Equipping boards for sustainable value creation

In a world grappling with complex challenges, the imperative for boards of directors to drive sustainable value creation has never been greater.

This pressing need arises from the evolving context in which companies operate – marked by rapid technological advances, shifting consumer preferences and the increasingly acknowledged need and opportunity to actively work with environmental and social dimensions to generate sustainable value.

Understanding the Challenge

At the core of this challenge is the need to define and generate diverse forms of value that are, in fact, sustainable.

Companies must therefore seek to optimise not only financial returns but also the value associated with social and environmental impact.

Organisations invariably make trade-offs between different objectives and find innovative solutions that respond to the needs and expectations of relevant stakeholders, including shareholders, employees, customers, suppliers, governments and the community at large, but also the natural environment.

For these decisions to be made well, to maximise the contribution to the well-being of people and planet, all the value dimensions must be well defined.

This, in turn, requires that all the value-generation together, when considered as a whole, reflects the values and beliefs of the organisation and is an actionable interpretation of the organisational purpose.

Role of the governing body

Central to addressing this challenge is the governing body, as outlined in ISO 37000 Governance of Organisations – the global benchmark on governance that enables sustainable development.

This body, whether a single individual or a group, holds ultimate accountability for the organisation as a whole. Even in smaller entities, where governance and management roles are often carried out by the same person, there exists a governing body, and it is crucial that it works well.

Competence as a prerequisite

However, responsibility alone is insufficient. Competence – the ability to effectively direct the organisation – is essential.

The pertinent question then, is how to define and measure this competence at the individual and collective levels.

Most guidelines only provide an imprecise framework and lack specificity in defining and measuring these competencies.

The gap in practice

In reality, this gap leads to the implementation of board skill or competency matrices that are universally recommended but inadequate for practice.

Often, these matrices are vague, with criteria like "sustainability" open to broad interpretation.

Moreover, the unguided self-assessment approach can lead to questionable claims of competence, sometimes met with internal scepticism.

Learning from best practices

To my knowledge, the most rigorous, detailed and publicly available board competency assessment framework is the one I was involved in developing as part of Romania’s Law 111 of 2016.

This legislation distinguishes itself by clearly defining competencies from the perspective of governance (as opposed to say, general management), establishing an explicit and transparent competency rating scale and differentiating between mandatory and optional criteria. It also incorporates both individual and collective thresholds for competencies.

Competence vs competency

This approach is consistent with the distinction Dr Chris Pierce made in a seminal 1994 publication between competence (the effective and efficient performance of work) and competency (the management ability and behaviour required for competent performance).

A board, operating as a collective entity, must possess competencies that enable it to deliver outputs that align with the organisation's unique context and nature.

These competencies stem from the combination of individual members' knowledge, skills and experience.

The collective imperative

A competent board is more than the sum of its parts. It represents a collective capability to steer an organisation towards sustainable value-creation, addressing the complex demands of today’s business environment. This includes navigating the evolving landscape of sustainable value generation, ESG disclosure regulation, adapting to technological disruptions and responding to evolving stakeholder expectations.

ISO 37000: A guiding framework

ISO 37000 provides a rigorous and practical framework for assessing and enhancing board competence.

By developing the right kind of tailored competency-assessment frameworks for their organisations in accordance with international norms, boards can not only fulfil their fiduciary duties but also champion sustainable practices and increase the amount of sustainable value their organisations generate. In this way, they position their organisations as responsible, forward-thinking entities capable of making a positive impact in an increasingly interconnected and dynamic world.

Sustainability competency on every board

Many boards often lack competency in relation to sustainable value-generation, even though this knowledge is crucial for navigating challenges like carbon emissions, nature-positive innovations or supply chain due diligence.

Boards need to evolve. It's not sufficient to rely solely on management or external advisers for sustainability oversight. Boards need to integrate this competence into their fabric, appointing directors with a range of sustainability and ESG knowledge, skills and experience.

All boards need directors who understand these issues at a systemic level and can drive innovation, align operations with stakeholder expectations and communicate effectively with regulators, investors and the public.

If a board determines that it does not have the necessary competence, it needs to conduct training and development for existing members, secure the necessary advice for itself until is competent, and make this a priority in its board renewal process.

Adding a sustainability competency to a board is not just about better oversight and risk mitigation, it’s about infusing the entire governance system with a purpose-driven, forward-thinking, sustainable mindset. This competency can catalyse knowledge diffusion and cultural transformation, ensuring that sustainability is integrated into every strategic decision.

Dr Axel Kravatzky is managing partner of TT-based Syntegra-360 Ltd, vice-chair of ISO/TC309 Governance of Organizations and president of EUROCHAMTT.

He enables companies to flourish through integrated governance, certified management systems and transformational leadership.