequently outside management and board member comfort zones. For that reason, management and board directors need to level set by starting with essential topics.

First, revisit the business mission, vision, and values. Why does the company exist? What purpose does it serve? What will it look like in the future? What do we value? Why? Do they conflict with what is happening in the world? What image does the company project in the community and marketplace? Next, the family, board directors, and management team must coalesce around the mission, vision, and values. My experience has shown better success with groups presenting with self-awareness and EQ. It requires a lot of self-reflection and intellectual honesty to flush out these foundational attributes. I have also successfully used off-site facilitated sessions to gain agreement.

Social matters define company perceptions by its stakeholders, specifically employees, suppliers, community, and customers. Stakeholders know how to mobilize and quickly build coalitions that can move against the company. Stakeholders are conditioned to expect immediate gratification and will not wait. They expect a rapid response. Competitors can disrupt customer relations using well-developed social programming. The board director’s role is to front-run issues that may impact the business, and social matters can change quickly, requiring more upfront preparation.

Management teams and board directors need to question their assumptions about the business and seek to understand what is happening in the marketplace. The use of employee roundtable discussions, social media data mining, primary market research, and third-party supplier audits help portray realistic feedback. You want employees to be safe, so they fully engage and give their best efforts. You want to create an environment where people bring their “authentic” self to work. Consider auditing the work environment and measuring engagement levels. From experience, engagement surveys work best when administered regularly, and management follows up diligently to address documented issues. The board directors should see summary reports on these surveys and discuss implications and progress.

Build engagement and loyalty by investing in human capital. The human resources department is more than compensation and benefits as these processes should all be automated. Human resources must build a compelling value statement to attract talent, especially millennials, with senior management. Employees want to be part of something and will seek a purpose-driven company. A well-defined, frequently communicated mission, vision, and values are the starting point. Management also must walk the talk and live the values. More importantly, management must separate from employees who don’t live the values. As CEO, I had a staff member who consistently delivered on the numbers. The problem was that they did it without living the values. It is one of the toughest calls any manager has to make. The employee was released. Positive employee feedback was immediate. Conscious social programming creates an environment where management leads by example and employees feel they can do their best work.

Additional best-in-class social programming that drives productivity and retention includes wellness, onsite health clinics, exercise facilities, affinity groups, leadership development, and community activism. As CEO, we implemented these programs over a five-year period, collected data, measured results, and reported it to the board directors. The clinic and exercise facilities were partnerships with the community hospital and YMCA, respectively. Over three years, the wellness, health clinic, and exercise facility combined to dramatically reduce the company’s self-insurance health costs. The wellness success stories drove workplace engagement and productivity. The affinity group supported women. Today, it could be easily scaled to include other groups like minorities and LGBTQ. Over time, trust levels increased when senior management met directly with the affinity group and learned firsthand about opportunities to improve the working environment. Leadership development programming rolled out over three years and ultimately reached the middle-management ranks. Community activism focused on specific areas employees felt important. Donations went to non-profits with employee involvement. Volunteerism is a powerful social program that invests employees in the community, offers leadership development, and ultimately positively reflects the company. These types of social programming drive employee engagement, retention, and productivity. Management teams and board directors who support such programming and measure it see robust ROI. Board directors have a role to play here. They need to engage senior managers in defining social programs that meet the needs of stakeholders. Measured and sustained progress over time fulfills most expectations and is manageable.

Governance is the third leg of ESG. Well-defined, forward-looking governance programming enhances company value. Family businesses with independent directors who understand, support and live the family vision and values are invaluable when focusing on essential governance functions. Strategy is where board directors need to focus time, yet in my experience, it rarely occurs. Board directors must ask for time to conduct deeper dives into the strategy process. Management should lay out clearly defined strategies with objectives and measurable goals and add pressure-tested contingency plans. The business strategy should be a standing topic at every board meeting. Succession planning is another crucial focus area that applies to all employees, including family members. Here the emphasis is on understanding if management has put a robust process that focuses on skills, perspectives, results, values, readiness, self-awareness, not tactics, tenure, or entitlement.

High-functioning boards have well-developed standing committees supporting them. Historically, the compensation committee focused on executive plans. Nowadays, it is not atypical for the compensation committee to examine all pay levels, consider how it relates to the market, and consider equity and gender issues. Family businesses may be uncomfortable with this concept but may need to explain expenses such as company cars, club memberships, and corporate jets to stakeholders. In addition, the use of outside compensation consultants to benchmark and demonstrate competitiveness and fairness is a good use of resources. Compensation committees should also review employee policies, codes of conduct, and programs addressing workplace bias. Does the company apply these policies consistently and fairly?

Next, the audit committee performs vital work overseeing risk and financial integrity. A modern audit committee also should be asking management for a grievance hotline. Employees and other stakeholders need to know a process exists for confidentially reporting unsavory acts that undermine the business’s reputation and may put the company at risk. A grievance hotline is where employees or other stakeholders can privately voice concerns about the company while maintaining the company’s integrity and employees’ safety. Lastly, audit manages risk, so it should also consider reviewing supplier chain of custody matters. It seems like overkill, but in a digital world, news travels fast. You don’t want to hear on the six o’clock news that your supplier employs child laborers.

Finally, the nominating/governance committee is integral to highly functioning boards, yet private companies rarely establish one. A nominating/governance committee drives continuous improvement. It defines expectations, the role of board education, conducts annual board performance reviews, manages board director succession, and conducts gap analysis between the future needs of the business and existing director skills and demographics. Board assessment and planning is hard work and potentially confrontational if not handled diplomatically. No wonder, so few private companies create a nominating/governance committee. Private companies committed to results need to hold the board directors to the same standard as other stakeholders. Board directors serve at the pleasure of the shareholders and must know that staying current and adding value is table stakes.

Forward-thinking private companies are using ESG constructively to drive business performance and more broadly define ROI. In addition, they recognize that a well-thought-out ESG program can attract and retain talent, especially millennials, build stronger community connections, and create more intimate customer relationships. A comprehensive ESG program permeates the entire organization and takes years to implement and optimize, making it a strategic weapon. As a result, forward-thinking companies that recognize the edge don’t resist ESG programming or view it as regulatory, punitive, political, or shifting social attitudes.

Mark Richards is the retired Chairman and CEO of Appvion, Inc., headquartered in Appleton, WI.

Mark is now President of Meade Street Advisors, LLC, a board governance, executive coaching, and strategic planning consulting business headquartered in Fort Lauderdale, FL. Mark can be reached at mark@meadestreetadvisors.com

www.meadestreetadvisors.com

www.linkedin.com/in/markrrichards

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