Category Archives: Governance

Purpose of the Firm: The Shareholder-Stakeholder Debate

One of the most common descriptions of corporate governance has been the way in which corporations are directed, administered and controlled and the actual activities of the directors and senior executives have been referred to as steering, guiding and piloting the corporation through the challenges that arise as it pursues its goals and objectives. Jamali et al. explained that the “control” aspect of corporate governance encompassed the notions of compliance, accountability, and transparency, and how managers exert their functions through compliance with the existing laws and regulations and codes of conduct.[1]  At the board level, the focus is on leadership and strategy and directors are expected to deliberate, establish, monitor and adjust the corporation’s strategy, determine and communicate the rules by which the strategy is to be implemented, and select, monitor and evaluate the members of the senior executive team who will be responsible for the day-to-day activities associated with the strategy.  In addition, directors are expected to define roles and responsibilities, orient management toward a long-term vision of corporate performance, set proper resource allocation plans, contribute know-how, expertise, and external information, perform various watchdog functions, and lead the firm’s executives, managers and employees in the desired direction.[2]

Setting the strategy for the corporation obviously requires consensus on the purpose of the firm, the goals and objectives of the firm’s activities and the parties who are to be the primary beneficiaries of the firm’s performance.  Traditionally, directors were seen as the agents of the persons and parties that provided the capital necessary for the corporation to operate—the shareholders—and corporate governance was depicted as the framework for allocating power between the directors and the shareholders and holding the directors accountable for the stewardship of the capital provided by investors.  While economists and corporate governance scholars from other disciplines recognized that the governance framework involved a variety of tools and mechanisms such as contracts, organizational designs and legislation, the primary question was how to use these tools and mechanisms in the best way to motivate and guarantee that the managers of the corporation would deliver a competitive rate of return.[3]  All of this is consistent with what has been described as the “narrow view” of corporate governance, one that conceptualizes corporate governance as an enforced system of laws and of financial accounting, where socio/environmental considerations are accorded a low priority.[4]

While primacy of shareholder interests was the dominant theme of corporate governance, at least in the US, for decades, there is no doubt that one of the most dynamic and important debates in the corporate governance arena, as well as in other areas of society, is the purpose of the firm.  Williams described this debate as follows[5]:

“Is it “simply” to produce products and services that create economic rents to be distributed to rights’ holders according to pre-existing contractual, statutory and (possibly) normative obligations? (Given that close to 70% of new companies ultimately fail, that task cannot be taken as too simple.)  Or does the firm also have a social obligation to minimize harm to people and the natural environment in its pursuits of profits, or even a positive duty to promote social welfare beyond its creation of economic rents?  In corporate governance and law, this debate tracks the competition between a shareholder versus stakeholder view of directors’ and officers’ fiduciary obligations.”

For a long time, the most influential voice among academics with respect to the role and primary objective of corporations was Milton Friedman, the Nobel Prize winning economist who famously declared that the exclusive goal of corporate activities was to maximize value for the owners of the corporation (i.e., the shareholders).  As history shows, this view was seized upon by investors and CEOs who often used aggressive tactics to drive up share prices and create large, yet often dysfunctional, conglomerates.  Friedman and others who shared his view maintained that companies did make a positive social contribution by running a profitable business, employing people, paying taxes and distributing some part of their net profits to shareholders.[6]  Another argument often made for the shareholder primacy approach to corporate governance was that requiring management to invest time and effort in devising ways to create additional social benefits beyond the honest pursuit of profits within the boundaries of the law would dilute management’s focus, undermine economic performance, and thereby ultimately undermine social welfare.[7]  Other supporters of the shareholder-oriented perspective cautioned that corporate responsibility was too much responsibility to impose on directors and pursuing social policy goals was a task best left to the state and not to businesses, which should not get themselves involved with political matters.  Another stated concern about expanding the directors’ power beyond shareholder interests is that it would undermine director accountability by allowing them to act in their own self-interest while claiming to act in other constituents’ interests.[8]

Eventually, other members of the academic community, as well as regulators, politicians, activists and even some of the investors that had grown wealthy during the stock market turbulence over the three decades starting with the 1980s, began to question the primacy of shareholder value and called for rethinking the role of the corporation in society and its duties to their owners and other parties impacted by their operational activities and strategic decisions.  Among other things, this meant challenging the long-accepted assumption that the principal participants in the corporate governance framework were the shareholders, management and board of directors.  For example, Sir Adrian Cadbury, Chair of the UK Commission on Corporate Governance, famously offered the following description of corporate governance and the governance framework in the Commission’s 1992 Report on the Financial Aspects of Corporate Governance: “Corporate governance is concerned with holding the balance between economic and social goals and between individual and communal goals. The governance framework is there to encourage the efficient use of resources and equally to require accountability for the stewardship of those resources. The aim is to align as nearly as possible the interests of individuals, corporations and society.”

Cadbury’s formulation of corporate governance brought an array of other participants, referred to as “stakeholders”, into the conversation: employees, suppliers, partners, customers, creditors, auditors, government agencies, the press and the general community.  As described by Goergen and Renneboog: “[a] corporate governance system is the combination of mechanisms which ensure that the management (the agent) runs the firm for the benefit of one or several stakeholders (principals). Such stakeholders may cover shareholders, creditors, suppliers, clients, employees and other parties with whom the firm conducts its business.”[9]  The principles of corporate governance of the Organisation for Economic Cooperation and Development clearly state that the corporate governance framework should recognize the rights of stakeholders (i.e., employees, customers, partners and the local community) as established by law and encourage active co-operation between corporations and stakeholders in creating wealth, jobs, and the sustainability of financially sound enterprises.

Colin Mayer of the University of Oxford has written and lectured about the need to reject shareholder value primacy and reconceive corporations as being committed to all of its stakeholders including the general economy and the community.[10]  Hart and Zingales have argued that the appropriate objective of the corporation is shareholder welfare rather than shareholder wealth.  While retaining Friedman’s shareholder-centered model, Hart and Zingales elected to focus on the ability of corporations to accomplish objectives that shareholders could not reasonably pursue on their own and called on corporations to consider activities other than wealth creation that enhance the welfare of shareholders as a whole.[11]  This opened the door to considering issues and initiatives relating to sustainability, employee welfare, social concerns and environmental stewardship and, as Hart and Zingales advocated in their proposed “constituency theory” of governance, expanding the beneficiaries of the directors’ fiduciary duties beyond shareholders to other constituencies, or stakeholders, such as employees, customers, members of the local communities in which the corporation operates and society as a whole.[12]

Approval of the constituency theory can often be seen in the statements of institutional shareholder groups such as the Investor Stewardship Group (, which has included the following in Endorsement Statement for its Corporate Governance Principles for U.S. Listed Companies: “[I]t is the fiduciary responsibility of all asset managers to conduct themselves in accordance with the preconditions for responsible engagement in a manner that accrues to the best interests of stakeholders and society in general, and that in so doing they’ll help to build a framework for promoting long-term value creation on behalf of U.S. companies and the broader U.S. economy.”[13]  Calvert Asset Management also pointed out that while the fiduciary duties of directors set out by statute do explicitly run to shareholders, the statutes also include similar duties to the corporation itself and thus allows, if not requires, directors to take into account more than just shareholder value when making decisions and be attentive to promoting the welfare of the corporation and the interests of all of its stakeholders.[14]

The focus on interested parties beyond shareholders is the hallmark of a broader view of corporate governance that emphasizes the responsibilities of business organizations to all of the different stakeholders that provide it with the necessary resources for its survival, competitiveness, and success.[15] In this conception, managers remain primarily accountable to the stockholders who have placed their wealth in the hands of those managers; however, managers, particularly the members of the board of directors, are also responsible to groups of stakeholders that have made equally significant contributions to the corporation and these stakeholder responsibilities impose additional constraints on managerial action and the primacy of shareholder rights.[16]  Rahim, noting that the roles and responsibilities of directors have been described as the “board as manager”, pointed out that the duties of board members have been vastly extended as corporate social responsibility has moved from the margins to the center of corporate governance attention, a trend which is discussed in more detail below.[17]

Commentators such as Bower and Paine have written about the fallacies underlying the economic theories used to support the maximization of shareholder value rule and argued that short-termism and hedge fund activism have not actually created value but rather has simply shifted value among a small group of wealthy parties, encouraged corporations to park idle funds offshore and reduce long-term investments in innovation that would benefit future generations, and triggered crises that have drained public funds and harmed workers, consumers and communities.[18]  Bower and Paine advocated an alternative model for corporations based on the health of the enterprise rather than short-term returns to shareholders and encouraged directors and managers to pay more attention to innovation, strategic renewal and investment in projects that ensure future sustainability.

The stakeholder approach to corporate governance arose out of a growing sense that more consideration had to be given to “the whole set of legal, cultural, and institutional arrangements that determine what public corporations can do, who controls them, how that control is exercised, and how the risks and return from the activities they undertake are allocated.”[19]  The impact and importance of corporate governance was emphasized by Gourvevitch and Shinn in the following quotes from their book on the “new global politics of corporate governance”[20]:

“Corporate governance–the authority structure of a firm–lies at the heart of the most important issues of society”… such as “who has claim to the cash flow of the firm, who has a say in its strategy and its allocation of resources.” The corporate governance framework shapes corporate efficiency, employment stability, retirement security, and the endowments of orphanages, hospitals, and universities. “It creates the temptations for cheating and the rewards for honesty, inside the firm and more generally in the body politic.” It “influences social mobility, stability and fluidity… It is no wonder then, that corporate governance provokes conflict. Anything so important will be fought over… like other decisions about authority, corporate governance structures are fundamentally the result of political decisions.  Shareholder value is partly about efficiency. But there are serious issues of distribution at stake – job security, income inequality, social welfare.”

Jamali et al. noted that corporate governance “is also intimately concerned with honesty and transparency, which are increasingly expected of the public both in corporate dealings and disclosure”.[21]  They pointed out that investor confidence and market efficiency has always depended on the disclosure of accurate information about corporate performance and regulators and corporate activists have insisted that companies prepare and disseminate reports that are clear, consistent and comparable.  The growing interest in CSR and the broader view of corporate governance has slowly transformed the concept of disclosure and transparency to include non-shareholder stakeholders of the corporation.  For example, Jamali et al. pointed out that transparency and disclosure of information between managers and employees is essential to earning employee trust and commitment.  As for external stakeholders, such as the members of the communities in which the company operates and society as a whole, transparency has become a fundamental principle underlying the notion that firms need to be “good citizens”.[22]  An additional byproduct of the aspiration for transparency is the creation of reporting systems that provide directors with the information necessary for them to discharge their leadership and strategic duties and ensure that the corporate governance framework works efficiently.

Williams clearly described the rationale for the stakeholder perspective to corporate governance as follows[23]:

“From a stakeholder perspective, successful companies incorporate and rely upon multiple social and natural inputs, such as an educated work-force, the physical infrastructure for the production, transportation and distribution of goods, an effective legal system, and natural capital inputs of water, air, commodities, and so forth. Since some significant portion of the inputs of corporate success, including financial inputs, have been contributed by parties other than shareholders, those parties also have interests to be considered in determining the responsibilities of managers and directors and in distributing the outputs of corporate action.  Some, perhaps many, of those interests will be protected by contractual or regulatory arrangements, but others cannot be specified ex ante, and so must depend on corporate participants to fairly balance multiple parties’ legitimate claims ex post”.

The Australian Parliamentary Joint Committee on Corporations and Financial Services, in its 2006 report on “corporate responsibility”, announced that it endorsed the “enlightened self-interest interpretation” of directors’ duties, which acknowledges that investments in corporate responsibility and corporate philanthropy can contribute to the long term viability of a company even where they do not generate immediate profit.  The Committee felt that it was necessary and appropriate for directors to consider and act upon the legitimate interests of stakeholders to the extent that these interests are relevant to the corporation and noted that addressing some of the driving factors of corporate responsibility (e.g., community license to operate, reputational factors, avoidance of regulation, attraction and retention of staff and attraction of investment from ethical funds) by undertaking activities that contribute to social wellbeing and environmental protection are clearly in the best interests of the company from a commercial perspective (and thus well within the bounds of directors’ duties).[24]

This article is part of the Sustainable Entrepreneurship Project’s extensive materials on Sustainability and Corporate Governance.

[1] D. Jamali, A. Safieddine and M. Rabbath, “Corporate Governance and Corporate Social Responsibility Synergies and Interrelationship”, Corporate Governance, 16(5) (2008), 443, 444 (citing K. MacMillan, K. Money, S. Downing and C. Hillenbrad, “Giving your organization SPIRIT: An overview and call to action for directors on issues of corporate governance, corporate reputation and corporate responsibility”, Journal of General Management, 30 (2004), 15; and A. Cadbury, “The corporate governance agenda”, Journal of Corporate Governance, Practice-Based Papers, 8 (2000), 7).

[2] K. MacMillan, K. Money, S. Downing and C. Hillenbrad, “Giving your organization SPIRIT: An overview and call to action for directors on issues of corporate governance, corporate reputation and corporate responsibility”, Journal of General Management, 30 (2004), 15; A. Cadbury, “The corporate governance agenda”, Journal of Corporate Governance, Practice-Based Papers, 8 (2000), 7) and J. Page, Corporate Governance and Value Creation (University of Sherbrooke, Research Foundation of CFA Institute, 2005).

[3] H. Mathiesen, Managerial Ownership and Finance Performance (Dissertation presented at Copenhagen Business School, 2002).

[4] K. Saravanamuthu, “What is measured counts: Harmonized corporate reporting and sustainable economic development”, Critical Perspectives on Accounting, 15 (2004), 295.

[5] C. Williams, “Corporate Social Responsibility and Corporate Governance” in J. Gordon and G. Ringe (Eds.), Oxford Handbook of Corporate Law and Governance (Oxford: Oxford University Press, 2016), 34, available at

[6] Id. at 35.

[7] Id. at 35 (citing H. Hansmann and R. Kraakman, “The End of History for Corporate Law”, Georgetown Law Journal, 89 (2001), 439, 442-443).

[8] Id. at 36-37 (citing D. Engel, “An Approach to Corporate Social Responsibility”, Stanford Law Review, 32 (1979), 1; D. Fischel, “The Corporate Governance Movement”, Vanderbilt Law Review, 35 (1982), 1259; and S. Bainbridge, “Corporate Social Responsibility in the Night-Watchman State”, Colorado Law Review Sidebar, 115 (2015), 39, 49).

[9] M. Goergen and L. Renneboog, “Contractual Corporate Governance”, Journal of Corporate Finance, 14(3) (June 2008), 166.

[10] See C. Mayer, Firm Commitment: Why the Corporation is Failing Us and How to Restore Trust in It (Oxford: Oxford University Press, 2013); and C. Mayer, Prosperity: Better Business Makes the Greater Good (Oxford: Oxford University Press, 2018).

[11] O. Hart and L. Zingales, “Should a Company Pursue Shareholder Value?” (October 2016), available at–Share_value.pdf

[12] Id.

[13]  The Principles Affirm that boards are accountable to shareholders; however, they also require that boards be responsive to shareholders and be proactive in order to understand their perspectives and that boards develop management incentive structures that are aligned with the long-term strategy of the company.

[14] Board Oversight of Environmental and Social Issues: An Analysis of Current North American Practice (Calvert Asset Capital Management Inc. and The Corporate Library, 2010), 8.

[15] K. MacMillan, K. Money, S. Downing and C. Hillenbrad, “Giving your organization SPIRIT: An overview and call to action for directors on issues of corporate governance, corporate reputation and corporate responsibility”, Journal of General Management, 30 (2004), 15

[16] J. Page, Corporate Governance and Value Creation (University of Sherbrooke, Research Foundation of CFA Institute, 2005); and N. Kendall, “Good corporate governance”, Accountants’ Digest, 40 (1999).

[17] M. Rahim, Legal Regulation of Corporate Social Responsibility: A Meta-Regulation Approach of Law for Raising CSR in a Weak Economy (Berlin: Springer, 2013), 13, 22 (citing M. Eisenberg, “The Modernization of Corporate Law: An Essay for Bill Cary”, University of Miami Law Review, 37 (1982), 187, 209-210).

[18] J. Bower and L. Paine, “The Error at the Heart of Corporate Leadership”, Harvard Business Review, 95(3) (May-June 2017), 50.

[19] M. Blair, Ownership and Control: Rethinking Corporate Governance for the Twenty-First Century (Washington DC: The Brookings Institute, 1995).

[20] P. Gourvevitch and J. Shinn, Political Power and Corporate Control: The New Global Politics of Corporate Governance (Princeton NJ: Princeton University Press, 2007) (as compiled by J. McRichie at

[21] D. Jamali, A. Safieddine and M. Rabbath, “Corporate Governance and Corporate Social Responsibility Synergies and Interrelationship”, Corporate Governance, 16(5) (2008), 443, 444 (citing J. Page, Corporate Governance and Value Creation (University of Sherbrooke, Research Foundation of CFA Institute, 2005)).

[22] Id. at 444.

[23] C. Williams, “Corporate Social Responsibility and Corporate Governance” in J. Gordon and G. Ringe (Eds.), Oxford Handbook of Corporate Law and Governance (Oxford: Oxford University Press, 2016), 38-39, available at (citing M. Blair and L. Stout, “A Team Production Theory of Corporate Law”, Virginia Law Review, 85 (2003), 248).

[24] Parliamentary Joint Committee on Corporations and Financial Services, Corporate responsibility: Managing risk and creating value (2006), 52-53.  The Committee also found that the then-current version of the Australian Corporations Act, first adopted in 2001, actually permitted directors to have regard for the interests of stakeholders other than shareholders and recommended that no further amendment to clarify directors’ duties in that regard was required. Id. at 63.

Changing Expectations for Board Oversight of Sustainability

A discussion paper on board adoption and oversight of corporate sustainability prepared by The Global Compact LEAD included the following observation[1]:

“Sustainability is increasingly recognized as a strategic imperative for businesses globally. Far more than when the Global Compact was launched in 1999, companies recognize that their sustainability performance affects their strategy, financial performance, resilience, access to essential resources, reputation, and license to operate. Peter Senge, noted strategy theorist and faculty member at the Sloan School of Business at MIT wrote in 2009 that “people are starting to suspect that these are really strategic issues that will shape the future of our businesses.” And as sustainability is being recognized more and more as a strategic business question, Boards are increasingly considering sustainability as part of their core responsibility of guiding and overseeing corporate activities.”

The paper also noted that: “more and more investors are looking for corporate boards to steward corporate sustainability in order to both adequately manage risks and maximize business opportunities related to sustainability. Indeed, engagement activities are on the rise in many quarters, and like‐minded investors are increasingly pooling resources to create a stronger and more representative shareholder voice and to ensure that company engagement becomes more effective.[2]

Calvert Asset Management, in its 2010 survey of board oversight of environmental and social issues in North America, explained the rationale for the board’s role as follows:

“The question of whether boards of directors should have responsibility for corporate sustainability matters is sometimes debated.  Some critics of the idea argue that social and environmental issues are by their nature managerial and operational issues which makes them inefficient for the board to address. However, many investors have come to believe that these issues have implication for capital investments, corporate strategy, brand and reputation. From this perspective, boards of directors are the appropriate bodies to provide long-term perspective and guidance on these matters, and the absence of board responsibility can raise questions about whether a company is managing these factors appropriately. Conversely, board-level oversight of corporate responsibility can set a meaningful “tone at the top” and provide investors and other stakeholders with a deeper understanding of how the company assesses its challenges and prioritizes issues relevant to its success.”[3]

A March 2014 study of board oversight of sustainability issues among S&P 500 companies commissioned by the IRRC Institute and authored by the Sustainable Investments Institute found that just a little over half of the companies had implemented board oversight of sustainability issues.[4]  The sustainability executives surveyed in a report released by The Conference Board in June 2016 found that 55% of the respondents said that their boards of their companies met only once a year or never on sustainability issues and 69% of the respondents said that their boards spend four hours or less per year on sustainability issues.[5] Identifying, acknowledging and addressing corporate sustainability issues create new and significant challenges for directors and the management team that range from setting high-level goals and adopting strategies to achieve those goals to extensive changes in day-to-day operational activities.  Directors must not only ensure that their companies are conducting full assessments of the entire lifecycle of their products and services but must also provide the resources and incentives to collect, analyze and report information relating to the progress of the company’s corporate sustainability initiatives.  Institutional investors and other stakeholders will not be satisfied with vague promises and aspirational principles from their companies, nor will companies be able to simply continue to adopt a reactive approach to ESG-related concerns (i.e., waiting until a shareholder proposal on an ESG-topic is imminent before engaging with the shareholder to resolve the concern).  In fact, directors should expect that stakeholders demand that companies demonstrate a proactive approach to developing and implementing sustainability strategies, allocating capital to sustainability-related initiatives and managing the risks associated with failure to respond to ESG issues.

Harper Ho suggested that investor activism around ESG issues and investors’ growing demand growing demand for investment-grade ESG information has important implication for how directors should approach corporate governance, investor engagement, compliance and disclosure practices.[6]  First of all, the broadened scope of risks that directors must consider in light of ESG activism means that boards must have new capacities to support oversight of ESG risk.  Second, investors want their companies to integrate ESG performance metrics and long-term benchmarks into executive compensation.  Third, directors should ensure that investor engagement encourages dialogue and learning and confirm that senior management and investor relations personnel are aware of the increasing overlap between corporate governance and environmental and social concerns.  Finally, directors need to improve the quality and formatting of their sustainability-related reporting and ensure that ESG materiality is being considered as part of their company’s financial reporting process.  According to Harper Ho, companies that can improve their practices in these areas are likely to see improved financial and operational performance, improved focus on long-term risk and return, better access to “patient capital” (i.e., investors that are less fixated on quarterly earnings and more supportive of R&D and other investments in the company’s future) and be able to identify and exploit new sources of value for the company and keep ahead of emerging risks and opportunities.[7]

CSR and corporate sustainability are broad and challenging topics and the directors must carefully consider how the board’s duties and responsibilities will be discharged and allocated among board members.  One well-known corporate governance advisor has counseled that directors should begin the process of developing an oversight framework for CSR and corporate sustainability by asking and answering the following questions[8]:

  • How should concerns regarding CSR and corporate sustainability be integrated into the board’s discussions on strategy and risk oversight? Strategy and risk oversight are two topics that all board members should be working on and actively discussing during each board meeting and investors are looking to see whether CSR and corporate sustainability have been formalized as priorities in the board’s governance guidelines and overall goals.
  • To what extent should CSR and corporate sustainability topics be included as standalone agenda items for board meetings?
  • What information should be provided to directors (e.g., data on how the company’s efforts compare to those of its peer companies, leading industry standards, and the CSR-related priorities of key shareholders and proxy advisory firms)?
  • Which metrics should the board and members of the executive team focus on in considering progress against CSR and corporate sustainability goals (e.g., goals involving reduction of water usage and emissions, reducing on-the-job injuries and employee turnover, or improving workforce diversity and employee retention)?
  • What process should be used for drafting and reviewing public disclosures about the company’s CSR and corporate sustainability efforts?

In addition, the board should also consider how the company’s current efforts and activities with respect to CSR and corporate sustainability compare to its peers, how investors and other stakeholders perceive the company’s engagement with and disclosure of CSR and corporate sustainability and whether or not the company has been effectively communicating its CSR and corporate sustainability strategies, goals and actions to investors and other stakeholders.[9]

Recognition of the importance of stakeholders in corporate governance calls on directors and managers of corporations to develop new skills in order to integrate the values and expectations of external and internal stakeholders into the overall strategic management process.  Digman et al. pointed that strategic management is “inseparable from the strategic management of relationships” and Masuku advised: “A strategy should be in place for each stakeholder group their key issues and willingness to expend resources helping or hurting the organization on those issues must be understood.  For each major stakeholder, managers responsible for that stakeholder relationship must identify the strategic issues that affect the stakeholder and must understand how to formulate, implement and monitor strategies for dealing with that group.”[10]

In addition to the steps needed to integrate CSR and corporate sustainability at the board level, including allocating various responsibilities and activities among board committees, the directors need to ensure that the company has an effective internal organizational structure.  Many companies are creating an additional position among the members of the senior executive team that is specifically focused on corporate sustainability.  Appointing these “chief sustainability officers” demonstrates a high level of commitment to the area by the directors and also helps everyone inside and outside the company to identify the person who will likely be the company’s spokesperson on corporate sustainability issues and responsible for managing the resources provided by the board to implement sustainability strategies and satisfy the company’s disclosure obligations.  The chief sustainability officer must be prepared to support the board as it considers CSR and corporate sustainability issues, engage with the company’s stakeholders and, not unimportantly, effectively coordinate the efforts of all of the various departments within the company that should be involved in sustainability initiatives (e.g., investor relations, legal, operating heads and risk management).[11]

Advice for Directors on Meeting Stakeholder Expectations Regarding Sustainability

Kuprionis and Styles suggested that directors ask “How prepared is my company to respond to increased sustainability expectations from investors, customers and employees? and then be prepared to do each of the following seven things:

·         Add sustainability discussions to the board agenda.

·         Focus on what sustainability means for the company.

·         Ask for briefs on industry developments, both in substance and in governance.

·         Engage with the company’s chief sustainability officer and investor relations officer.

·         Establish an effective board oversight approach.

·         Look for balanced perspectives among differing constituencies and stakeholders.

·         Consider the appropriate sustainability disclosures for the company.

Source: D. Kuprionis and P. Styles, “Translating Sustainability into a Language Your Board Understands”, The Corporate Governance Advisor, 25(5) (September/October 2017), 13, 17. 

This article is part of the Sustainable Entrepreneurship Project’s extensive materials on Sustainability and Corporate Governance.

[1] The Global Compact LEAD, Discussion Paper: Board Adoption and Oversight of Corporate Sustainability.

[2] Id.  For further discussion of board oversight of sustainability, see “Board Oversight of Sustainability” in “Governance: A Library of Resources for Sustainable Entrepreneurs” prepared and distributed by the Sustainable Entrepreneurship Project (

[3] Board Oversight of Environmental and Social Issues: An Analysis of Current North American Practice (Calvert Asset Capital Management Inc. and The Corporate Library, 2010), 8.

[4] P. DeSimone, Board Oversight of Sustainability Issues: A Study of the S&P 500 (IRRC Institute, March 2014).

[5] The Seven Pillars of Sustainability Leadership: CEO Business Implications (The Conference Board, June 2016), 4 (as cited and discussed in V. Harper Ho, Director Notes: Sustainability in the Mainstream–Why Investors Care and What It Means for Corporate Boards (The Conference Board, November 2017), 15, electronic copy available at:

[6] V. Harper Ho, Director Notes: Sustainability in the Mainstream–Why Investors Care and What It Means for Corporate Boards (The Conference Board, November 2017), 13-14, electronic copy available at: (based on information available at UNPRI, Signatories,

[7] Id. at 15.

[8] H. Gregory, “Corporate Social Responsibility, Corporate Sustainability and the Role of the Board”, Practical Law Company (July 1, 2017), 3.

[9] D. Kuprionis and P. Styles, “Translating Sustainability into a Language Your Board Understands”, The Corporate Governance Advisor, 25(5) (September/October 2017), 13, 15.

[10] C. Masuku, Corporate Social Responsibility Literature Review and Theoretical Framework, available at (citing L. Digman, Strategic management: concepts, decisions, cases (Homewood IL: BPI/Irwin, 1990).

[11] D. Kuprionis and P. Styles, “Translating Sustainability into a Language Your Board Understands”, The Corporate Governance Advisor, 25(5) (September/October 2017), 13, 16.

Relationship between Corporate Governance and CSR

According to Rahim, there is an evolving interplay between corporate governance and CSR, both of which hold economic and legal features that may be altered through socio-economic processes in which competition within the product market is the most powerful force.[1]  Rahim stressed that corporate governance and CSR are complimentary and closely linked with market forces and that while their objectives are not concurrent they may act as tools for attaining each other’s goals.  Winberg and Randolph also agreed that “CSR is related to and overlaps in some respects with the concepts of corporate governance and ethics”, however, they believed that: “it is nevertheless distinct….governance programs tend to be internally focused and generally retain heavy rules based favor. In contrast CSR tends to be more value-based and externally focused.”[2] The Australian Parliamentary Joint Committee on Corporations and Financial Services noted that the terms “corporate responsibility” and “corporate governance” were sometimes confused with each other and explained its position that corporate governance referred to broader issues of company management practices (i.e., the conduct of the board of directors;, the relationships between the board, management and shareholders; transparency of major corporate decisions; and accountability to shareholders) and that corporate responsibility is only one aspect of an organization’s governance and risk management processes.[3]

A somewhat contrary view of the relationship between CSR and corporate governance was taken by Walsh and Lowry, who wrote that “corporate governance is an increasingly important aspect of CSR…. to provide the more solid foundation on which broader CSR principles and business ethics can be further enhanced”.[4]  Their approach was based on the assumption that “corporate governance” was to be construed narrowly, thus limited to enhancement of shareholder value and the protection of the interests of shareholders, and that the obligations of corporations with respect to the environment, employees and consumers could be assigned to the separate domain of CSR even though some of those obligations were becoming based in law regulation.  All of this illustrates the importance of how corporate governance is conceptualized, narrowly or broadly, on the degree of overlap and convergence between CSR and corporate governance.

A number of commentators have suggested that there are actually two models of corporate governance.[5]  The first model, which is based in the economic tradition of Friedman, is the “shareholder governance” system in which the directors and managers of the corporation are the agents for the shareholders as the principals of the corporation and the responsibility of the agents is to maximize shareholder value.  The second model is the “stakeholder governance” system, which does not ignore shareholders but also extends the responsibility of directors and managers to different groups of stakeholders upon which the corporation is dependent for its operations and survival.  The second model has been used as the basis for the argument that CSR is, in fact, an extended corporate governance system whereby the responsibilities of corporations and their directors range from fiduciary duties towards the owners to the analogous fiduciary duties towards all of the firm’s stakeholders.[6]  Certain of these duties, primarily those that have been imposed by law, are enforced by litigation and activities of governmental regulators, while the “softer” duties associated with social and environmental issues are being enforced by self-regulatory codes of conduct and stakeholder activism (including pressure from institutional shareholders).

Jamali et al. examined several models that have posited a relationship between corporate governance and CSR.[7]  The first model depicted corporate governance as a pillar of CSR and requires that an effective corporate governance system be in place to serve as a foundation for solid and integrated CSR activities.   This model could be illustrated by Hancock’s “Key Pillars of Corporate Responsibility”, which was based on the argument that investors and senior management should focus their attention on four core pillars that account for most of the company’s true value and future value creation[8]:

  • Strategic Governance: Strategic scanning capability; agility/adaptation; performance indicators/monitoring; traditional governance concerns; and international “best practice”
  • Stakeholder Capital: Regulators and policy makers; local communities/NGOs; customer relationships; and alliance partners
  • Human Capital: Labor relations; recruitment/retention strategies; employee motivation; innovation capacity; and knowledge development
  • Environment: Brand equity; cost/risk reduction; market share growth; process efficiencies; customer loyalty; and innovation effect

In this model, corporate governance is one of the basic building blocks of CSR and suggests that when boards are exercising their responsibility over CSR they need strategic good corporate governance practices in place in order to effectively leverage the company’s crucial sources of capital: human, stakeholder and environmental.[9]

The second model visualized CSR as being an attribute or dimension of corporate governance, thus widening the scope of corporate governance to incorporate non-financial risks into the risk mitigation dimension of corporate governance activities.  This approach could be illustrated by Ho’s depiction of the following attributes of good corporate governance and the activities and topics associated with each attribute[10]:

  • Strategic Leadership: Set corporate objectives, direct competitive focus, make major decisions, measure performance and determine executive pay
  • Stewardship: Legislative safeguards, governance policy and governance committee, director participation, regular reviews and “ask tough questions and demand answers”
  • Social Responsibilities: Adopt policies, enforce and audit and report on conformance
  • Board Structure: Separate supervisory and executive roles, nonexecutive directors, election procedure and committees (i.e., nomination, audit and compensation committees)
  • Capital Structure and Market Relations: Capital concentration, satisfy shareholders and research and development, continuous dialogue with investors and markets

Ho explained that her framework viewed corporate governance more holistically and Jamali et al. observed that this was consistent with the work of other scholars, such as Kendall[11], who considered good corporate governance as “ensuring that companies are run in a socially responsible way and that there should be a clearly ethical basis to the business complying with the accepted norms of the society in which it is operating”.[12]   It is interesting to note that Ho’s study provided evidence that higher commitments to CSR were strongly and positively related to the qualifications and terms of directors, boards that exercise strong stewardship and strategic leadership roles and the management of capital market pressures, all of which are also hallmarks of good corporate governance.[13]

The third model, suggested by Bhimani and Soonawalla, portrayed corporate governance and CSR as complementary constituents of the same corporate accountability continuum that could be illustrated as follows[14]:

Corporate                                                                                                      Corporate


Corporate              Corporate              Corporate              Stakeholder

Financial               Governance          Social                     Value

Reporting                                              Responsibility       Creation

Jamali et al. explained that “the continuum reflected varying degrees of compliance with laws and legally enforceable standards, with stress placed on corporate conformance on the left end of the continuum and attention shifting to corporate performance on the right end, where codes/standards are extremely difficult to apply, and oversight mechanisms are much less evident”.[15]  The continuum approach also illustrates that companies approach their expanding corporate governance responsibilities must understand and balance “binding” legal requirements that require formal compliance and reporting and the self-regulatory initiatives commonly associated with CSR that, while still technically “voluntary”, have increasingly become expectations of investors and other stakeholders.

This article is part of the Sustainable Entrepreneurship Project’s extensive materials on Sustainability and Corporate Governance.

[1] M. Rahim, Legal Regulation of Corporate Social Responsibility: A Meta-Regulation Approach of Law for Raising CSR in a Weak Economy (Berlin: Springer, 2013), 13, 21 (citing L. Mitchell, “The Board as a Path toward Corporate Social Responsibility” in D. McBarnet, A. Voiculescu and T. Campbell, The New Corporate Accountability: Corporate Social Responsibility and the Law (2007), 279).  See also M. Rahim, “Corporate Governance as Social Responsibility: A Meta-regulation Approach to Incorporate CSR in Corporate Governance” in S. Boubaker and D. Nguyen (Eds.), Board of Directors and Corporate Social Responsibility (London: Palgrave Macmillan, 2012).

[2] D. Winberge and P. Randolph, “Corporate Social Responsibility: What every In-House Council Should Know”, ACC Docket (May 2004), 72.

[3] Parliamentary Joint Committee on Corporations and Financial Services, Corporate responsibility: Managing risk and creating value (2006), 6-7.

[4] M. Walsh and J. Lowry, “CSR and Corporate Governance” in R. Mullerat (Ed.), Corporate Social Responsibility: The Corporate Governance of the 21st Century (Amsterdam: Kluwer, 2005), 38-39.

[5] See, e.g., C. Mayer, “Corporate Governance, Competition, and Performance”, Journal of Law and Society, 24 (March 1997), 152, 154.

[6] L. Sacconi, Corporate Social Responsibility (CSR) as a Model of “Extended” Corporate Governance. An Explanation based on the Economic Theories of Social Contract, Reputation and Reciprocal Conformism (UE Research Project, 2004).

[7] D. Jamali, A. Safieddine and M. Rabbath, “Corporate Governance and Corporate Social Responsibility Synergies and Interrelationship”, Corporate Governance, 16(5) (2008), 443, 447-448.

[8] J. Hancock (Ed.), Investing in Corporate Social Responsibility: A Guide to Best Practice, Business Planning & the UK’s Leading Companies (London: Kogan Page, 2005).

[9] J. Elkington, “Governance for sustainability”, Corporate Governance: An International Review, 14 (2006), 522.

[10] C. Ho, “Corporate governance and corporate competitiveness: An international analysis”, Corporate Governance: An International Review, 13 (2005), 211.

[11] N. Kendall, “Good corporate governance”, Accountants’ Digest: The ICA in England and Wales, 40 (1999).

[12] D. Jamali, A. Safieddine and M. Rabbath, “Corporate Governance and Corporate Social Responsibility Synergies and Interrelationship”, Corporate Governance, 16(5) (2008), 443, 447.

[13] Id.

[14] A. Bhimani and K. Soonawalla, “From conformance to performance: The corporate responsibilities continuum”, Journal of Accounting and Public Policy, 24 (2005), 165.

[15] D. Jamali, A. Safieddine and M. Rabbath, “Corporate Governance and Corporate Social Responsibility Synergies and Interrelationship”, Corporate Governance, 16(5) (2008), 443, 447.

Transparency and Disclosure

As interest in CSR and corporate sustainability has grown, companies have found that they are subject to heightened scrutiny and that the traditional disclosure practices that focused primarily, if not exclusively, on financial information and performance and related risks are no longer adequate.  Companies must now be prepared to provide disclosures that address the specific concerns and expectations of multiple stakeholders beyond investors including customers, employees, business partners, regulators and activists.  This means that the board of directors must understand existing and emerging disclosure requirements and ensure that the company has the necessary resources to collect and analyze the required information and present it in a manner that is clear and understandable.  At the same time, however, the directors need to be mindful of the risks of expanded disclosure include the possibility of providing too much strategic information, exposing the company to heightened risk of litigation from stakeholders that believe the company has not vigorously pursued its promised CSR and corporate sustainability goals and the need to invest additional time and resources in creating and maintaining the internal reporting process necessary to support CSR and corporate sustainability disclosures.[1]

While, as discussed below, certain CSR and corporate sustainability disclosures have now become minimum legal requirements in some jurisdictions, in general such disclosures are still a voluntary matter and directors have some leeway as to the scope of the disclosure made by their companies and how they are presented to investors and other stakeholders. Some companies continue to limit their disclosures to those are specifically required by regulators; however, most companies have realized that they need to pay attention to the issues raised by institutional investors and other key stakeholders and make sure that they are covered in the disclosure program.  At the other extreme, there are companies that have embraced sustainability as integral to their brands and have elected to demonstrate their commitment by preparing and disseminating additional disclosures that illustrate how they have woven sustainability into their long-term strategies and day-to-day operational activities.  These companies understand that not only are investors paying more attention but that more and more people everywhere are considering ESG performance when deciding whether to buy a company’s products and/or work for a particular company and that it is therefore essential to lay out their specific CSR and corporate sustainability goals and the metrics used to track performance and provide regular reports to all of the company’s stakeholders on how well they are doing against those goals.[2]

Williams noted that to the extent that governments have regulated corporate responsibility per se, such regulation has focused on disclosure and during the period 2000-2015 over 20 countries enacted legislation to require public companies to issue reports including environmental and/or social information.[3]  Many of these countries are in Europe and the EU has implemented a directive that requires approximately 6,000 large companies and “public interest organizations,” such as banks and insurance companies, to “prepare a nonfinancial statement containing information relating to at least environmental matters, social and employee-related matters, respect for human rights, anti-corruption and bribery matters.”[4]  In addition, several stock exchanges around the world require social and/or environmental disclosure as part of their listing requirements including exchanges in Australia, Brazil, India, South Africa and the London Stock Exchange.[5]  Also, pension funds in countries such as Australia, Belgium, Canada, France, Germany, Italy, Japan, Sweden and the UK are required to disclose the extent to which the fund incorporates social and environmental information into their investment decisions.[6]  All things considered, surveys show that more and more jurisdictions are implementing mandatory ESG disclosure requirements and that “there is a clear trend towards an increasing number of environmental and social disclosure requirements around the world”.[7]

As of 2013, over 90% of the Global 250 companies had decided to voluntarily disclose more environmental, social and governance information than required by law[8] and Williams noted in 2016 that “[v]oluntary, transnational standards of best social and environmental practices are proliferating in virtually every industry, many with associated certification schemes and requirements for third-party attestation or auditing … [and] … [t]hese voluntary initiatives are increasingly being supplemented by domestic and multilateral government actions to encourage, or in some cases require, companies to pay closer attention to the social and environmental consequences of their actions and to disclose more information about those consequences.[9]

The US, which has comprehensive reporting requirements relating to a broad range of corporate governance matters, has been a notable laggard with respect to establishing a comprehensive general ESG disclosure framework; however, there are certain specific federal and state disclosure requirements in certain contexts such as releases into the environment, management through recycling, median employee pay, mine safety disclosure and “conflict minerals” disclosure.[10]  Public companies in the US are required to make certain of their CSR and corporate sustainability disclosures in their SEC filings, which means that those disclosures are being made with a higher potential risk of liability.  Apart from mandatory disclosure, several studies have found that about 80% of larger US public companies have voluntarily provided some form of disclosures on their CSR and corporate sustainability initiatives in the form of published CSR/sustainability reports and/or disclosures on the company website; however, the quality of these disclosures has been criticized by the Sustainability Accounting Standards Board, which found that 52% of a sample of almost 600 companies that had made disclosures of CSR-related risks had done so using boilerplate language and has failed to disclose their plan to address such risks.[11] Directors need to be involved in decisions regarding placement of CSR and corporate sustainability disclosures including links in SEC filings to online sustainability reports and adding sustainability information to proxy statements as part of the company’s investor-focused communication efforts.  Companies can, and often do, rely on communications professionals to prepare sustainability reports; however, even when such reports are not included in the company’s SEC filings they should be subject to the same level of scrutiny applied in procedures established by the board’s disclosure committee.

Proposals from shareholder activists often help create the list of CSR and corporate sustainability topics that garner the most attention from companies and trigger movement toward greater transparency and disclosure.  In recent years, companies have frequently been required to respond to call for changes in corporate policies and activities with respect to political and lobbying activity, sustainability reporting, gender pay gap reporting, and child labor issues.[12]  In many cases, companies have been able to calm the concerns of activists, sometimes getting them to withdraw their proposals, by promising to provide fuller disclosure; however, once a commitment is made to expanded disclosure the company needs to fulfill its promises and allocate sufficient resources to the effort since activists will be watching closely to ensure that their expectations are satisfied.  When formulating voluntary CSR-related disclosures it is important to engage with activists to ensure that they understand the approach that the company is willing to take and the company’s need to balance disclosure against the need to protect sensitive and strategically important information.

A large number of parties providing non-form comments to the Securities and Exchange Commission (“SEC”) on its April 2016 concept release on disclosure required by Regulation S-K, the prescribed regulation under the Securities Act of 1933 that provides the framework for mandated disclosures in filings with the SEC, recommended that CSR disclosure be expanded and strengthened.[13]  While it is not likely that more CSR-related disclosures will be formally mandated in the immediate future, companies must nonetheless give greater consideration to CSR and corporate sustainability when responding to several current items in Regulation S-K include those related to describing the business activities of the company (Item 101); legal proceedings (Item 103); disclosures of material known events and uncertainties in the Management’s Discussion and Analysis (Item 303) and risk factors (Item 503(c)).  Public companies must also be mindful of the SEC’s guidance regarding disclosures relating to climate change, which was issued in 2010[14], and Rule 13p-1 under the Securities Exchange Act of 1934 relating to conflicts materials disclosure.

In addition, companies may be subject to disclosure requirements under the laws of foreign countries in which they operate as well as various state and local laws.  For example, under the California Transparency Supply Chains Act of 2010[15], which went into effect on January 1, 2012, every retail seller and manufacturer doing business in California and having annual worldwide gross receipts that exceed $100 million is required to disclose its efforts to eradicate slavery and human trafficking from its direct supply chain for tangible goods offered for sale.  The disclosures must be posted on the retail seller’s or manufacturer’s website with a conspicuous and easily understood link to the required information placed on the business’ homepage. In the event the retail seller or manufacturer does not have a website, consumers must be provided the written disclosure within 30 days of receiving a written request for the disclosure from a consumer.  At a minimum, the disclosures should disclose to what extent, if any, that the retail seller or manufacturer does each of the following:

  • Engages in verification of product supply chains to evaluate and address risks of human trafficking and slavery. The disclosure must specify if the verification was not conducted by a third party.
  • Conducts audits of suppliers to evaluate supplier compliance with company standards for trafficking and slavery in supply chains. The disclosure must specify if the verification was not an independent, unannounced audit.
  • Requires direct suppliers to certify that materials incorporated into the product comply with the laws regarding slavery and human trafficking of the country or countries in which they are doing business.
  • Maintains internal accountability standards and procedures for employees or contractors failing to meet company standards regarding slavery and trafficking.
  • Provides company employees and management, who have direct responsibility for supply chain management, training on human trafficking and slavery, particularly with respect to mitigating risks within the supply chains of products.

The exclusive remedy for a violation of the disclosure obligations is an action brought by the California Attorney General for injunctive relief.

When companies were first attempting to provide voluntary disclosures relating to their CSR and corporate sustainability initiatives they often struggled with the format and depth of their reporting.  Fortunately, as time went by, a consensus began to emerge about the benchmarks that companies should use for guidance in preparing their CSR and corporate sustainability reports.  Of particular note is the Global Reporting Initiative (“GRI”), which is a multi-stakeholder developed international independent organization that helps businesses, governments and other organizations understand and communicate the impact of business on critical sustainability issues such as climate change, human rights, corruption and many others.  The Global Sustainability Standards Board (“GSSB”) issues and maintains the GRI Standards for organizations to use in their “sustainability reporting”, described by the GSSB as “an organization’s practice of reporting publicly on its economic, environmental, and/or social impacts, and hence its contributions–positive or negative–towards the goal of sustainable development”.[16] GRI has pioneered sustainability reporting since the late 1990s, transforming it from a niche practice to one now adopted by a growing majority of organizations.  The GRI Standards are the world’s most widely used standards on sustainability reporting and disclosure and available for use by public agencies, firms and other organizations wishing to understand and communicate aspects of their economic, environmental and social performance.[17]

The International Integrated Reporting Council, or IIRC, which was founded in August 2010, released its International Integrated Reporting Framework in December 2013 as a guide that companies could use to describe how their governance structure creates value in the short, medium and long term; supports decision making that takes into account risks and includes mechanisms for addressing ethical issues; exceeds legal requirements; and ensures that the culture, ethics and values of the company are reflected in its use of and effects on the company’s “capitals” (described to include financial, manufactured, intellectual, human, social and relationship, and natural (i.e., the environment and natural resources) forms of value) and stakeholder relationships.[18]  Guiding principles for preparation of integrated reports include strategic focus and future orientation, connectivity of information, stakeholder relationships, materiality, conciseness, reliability and completeness and consistency and comparability, and integrated reports prepared using the Framework are expected to include the following common elements[19]:

  • Organizational overview and external environment: What does the organization do and what are the circumstances under which it operates?
  • Governance: How does the organization’s governance structure support its ability to create value in the short, medium and long term?
  • Business model: What is the organization’s business model?
  • Risks and opportunities: What are the specific risks and opportunities that affect the organization’s ability to create value over the short, medium and long term, and how is the organization dealing with them?
  • Strategy and resource allocation: Where does the organization want to go and how does it intend to get there?
  • Performance: To what extent has the organization achieved its strategic objectives for the period and what are its outcomes in terms of effects on the capitals?
  • Outlook: What challenges and uncertainties is the organization likely to encounter in pursuing its strategy, and what are the potential implications for its business model and future performance?
  • Basis of presentation: How does the organization determine what matters to include in the integrated report and how are such matters quantified or evaluated?

Other helpful resources are available from the Sustainability Accounting Standards Board, or SASB, which publishes the SASB Implementation Guide for Companies that provides the structure and the key considerations for companies seeking to implement sustainability accounting standards within their existing business functions and processes.[20]  The Guide helps companies to select sustainability topics; assess the current state of disclosure and management; embed SASB standards into financial reporting and management processes; support disclosure and management with internal control; and present information for disclosure.  The SASB’s online resource library also includes annual reports on the state of disclosure, industry briefs and standards and guidance on stakeholder engagement.  Companies should monitor CSR disclosures by their peers and the SASB library has examples of disclosures made by companies in annual reports filed with the SEC on Form 10-K.  Companies can also follow the reporting practices of competitors by reviewing sustainability reports that have been registered with the GRI.

While the efforts of the GRI and the SASB indicate that some progress has been made regarding the development of measurement and disclosure frameworks relating to corporate sustainability and ESG practices, companies and their stakeholders are not yet able to rely on universally accepted guidelines.  Hurdles that still much be overcome, and which may never be totally resolved, include variations in ESG rating methodologies and a lack of uniformity in disclosure expectations and requirement across jurisdictions.  For the time being, the most effective approach for directors and their companies may be engaging with their own key investors and other stakeholders to understand how those parties view and prioritize ESG issues and their preferences regarding measurement and disclosure with respect to the initiatives taken by the company relating to those issues.  Such an approach not only reduces the likelihood of misunderstanding between the company and its primary stakeholders but will also contribute to the improvement of measurement and disclosure tools and the development of best practices that can be widely disseminated.  In the meantime, work continues among corporate governance groups and consulting to develop performance measurement tools and disclosure frameworks that integrate traditional measures of financial value with new metrics that afford proper weight to projects launched primarily to pursue and achieve long-term value creation.

This article is part of the Sustainable Entrepreneurship Project’s extensive materials on Sustainability and Corporate Governance.

[1] For further discussion of non-financial disclosures and reporting, see “Sustainability Reporting and Auditing” in “Corporate Social Responsibility: A Library of Resources for Sustainable Entrepreneurs” prepared and distributed by the Sustainable Entrepreneurship Project (

[2] As mentioned above, expansive disclosure of this type increases the risk of litigation and/or adverse market reaction in the event that the company fails to meet its stated CSR and corporate sustainability goals, even if the disclosures are accompanied by appropriate disclaimers and are not included in regulatory filings that typically are covered by anti-fraud standards.  Disclosure of actual or potential links between CSR and corporate sustainability goals and compensation must also be handled carefully, similar to links between short-term financial goals and compensation.

[3] C. Williams, “Corporate Social Responsibility and Corporate Governance” in J. Gordon and G. Ringe (Eds.), Oxford Handbook of Corporate Law and Governance (Oxford: Oxford University Press, 2016), 15, available at (citing Initiative for Responsible Investment, Corporate Social Responsibility Disclosure Efforts by National Governments and Stock Exchanges (March 12, 2015), available at  These countries included Argentina, China, Denmark, the EU, Ecuador, Finland, France, Germany Greece, Hungary, India, Indonesia, Ireland (specific to state-supported financial institutions after the 2008 financial crisis), Italy, Japan, Malaysia, The Netherlands, Norway, South Africa, Spain, Sweden, Taiwan, and the U.K.

[4] See ¶ 6 of Directive 2014/95/EU of the European Parliament and of the Council of 22 October 2014, amending Directive 2013/34/EU as regards disclosure of non-financial and diversity information by certain large undertakings and groups, Official Journal of the European Union L330/1-330/9.

[5] C. Williams, “Corporate Social Responsibility and Corporate Governance” in J. Gordon and G. Ringe (Eds.), Oxford Handbook of Corporate Law and Governance (Oxford: Oxford University Press, 2016), 16, available at (citing Initiative for Responsible Investment, Corporate Social Responsibility Disclosure Efforts by National Governments and Stock Exchanges (March 12, 2015), available at

[6] Id.

[7] Id. at 19 (citing KPMG, UNEP, Global Reporting Initiative and Unit for Corporate Governance in Africa, Carrots and Sticks: sustainability reporting policies worldwide 8 (2013), available at

[8] KPMG, The KPMG Survey of CR Reporting 2013, available at  In addition, in 2013 76% of the top 100 companies in the Americas published a separate corporate responsibility report, as did 73% of top 100 companies in Europe and 71% in Asia.  Also, 59% of the Global 250 had their reports “assured” typically by the specialist bureaus of the major accountancy firms.  As reported in C. Williams, “Corporate Social Responsibility and Corporate Governance” in J. Gordon and G. Ringe (Eds.), Oxford Handbook of Corporate Law and Governance (Oxford: Oxford University Press, 2016), 5, available at

[9] C. Williams, “Corporate Social Responsibility and Corporate Governance” in J. Gordon and G. Ringe (Eds.), Oxford Handbook of Corporate Law and Governance (Oxford: Oxford University Press, 2016), 2-3, available at (citing M. Blair, C. Williams and Li-Wen Lin, “The New Role for Assurance Services in Global Commerce”, Journal of Corporate Law, 33 (2008), 325).

[10] Id. at 16-19.  See also C. Williams, The Securities and Exchange Commission and Corporate Social Transparency, Harvard Law Review, 112 (1999), 1197.  The federal Securities and Exchange Commission has also occasionally issued guidance on selected ESG topics such as disclosures related to climate change.

[11] See Flash Report: Eighty One Percent (81%) of the S&P 500 Index Companies Published Corporate Sustainability Reports in 2015 (Governance & Accountability Institute, Inc., 2016), available at; and Sustainability Accounting Standards Board, The State of Disclosure Report 2016, available at  The percentage is particularly striking given that less than 20% of the companies in the same group in 2011 published sustainability reports in that year.

[12] H. Gregory, “Corporate Social Responsibility, Corporate Sustainability and the Role of the Board”, Practical Law Company (July 1, 2017), 4.

[13] Sustainability Accounting Standards Board, “Business and Financial Disclosure Required by Regulation S-K—the SEC’s Concept Release and Its Implications”, (2016), 3-4, available at

[14] SEC Release Nos. 33-9106, 34-61469, FR-82 (February 8, 2010).

[15] California Civil Code § 1714.43.

[16] GRI 101: Foundation 2016 (Amsterdam: Stichting Global Reporting Initiative, 2016), 3.

[17] For detailed discussion of the GRI Standards, see “Sustainability Reporting and Auditing” in “Corporate Social Responsibility: A Library of Resources for Sustainable Entrepreneurs” prepared and distributed by the Sustainable Entrepreneurship Project (

[18] P. DeSimone, Board Oversight of Sustainability Issues: A Study of the S&P 500 (IRRC Institute, March 2014), 7.

[19] The International <IR> Framework (London: The International Integrated Reporting Council, December 2013), 5.  For detailed discussion of the International Integrated Reporting Framework, see “Sustainability Reporting and Auditing” in “Corporate Social Responsibility: A Library of Resources for Sustainable Entrepreneurs” prepared and distributed by the Sustainable Entrepreneurship Project (

[20] For detailed discussion of the activities of the SASB, see “Sustainability Reporting and Auditing” in “Corporate Social Responsibility: A Library of Resources for Sustainable Entrepreneurs” prepared and distributed by the Sustainable Entrepreneurship Project (

Investors Beginning to Prefer Companies that Pursue Long-Termism

Interest in CSR and corporate sustainability among institutional investors has logically been accompanied by a sharper focus on whether and how companies are adopting the long-term perspective necessary for committing resources to projects that will likely have the highest value to the business at some point beyond the traditional short-term performance window.  A study published in 2017 by the McKinsey Global Institute claimed to provide systematic evidence that companies that adopted a “long-term approach” outperformed companies that emphasized the short-term strategies typically associated with maximizing shareholder value on a range of key economic and financial metrics including revenue and earnings, investment, market capitalization, and job creation.[1]

Institutional investors have identified long-term corporate strategy and aligning compensation and management incentive to promote long-termism as key topics for engagement with their portfolio companies.  For example, over 100 companies from around the world have signed on to the “Compact for Responsive and Responsible Leadership A Roadmap for Sustainable Long-Term Growth and Opportunity”, which has been sponsored by the International Business Council of the World Economic Forum as a means for corporations, their chief executive officers and boards of directors, as well as leading investors and asset managers to create a corporate governance framework with a focus on the long-term sustainability of corporations and the long-term goals of society.  The Compact calls on companies to commit to[2]:

  • Ensuring the board oversees the definition and implementation of corporate strategies that pursue sustainable long-term value creation.
  • Encouraging periodic review of corporate governance, long-term objectives and strategies at the board level as well as clear communication between corporations, investors and other stakeholders about the outcomes.
  • Promoting meaningful engagement between the board, investors and other stakeholders that builds mutual trust and effective stewardship, and promotes the highest possible standards of corporate conduct.
  • Publicly supporting the adoption of the Compact and implement policies and practices within my organization that drive transformation towards the adherence to long-term strategies and sustainable growth for the benefit of all stakeholders.

Similarly, the corporate governance principles for US listed companies endorsed by the Investor Stewardship Group include guidance that boards should develop management incentive structures that are aligned with the long-term strategy of the company.[3]

One interesting approach to instilling long-termism into mainstream corporate governance is the call for the creation of a “Long-Term Stock Exchange” which would supplement existing requirements imposed by the Securities and Exchange Commission and other exchange regulators with additional conditions such as tenured shareholder voting power (i.e., permitting shareholder voting to be proportionately weighted by the length of time the shares have been held), mandated ties between executive pay and long-term business performance and disclosure requirements informing companies who their long-term shareholders are and informing investors of what companies’ long-term investments are.[4]

While sentiment for encouraging long-termism and promoting a broader range of stakeholder interests has been around in some form for decades, the attacks on the primacy of shareholder value creation have never been as strident and are likely to accelerate in the future and become a permanent fixture among governance issues.  Politicians in more than 30 states and the District of Columbia have formalized the constituency theory by adopting statutes that permit the formation of “benefit corporations”, a new form of for-profit corporation that explicitly expands the fiduciary duties of directors beyond maximizing shareholder value, which is still one of the primary goals of a corporation, to include consideration of whether or not the corporation’s activities have an overall positive impact on society, their workers, the communities in which they operate and the environment.  While the rate of adoption of benefit corporation status has been slow, particularly among public companies, the recognition of benefit corporations has contributed to sharpened focus on the separate interests of non-shareholder stakeholders and created a host of new issues and challenges for directors of all types of corporations such as ­­how to measure and compare non-financial performance aspects of corporate activities; how to hold corporations accountable to stakeholders who do not have the rights to vote that are held by shareholders; and how to structure incentive packages for executives and managers tied to complex multi-stakeholder goals and commitments.

This article is part of the Sustainable Entrepreneurship Project’s extensive materials on Sustainability and Corporate Governance.

[1] Discussion Paper: Measuring the Economic Impact of Short-Termism (McKinsey Global Institute, February 2017), available at file:///C:/Users/Alan/Downloads/MGI-Measuring-the-economic-impact-of-short-termism.pdf



[4] M. Lipton, S. Rosenblum, K. Cain, S. Niles, V. Chanani and K. Iannone, “Some Thoughts for Boards of Directors in 2018” (Wachtell, Lipton, Rosen & Katz, November 30, 2017), 7, accessible at

Investor Interest in CSR and Sustainability

Customers, employees and corporate activists, including socially conscious investors, have been focusing on issues now commonly associated with CSR and corporate sustainability for several decades, particularly in the areas of environmental protection and human rights; however, CSR has taken on a new urgency for corporate directors and managers as institutional investors, including large public pension funds, have become more interested in, and concerned about, environmental protection, human rights, health and safety and diversity and have shown greater appreciation for the benefits of pursuing corporate sustainability as opposed to only rewarding short-term profitability.  The submission by the BT Governance Advisory Service to the Australian Parliamentary Joint Committee on Corporations and Financial Services in 2006 provided an illustration of how and why institutional investors seek out companies that understand the need for a longer term approach to risk:

“Long term investors expect organizational decision makers to have a regard for the interests of stakeholders other than shareowners when those stakeholder interests have the capacity to influence shareowners’ interests. We believe that companies that manage their stakeholders’ interests are managing their shareowners’ interests, especially over the long-term. This arises from the fact that risks to companies arise not just from typical financial risks but also from regulatory, community and litigation risks.”[1]

Sustainability has become an important issue for the major institutional investors and asset managers and the marketplace is seeing an increase in smaller, more specialized investment funds that are primarily oriented toward providing capital to companies that excel in their environmental, social and governance (“ESG”) practices and which focus on ESG-oriented activities such as climate change and impact investing.  The goal of investors is to encourage their portfolio companies to contribute to the successful pursuit of environmental and social outcomes which continuing to provide investors with a suitable financial return.

A number of factors have contributed to the surge in the interest of investors in corporate sustainability and the ESG practices of their portfolio companies[2]:

  • Recognition in the financial community that ESG factors play a material role in determining risk and return;
  • Understanding and acceptance that incorporating ESG factors is part of investors’ fiduciary duty to their clients and beneficiaries;
  • Concern about the impact of short-termism on company performance, investment returns and market behavior;
  • Increased legal requirements protecting the long-term interests of beneficiaries and the wider financial system;
  • Pressure from competitors seeking to differentiate themselves by offering responsible investment services as a competitive advantage;
  • Increasing activism of beneficiaries who are demanding transparency about where and how their money is being invested; and
  • Concern regarding value-destroying reputational risk associated with environmental and social issues such as climate change, pollution, working conditions, employee diversity, corruption and aggressive tax strategies in a world of globalization and social media.

A reported prepared by The Conference Board in November 2017 highlighted several important market and regulatory drivers of increased ESG activism among institutional investors.[3]  First, there seems to be a clear shift in expectations among institutional investors’ own shareholders with respect to ESG voting and engagement and institutional investors must now contend with the demands of their shareholders to support environmental and social proposals in line with their fiduciary duties.  Second, in 2015 the US Department of Labor amended its guidelines interpreting the “prudent investor” standard for Employee Retirement Income Security Act (“ERISA”) fiduciaries to affirm that although ERISA does not allow fiduciaries to sacrifice the economic interests of their beneficiaries to promote public policy goals, fiduciary duties do permit consideration of ESG factors in investment analysis and voting practices when necessary to advance beneficiaries’ economic interests.[4]  The DOL’s change in position aligned the US with guidelines that had already been approved in a growing number of other countries that directly endorsed or encouraged public pension funds and other investment fiduciaries’ incorporation of ESG considerations in investment analysis.[5]  Third, consortiums of investors are being formed to exert influence on their peers to promote better oversight of ESG risk.  One example is the voluntary Framework of US Stewardship and Governance formed in 2017 by a group of institutional investors representing over $20 trillion in US equity investments to encourage investors “to continue to engage directly with companies and to make their proxy voting and engagement practices and policies more transparent as part of a balanced approach to corporate and shareholder accountability”.[6]

The consensus today among institutional investors is that “corporate sustainability” is no longer limited to the environmental practices of the company, but should be broadly construed to include all of the challenges that should be overcome–economic, environmental and social–and all of the actions that should be taken in order for the corporation’s business model to survive and thrive currently and into the future.  The President and CEO of State Street Global Advisors (“SSGA”) has informed the directors of SSGA’s portfolio companies that SSGA defines sustainability “as encompassing a broad range of environmental, social and governance issues that include, for example, effective independent board leadership and board composition, diversity and talent development, safety issues, and climate change.”[7]

The potential benefits to institutional investors have been highlighted by the Conference Board, which has argued that CSR enhances market and accounting performance, lowers the cost of capital, improves business reputation, and fosters new revenue growth when it is channeled toward product innovation.[8]  Similarly, the Chairman and CEO of BlackRock, Inc., the largest asset manager in the world, wrote in his 2016 Annual Letter to the CEOs of BlackRock’s portfolio companies that “[o]ver the long-term, environmental, social and governance (ESG) issues—ranging from climate change to diversity to board effectiveness—have real and quantifiable financial impacts”.[9]  While many investors argue that focusing on corporate sustainability is necessary in order for companies to identify and mitigate the risks to current operations due to climate change, shortages of natural resources and ignoring basic human rights issues, investors also believe that developing and implementing innovating solutions to environmental problems, improving workplace conditions and forging strong relationships with local communities will lead to better economic performance for the business.

Investors are embracing “responsible investment”, which has been described in the Principles for Responsible Investment ( backed by the United Nations (“PRI”) as “an approach to investing that aims to incorporate environmental, social and governance (“ESG”) factors into investment decisions, to better manage risk and generate sustainable, long-term returns”.  Investors that have committed to adherence to the PRI have undertaken to incorporate ESG issues into their investment analysis and decision making processes, be “active owners” of the companies in which they invest, incorporate ESG issues into their own ownership policies and practices, seek appropriate disclosure on ESG issues from their portfolio companies and report on their own activities and progress toward implementing the Principles.  The PRI are based on the assumption that institutional investor have a fiduciary duty to act in the best long-term interests of their beneficiaries and that ESG issues can affect the performance of investment portfolios and must be attended to in order for the investors, and their portfolio companies, to improve their risk management and generate sustainable, long-term returns.  In other words, attention to ESG not only helps investors achieve better long-range investment returns, thereby meeting the goals of their beneficiaries, but also aligns investor priorities with broader societal goals.

The Principles for Responsible Investment

The Principles for Responsible Investment (“PRI”), which is supported by, but not part of, the United Nations, considers itself to be the world’s leading proponent of responsible investment.  The PRI has explained its work as understanding the investment implications of environmental, social and governance (“ESG”) factors and supporting its international network of investor signatories in incorporating these factors into their investment and ownership decisions.  Signatories to the PRI commit to the following six principles and the accompanying possible actions for incorporating ESG issues into their investment analysis and decision making processes and their relationships with portfolio companies:

Principle 1: We will incorporate ESG issues into investment analysis and decision-making processes.

Possible actions:

·         Address ESG issues in investment policy statements.

·         Support development of ESG-related tools, metrics, and analyses.

·         Assess the capabilities of internal investment managers to incorporate ESG issues.

·         Assess the capabilities of external investment managers to incorporate ESG issues.

·         Ask investment service providers (such as financial analysts, consultants, brokers, research firms, or rating companies) to integrate ESG factors into evolving research and analysis.

·         Encourage academic and other research on this theme.

·         Advocate ESG training for investment professionals.

Principle 2: We will be active owners and incorporate ESG issues into our ownership policies and practices.

Possible actions:

·         Develop and disclose an active ownership policy consistent with the Principles.

·         Exercise voting rights or monitor compliance with voting policy (if outsourced).

·         Develop an engagement capability (either directly or through outsourcing).

·         Participate in the development of policy, regulation, and standard setting (such as promoting and protecting shareholder rights).

·         File shareholder resolutions consistent with long-term ESG considerations.

·         Engage with companies on ESG issues.

·         Participate in collaborative engagement initiatives.

·         Ask investment managers to undertake and report on ESG-related engagement.

Principle 3: We will seek appropriate disclosure on ESG issues by the entities in which we invest.

Possible actions:

·         Ask for standardized reporting on ESG issues (using tools such as the Global Reporting Initiative).

·         Ask for ESG issues to be integrated within annual financial reports.

·         Ask for information from companies regarding adoption of/adherence to relevant norms, standards, codes of conduct or international initiatives (such as the UN Global Compact).

·         Support shareholder initiatives and resolutions promoting ESG disclosure.

Principle 4: We will promote acceptance and implementation of the Principles within the investment industry.

Possible actions:

·         Include Principles-related requirements in requests for proposals (RFPs).

·         Align investment mandates, monitoring procedures, performance indicators and incentive structures accordingly (for example, ensure investment management processes reflect long-term time horizons when appropriate).

·         Communicate ESG expectations to investment service providers.

·         Revisit relationships with service providers that fail to meet ESG expectations.

·         Support the development of tools for benchmarking ESG integration.

·         Support regulatory or policy developments that enable implementation of the Principles.

Principle 5: We will work together to enhance our effectiveness in implementing the Principles.

Possible actions:

·         Support/participate in networks and information platforms to share tools, pool resources, and make use of investor reporting as a source of learning.

·         Collectively address relevant emerging issues.

·         Develop or support appropriate collaborative initiatives.

Principle 6: We will each report on our activities and progress towards implementing the Principles.

Possible actions:

·         Disclose how ESG issues are integrated within investment practices.

·         Disclose active ownership activities (voting, engagement, and/or policy dialogue).

·         Disclose what is required from service providers in relation to the Principles.

·         Communicate with beneficiaries about ESG issues and the Principles.

·         Report on progress and/or achievements relating to the Principles using a comply-or-explain approach.

·         Seek to determine the impact of the Principles.

·         Make use of reporting to raise awareness among a broader group of stakeholders.


Pronouncements regarding the importance of CSR by institutional investors are tremendously impactful on the decisions made by management since those investors are among the largest shareholders of the companies they follow.  CEOs must be mindful of surveys showing that CSR issues play a pivotal role in investment decisions for 90% of investors.[10]  The BlackRock Chairman’s 2017 Annual Letter to CEOs put the executive leaders of BlackRock’s portfolio companies on notice that they would be expected to consider sustainability of operations, environmental factors that affect the business, and the company’s role as a member of the community.[11]  State Street Global Advisors (“SSGA”), in a letter from its President and CEO to the directors of its portfolio companies, has made it clear that SSGA believes that CSR issues can have a material impact on a company’s ability to generate revenues over the long term and that whether the companies “clearly [communicate] their approach to sustainability and its influence on strategy” impacts how they will be classified by SSGA.[12]  A few days earlier, SSGA announced that it would consider the following issues when evaluating companies’ CSR and corporate sustainability efforts and the actions of board members in overseeing and management and setting long-term strategy[13]:

  • The company has identified the sustainability issues material to the business.
  • The company has analyzed and incorporated sustainability issues, where relevant, into its long-term strategy.
  • The company considers long-term sustainability trends in capital allocation decisions.
  • The board is equipped to adequately evaluate and oversee the sustainability aspects of the company’s long-term strategy.
  • The company’s reporting clearly articulates the influence of sustainability issues on strategy.
  • The board incorporates key sustainability drivers into performance evaluation and compensation programs.

SSGA has also opined: “Today’s investors are looking for ways to put their capital to work in a more sustainable way, one focused on long-term value creation that enables them to address their financial goals and responsible investing needs.  So, for a growing number of institutional investors, the environmental, social and governance (ESG) characteristics of their portfolio are key to their investment strategy.”[14]  In the same vein, an article distributed by the consulting firm PwC in October 2016 noted that “[m]ore and more, stakeholders are considering environmental, social and governance (ESG) factors when they evaluate a company’s strategy, risk profile, and ultimately, its plan for creating long-term value”.[15] The Forum for Responsible and Sustainable Investment ( provided further insights on changing investor motivations leading to the surging interest in sustainable, responsible and impact (“SRI”) investment:

“There are several motivations for sustainable, responsible and impact investing, including personal values and goals, institutional mission, and the demands of clients, constituents or plan participants. Sustainable investors aim for strong financial performance, but also believe that these investments should be used to contribute to advancements in social, environmental and governance practices. They may actively seek out investments—such as community development loan funds or clean tech portfolios—that are likely to provide important societal or environmental benefits. Some investors embrace SRI strategies to manage risk and fulfill fiduciary duties; they review ESG criteria to assess the quality of management and the likely resilience of their portfolio companies in dealing with future challenges. Some are seeking financial outperformance over the long term; a growing body of academic research shows a strong link between ESG and financial performance.”[16]

As for the specific CSR and corporate sustainability issues that are most important to investors, and which should therefore be priorities for directors and members of the executive team, reference can be made to surveys of CSR-related shareholder proposals compiled by organizations such as the Institutional Shareholder Services Inc. (“ISS”) Governance Analytics Database.  In 2016 and early 2017, for example, the most popular topics among shareholder activists included lobbying disclosure, climate change reporting, political contributions disclosure, gender pay gap disclosure and sustainability reporting, a list that highlighted a decided shift in shareholder engagement toward sustainability and away from some of the issues that had dominated in previous years such as proxy access.[17]  A little more than half of the CSR-related shareholder proposals submitted to companies in 2016 were actually voted upon since some did not meet the criteria for voting established by the company and others were removed from the ballot before the meeting based on undertakings by the company following engagement with the proponents of the proposal to voluntarily provide expanded CSR-related disclosures.  Average support for those proposals that were voted upon was around 20%; however, nine proposals focusing on the following topics received majority support: board diversity, political contributions disclosure, methane emissions management, sustainability reporting, animal welfare, prohibition of sexual orientation and gender identity discrimination and gender pay gap disclosure.  Companies can gather further insights by closely reviewing the proxy materials of other firms in their industry and the published voting records and pronouncements of their major institutional investors.

In the 2017 proxy season, shareholders at ExxonMobil, Occidental Petroleum, and PPL Corp. voted by overwhelming majorities in favor of proposals urging these boards to assess and report on the financial risks their companies face as a result of climate-related regulation. These proposals passed with the support of BlackRock, State Street Global Advisors, and Vanguard, all of whom have voting and investment policies that include environmental, social, and governance (“ESG”) considerations and risk assessment. In 2017, Fidelity followed suit and revised its proxy voting guidelines to state that it “may support shareholder proposals calling for reports on sustainability, renewable energy and environmental impact issues” as well as proposals on board and workplace diversity.[18]

The published voting guidelines of ISS for the 2017 proxy season reflected the growing support among institutional investors for ESG-related proposals.  Among other things, the guidelines called for generally supporting resolutions requesting that a company disclose information on the risks related to climate change on its operations and investments, such as financial, physical, or regulatory risks; generally voting for proposals requesting that a company report on its policies, initiatives, and oversight mechanisms related to social, economic, and environmental sustainability; and supporting proposals seeking reports of company’s efforts to respond on a range of ESG issues, including climate impact mitigation, board and workplace diversity.  Proposals that called for the adoption of GHG reduction goals from products and operations were to be considered on a case-by-case basis and proposals seeking a company’s endorsement of social/environmental issue principles that support a particular public policy position were opposed.[19]

Institutional investors are themselves under increasing pressure from their own investors, as well as peers, activist groups and non-governmental organizations, to proactively embrace CSR and corporate sustainability.  For example, in 2006 investors with over $2 trillion in assets under management pledged to commit to the UN Principles for Responsible Investment (“PRI”), which require that environmental, social and governance issues be incorporated into investment analysis and decision making and that shareholders committed to the Principles proactively engage their portfolio companies regarding CSR and corporate sustainability issues and goals.  At the time the Principles were first announced, the then-UN Secretary General observed:

“In signing on to these principles, you are publicly committing yourselves to adopt and live up to them. And you are expressing your intent to channel finance in ways that encourage companies and other assets to demonstrate corporate responsibility and sustainability. In short, you have given a vote of confidence to corporate responsibility – not as a luxury, not as an afterthought, not as a goal to be achieved someday, but as an essential practice today.”[20]

By 2016, more than half of all publicly traded debt and equity worldwide was held by investors who were signatories to the PRI, and US signatories accounted for nearly 20% of the total participation and included both traditional backers of environmental and social proposals and mainstream investment companies like BlackRock, Fidelity, State Street and Vanguard.[21]  Not to be forgotten is that in addition to the assets managed by these well-known mainstream investors, more than 20% of all assets under management in the US were invested based on sustainable, responsible or impact investing strategies.[22]

A survey of whether institutional investors affected a firm’s commitment to CSR for a large sample of firms from 41 countries over the period 2004 through 2013 found that institutional ownership was positively associated with firm-level environmental and social commitments.[23] A July 2017 report issued by US SIF Foundation indicated that managers of $8.72 trillion of the overall total of $40 trillion assets under management in the US, about 22%, included sustainability in their investment decision making.[24]  A November 2017 reported by The Conference Board stated that surveys of institutional investors by major consulting firms since at least 2014 have found, on average, that 70% to 80% saw ESG information as important or essential to their investment analysis.

This article is part of the Sustainable Entrepreneurship Project’s extensive materials on Sustainability and Corporate Governance.

[1] Parliamentary Joint Committee on Corporations and Financial Services, Corporate responsibility: Managing risk and creating value (2006), 68.


[3] V. Harper Ho, Director Notes: Sustainability in the Mainstream–Why Investors Care and What It Means for Corporate Boards (The Conference Board, November 2017), 10-12, electronic copy available at: (based on information available at UNPRI, Signatories,

[4] Interpretive Bulletin Relating to the Fiduciary Standard under ERISA in Considering Economically Targeted Investments, 29 C.F.R. § 2509.15-01 (October 26, 2015).  The guidance in effect prior to October 26, 2015, which had been in place since 2008, generally prohibited ERISA from selecting investments on the basis of any non-economic factors. Interpretive Bulletin Relating to Investing in Economically Targeted Investments, 73 Fed. Reg. 61,734 (October 17, 2008).

[5] According to the Report, many jurisdictions in the midst of changing their conceptions of fiduciary duty to permit, or even impose a positive duty on, investors to incorporate financially material ESG factors into their investment decision making.  Sources cited included UNEP-FI, A legal framework for the integration of environmental, social, and governance issues into institutional investment (2005),; UNEP-FI, Fiduciary Duty in the 21st Century (2015),; and OECD, Investment governance and the integration of environmental, social, and governance factors, (2017), 48-50.

[6] Investor Stewardship Group, “Framework for U.S. Stewardship and Governance”, Stewardship codes have also been introduced in a number of foreign countries as a means for encouraging or requiring institutional investors as asset owners or managers to disclose how their investment strategy contributes to the medium and long-term performance of the investor’s assets.

[7] Letter from Ronald P. O’Hanley, President and CEO, SSGA, to Board Members, 1-2 (January 26, 2017), available at

[8] M. Tonello, Corporate Investment in ESG Practices (The Conference Board, Inc.: August 5, 2015).

[9] Annual Letter from Larry Fink, Chairman and CEO, BlackRock, to CEOs (February 1, 2016), available at

[10] Tomorrow’s Investment Rules: Global Survey of Institutional Investors on Non-Financial Performance, 5 (Ernst & Young, 2014).

[11] Annual Letter from Larry Fink, Chairman and CEO, BlackRock, to CEOs (January 24, 2017), available at

[12] Letter from Ronald P. O’Hanley, President and CEO, SSGA, to Board Members, 1-2 (January 26, 2017), available at

[13] SSGA, Incorporating Sustainability Into Long-Term Strategy (January 23, 2017), available at

[14] SSGA, Performing for the Future: ESGs Place in Investment Portfolios Today and Tomorrow (2017), available at


[16]  The Forum for Responsible and Sustainable Investment is a valuable online resource with information and educational materials on sustainable and responsible investing trends, performance and sustainable investment, proxy voting, shareholder proposals and community investing.

[17] H. Gregory, “Corporate Social Responsibility, Corporate Sustainability and the Role of the Board”, Practical Law Company (July 1, 2017), 5-6 (citing Institutional Shareholder Services Inc., United States 2016: Proxy Season Review—Environmental and Social Issues (October 26, 2016), available at (subscription required)).

[18] V. Harper Ho, Director Notes: Sustainability in the Mainstream–Why Investors Care and What It Means for Corporate Boards (The Conference Board, November 2017), 2, electronic copy available at: See also V. Harper Ho, “’Comply or Explain’ and the Future of Nonfinancial Reporting”, Lewis & Clark Law Review, 21 (2017), 318; and V. Harper Ho, “Risk-Related Activism: The Business Case for Monitoring Nonfinancial Risk”, Journal of Corporate Law, 41 (2016), 648.

[19], 57-63.

[20] Ban Ki Moon, UN Secretary General Speech at the NYSE announcing the UN Principles for Responsible Investment (April 26, 2006).

[21] V. Harper Ho, Director Notes: Sustainability in the Mainstream–Why Investors Care and What It Means for Corporate Boards (The Conference Board, November 2017), 3 and Table 1, electronic copy available at: (based on information available at UNPRI, Signatories,

[22] Id.

[23] A. Dyck, K. Lins, L. Roth and H. Bocconi, “Do Institutional Investors Drive Corporate Social Responsibility? International Evidence” (November 18, 2015).  Interestingly, the researchers found that while domestic institutional investors and non-U.S. foreign investors accounted for the identified positive associations, U.S. institutional investors’ holdings are not related to environmental and social scores. Similarly, higher scores are associated with long-term investors such as pension funds but not with hedge funds.


Descriptions of Corporate Sustainability

While corporate social responsibility, or CSR, is generally associated with ensuring the corporations contribute to sustainable economic development at the macro-level, the concept of corporate sustainability can be seen as primarily concerned with the survival, or sustainability, of the corporation itself, something that is necessary in order for the corporation to make the contributions to society that are expected from being a “responsible corporate citizen”.[1]  Corporate sustainability goals and programs are focused on issues that not only impact society as a whole but must also be addressed by the directors and managers of a corporation in order for it to survive and thrive: climate change; resource scarcity; demographic shifts; and regulatory and political changes.[2]

Coblentz argued that “sustainability” in the context of a corporation or any other similar type of organization, means “continuation” through the acquisition and maintenance of the elements necessary for it to carry on and constantly enhance its activities in pursuit of a defined mission.[3]  According to Colblenz, there are actually three key aspects of organizational sustainability—institutional, financial and moral:

  • Institutional sustainability comes from having a mission, a process in place to develop long-term strategic plans, an annual planning process, a process for managing the operational activities included in the strategic and annual plans and, finally, processes for monitoring and evaluating the flow of work to ensure that it is contributing to the organization’s goals and objectives.
  • Financial sustainability means having access to the financial resources that the organization needs in order to collect the resources—human, physical and technological—necessary for it to carry out its mission. This does not mean that the organization is self-sufficient with regard to capital (i.e., it can fund operations out of its own cash flow), but rather that it can obtain needed funds from outside sources without compromising its mission.  A financially sustainable organization also practices prudent financial management to ensure that its resources are used efficiently.
  • Moral sustainability requires that organizational leaders have a clear vision of, and commitment to the mission, and communicate it effectively to all stakeholders; that all staff rally around the organizational leaders and become committed to the mission as well; that staff who are committed to the mission are rewarded by career development opportunities, adequate compensation and dynamic work environment, all of which improves morale and builds a unity of purpose and commitment that will overcome challenges; and that leadership, management and staff act ethically and are perceived as doing so.

While Coblenz’s model of organizational sustainability does not explicitly mention environmental and social issues, it does paint a picture of a deliberative process throughout an organization that operates on a vision of a mission that is clearly communicated and shared by everyone and which understands that results will take time and require steady and prudent general and financial management and a commitment to acting in an ethical manner.  Financial sustainability in the model includes engaging with investors that understand the company’s mission and do not place conditions on funding that will conflict with the mission.  For example, when the mission of the organization is to achieve environmental efficiencies that may not be realized for several years, investors will refrain from applying pressure for short-term economic returns provided that management is transparent about progress and acts in an ethical manner in its engagement and relationships with investors.

A 2017 article in The Economist described “sustainability” in the corporate context as follows:

“The term “sustainability” is often used interchangeably with CSR or viewed exclusively through an environmental lens. Thought leaders, however, generally describe it as a business strategy that creates long-term stakeholder value by addressing social, economic, and environmental opportunities and risks material to a company. It is integral to a company’s business and culture, rather than on the periphery. Optimizing waste reduction, or water or energy consumption, for example, can help a company reduce operational costs. Sustainability can drive innovation by reconceiving products and services for low-income consumers, opening new lines of business and boosting revenue in the process. Finally, being socially responsible can help a company earn license to operate in new markets, and attract and retain talent.”[4]

While the terms “CSR” and “corporate sustainability” are often used interchangeably, there are real and important distinctions between the two concepts; however, corporations can and should pursue both CSR and sustainability in order to generate the most value for all of their stakeholders:

  • Avoiding environmental harm from operational activities is not only a socially responsible way to conduct business but also ensures that the corporation has sufficient natural resources available to it to survive and thrive in the future;
  • Monitoring the environmental and social impact of the activities of members of the corporation’s supply chain not only protects natural and human resources it also ensures that the corporation will have reliable partners and a stable stream of inputs for its products;
  • Treating employees and their families fairly and providing them with a living wage not only enhances their wellbeing but also makes it easier for the corporation to attract and retain the talent necessary to create and commercialize innovative products and services needed to maintain long-term competitiveness;
  • Honest engagement with local communities and environmental and social activists promotes mutual understanding and problem solving while reducing potential distractions for directors and members of the management team; and
  • Products that are developed in an environmentally and socially responsible manner not only reduce the burden on natural and human resources but also improve the corporation’s reputation and brand and reduce the risk of consumer disenchantment and product recalls.

Porter and Kramer argued that sustainability and responsible business practices are integral parts of a corporate strategy that can create “shared value” for the company, its shareholders and other key stakeholders of the company.[5]   Porter, along with others such as McWilliams and Segal, has also maintained that companies should use the CSR initiatives as part of their business strategies to promote competitive advantage and, in fact, a large percentage of Global 250 firms have explicitly identified issues such as climate change and material resource scarcity as opportunities for the development of new products and services.[6]

One threshold issue for directors with respect to embracing “corporate sustainability” is that it remains a broad topic when the time comes to putting together a framework for implementation.  For example, when the subject is environmental responsibility, issues can range from climate change to carbon footprints, water and energy.  Social responsibility can involve issues and projects relating to supply chain management, product stewardship and consumer protection and human rights.  CSR and corporate sustainability requires attention to risk management and stakeholder engagement and investment of resources in new management and information systems that can generate data needed to track performance and prepare the reports necessary to meet expectations of investors and other stakeholders with respect to transparent disclosure of the nature and effectiveness of the company’s CSR and corporate sustainability initiatives.

This article is part of the Sustainable Entrepreneurship Project’s extensive materials on Sustainability and Corporate Governance.

[1] For further discussion of the various definitions and descriptions of corporate sustainability, see “Corporate Sustainability” in “Entrepreneurship: A Library of Resources for Sustainable Entrepreneurs” prepared and distributed by the Sustainable Entrepreneurship Project (

[2] RobecoSAM, Corporate Sustainability, available at

[3] J. Coblentz, “Organizational Sustainability: The Three Aspects that Matter” (Washington DC: Academy for Educational Development, 2002).

[4] J. Cramer-Montes, “Sustainability: A New Path to Corporate and NGO Collaborations”, The Economist (March 24, 2017),

[5] M. Porter and M. Kramer, “Creating Shared Value, Harvard Business Review (January-February 2011).

[6] See M. Porter and M. Kramer, “Strategy and Society: The Link Between Competitive Advantage and Corporate Social Responsibility”, Harvard Business Review, 78 (December 2006); and A. McWilliams and D. Siegel, “Creating and Capturing Value: Strategic Corporate Social Responsibility, Resource-Based Theory, and Sustainable Competitive Advantage”, Journal of Management 37 (2011), 1480.