Leaders today are navigating a business environment that is evolving at a record pace. And while financial measures of success proliferate, savvy business executives realize that the full measure of a corporation’s value transcends the balance sheet. Faced with this reality and the rapid pace of change, chief executive officers and boards of directors are finding themselves in unfamiliar territory. In this new world, the CLO is uniquely positioned to advise the CEO and board to chart a course forward.
Climate change impacts the corporate environment
A warming planet is making a profound mark on business at multiple levels. Water shortages around the world are ravaging populations, shrinking agricultural yields, and threatening farmers. In Europe, seawater is too warm to effectively cool nuclear reactors, shutting them down. Fishing stock has dwindled across the oceans and fuel prices are spiking internationally.
New regulations, mandated at the national and international levels, are cropping up rapidly to attempt to stem climate change. Unfortunately, no one can see whether it will be too little, too late. What we do know is that a hotter planet brings increased and volatile business risk, whether operational, value chain, disruption, litigation, or regulatory.
A survey published in 2018 by Standard & Poor’s found that 73 of the S&P 500 companies publicly disclosed that extreme weather affects or will affect their bottom line, overwhelmingly for the worse. The writing on the wall is clear: The weather will trend increasingly extreme; revenue will be less predictable and more prone to swings. New risks demand new strategies. Doing business in the same old way is now a recipe for failure. Boards at companies like those 73 in the S&P survey are increasingly demanding proactive measures. But boards are far from the only stakeholders demanding change.
Stakeholders demand action
As climate change adds volatility to more industries such as fossil fuels, agriculture, and logistics, investors are focusing their attention on risk. As a result, more and more capital is flowing into sustainable investments. In fact, the consulting firm Opimas projects that the market in ethical, sustainable investment will reach US$35 trillion in assets in 2020. It’s no coincidence that issuance of green bonds is soaring, and environmental, social, and governance (ESG) indices are proliferating.
A growing number of investors, along with consumers, governments, and stakeholders up and down the supply chain, are making demands from a moral standpoint, rather than a strictly commercial one. In the end, the planet’s wellbeing is our responsibility; to ignore that imperative looks more and more like a gross dereliction of duty. Today’s workforce and tomorrow’s talent want to work for employers who match their values, and those values are increasingly connected to action on climate change.
Businesses need to update their organizational models
The hardest part of adjusting for climate change is not necessarily strategic, but tactical. Every department of a business has a part to play. Supply chains are focused on decreasing their carbon footprint. Financial institutions develop green plans to persuade investors to give a little more to benefit the earth. Human resources look to incentivize employee actions like taking public transit, recycling, and working remotely. Boards are paying attention and asking more questions, and chief executive officers are tasking members of the C-suite to lead company-wide initiatives on sustainability.
Increasingly, the duty of coordinating these tasks falls on the CLO or general counsel. According to a 2019 study by the Association of Corporate Counsel (ACC), a global association of 46,000 in-house lawyers, 93 percent of CLOs in companies with a sustainability plan either lead or significantly influence those plans.
(Proactive) legal is the linchpin
At companies worldwide, the general counsel is emerging as a C-suite player with unprecedented levels of responsibility. CEOs and boards of directors are wise to take full advantage of the critical thinking and political savvy that the CLO brings to the table. With all of the environmental, geopolitical, regulatory, compliance, data privacy, reputational, and cybersecurity risk that companies are facing, the input of a seasoned, credible general counsel is essential.
Just as the 2007-2008 financial crisis led to an “Age of the Chief Financial Officer,” when the CFO was the central executive increasingly tapped for corporate boards and promotion to CEO, the teens and twenties of the 21st century have become the “Age of the Chief Legal Officer.” CLOs are no longer counselors for the C-suite, but key business strategists and partners. Increasingly the authority on tech policy and other rapidly changing fronts, the legal function is uniquely equipped to help companies navigate a business environment where most business decisions are also potentially legal ones. Regulations mandated by the Paris Climate Accord, or by national or regional authorities, intersect at complicated angles, which only the CLO can navigate. The old-fashioned, reactive CLO could never keep pace with these tangled webs of risk and regulation. The modern CLO, however, is the only officer with the training and knowledge to help companies stay ahead of the curve.
Moreover, reputational risk, a major factor for consumers and investors alike, is squarely in the bailiwick of legal. ACC data show that CLO attention to sustainability issues is largely motivated by the reputational impacts associated with environmental and social issues.
Reputation is ultimately linked to ethics: is this company acting in the interest of me and my community? This goes beyond the prevention of obvious malfeasance, like money laundering or an internal culture of sexual harassment: It means ensuring that the company’s actions, values, and tone from the top are aligned. Again, the CLO is best equipped to serve as an ally to the board and CEO to strengthen and enforce the company’s ethical culture.
The CLO must have a seat at the table
The greatest problem facing CLOs has nothing to do with expertise or capacity, and everything to do with lack of access to the executive team. According to ACC research, only 78 percent of CLOs report to their CEO. And while it’s encouraging that 93 percent of CLOs lead or significantly influence ESG matters, in companies where a special officer handles ESG matters, only 11 percent of those officers report to the CLO. Worse, almost 45 percent of companies surveyed don’t have a sustainability plan at all.
If boards want to get serious about sustainability, they cannot afford to let the natural leaders in this new space languish without a seat at the leadership table. All CLOs should report to their CEO. In developing ESG policy and dealing with stakeholders large and small, national and international, boards and executives alike should look to their best-suited ally.
About the Author:
Veta T. Richardson is president and CEO of the Association of Corporate Counsel (ACC), a global legal association that promotes the common professional and business interests of in-house counsel who work for corporations, associations and other organisations through information, education, networking, and advocacy. With more than 46,000 members in 85 countries employed by over 10,000 organisations, ACC connects its members to the people and resources necessary for both personal and professional growth. By in-house counsel, for in-house counsel.® For more information, visit www.acc.com and follow ACC on Twitter: @ACCinhouse.