Sustainability as a Leadership Imperative

The pressure on companies to tackle environmental, social, and governance (ESG) issues continues to mount. A broad set of stakeholders— including customers, employees, investors and suppliers — are increasingly challenging companies to respond to concerns about climate change, the consumption of natural resources, changing societal values, and economic and political instability. Russell Reynolds Associates’ partnership with the United Nations Global Compact (UNGC) uncovered the importance of strong leadership from CEOs and boards in driving sustainable change – something we call Sustainable Leadership.1 The Sustainable Leadership model identifies the differentiating characteristics of sustainable leaders: multi-level systems thinking, stakeholder inclusion, disruptive innovation and long-term activation.

Despite the growing awareness that a focus on sustainability creates value over both the short- and longterm, many CEOs and boards are not responding rapidly enough to stakeholder concerns. Over the last year, some of the world’s biggest companies have been subjected to intensified stakeholder scrutiny over their performance on sustainability issues. Exxon Mobil’s shareholders recently voted to oust members of the energy company’s board following an activist campaign by a hedge fund known as Engine No. 1, which blamed the energy giant’s poor performance in recent years on its failure to transition to a “decarbonising world.” In May 2021, the Exxon shareholders approved three of the four board members Engine No. 1 nominated, dealing a major blow to the oil company. In another recent example, Rio Tinto’s destruction of the Juuken Gorge caves, which represented 46,000 years of culture and history for the Puutu Kunti Kurrama and Pinikura (PKKP) peoples of the Pilbara in Western Australia, resulted in significant public and investor backlash. Reports indicated that Rio executives were aware of the value of these caves, had the opportunity to preserve them, but still chose to destroy the shelters.2

Elsewhere in Australia, Woolworths Group planned to open a Dan Murphy’s megastore close to liquor-free Indigenous communities in Darwin, only to abandon plans after a backlash from Aboriginal and health groups. Following accusations Woolworths Group had failed to consult with local community organisations and had ignored concerns about the impact on public health, the retailer commissioned an independent panel to review health concerns and stakeholder engagement. The report found Woolworths Group failed to take into account the challenges facing Aboriginal communities in the Northern Territory and did not meet the standards expected of a leading corporate citizen.3

While most companies (90 percent) in the ASX200 do report on sustainability practices, this practice alone does not help companies avoid costly sustainability-related decisions.4 Both Rio Tinto and Woolworths are considered “leaders” in their ESG reporting processes, but still failed to avoid their recent missteps. To explore how boards and CEOs can improve their approach to sustainability, Russell Reynolds Associates hosted an event attended by eleven board chairs from leading Australian companies. The discussion led to three important calls for action:

1. Driving sustainability starts with the company’s purpose.

A clear and compelling mission will feed into a sustainable corporate strategy, leading to sustainable returns for investors. The board has the responsibility for defining this purpose, ensuring a long-term vision beyond any management changes.

“Sustainability starts with a company’s purpose (why we exist). This informs everything the company does.”
-Gordon Cairns, chair, Woolworths Group

Sustainability is therefore not a compliance exercise. Reporting on sustainability issues builds trust with customers, investors and other stakeholders by ensuring that the organisation is taking into consideration the environmental and societal impact of their operations. It creates transparency about the risks and opportunities an organisation faces. However, organisations also need to realize that sustainability reporting must be followed by action. This creates the accountability that ensures the organisation delivers on it’s commitments.

“It’s easy to get it wrong. For Woolworths, trying to establish a Dan Murphy store in Darwin impacted our social license. It wasn’t on the risk register, but should have been.”
-Gordon Cairns, chair, Woolworths Group

2. Making sustainability core to the DNA of leadership teams is essential, but not enough: Boards and CEOs need “moral courage.”

For CEOs and board members to effectively integrate sustainability into business strategy and operations, they must transform the leadership culture of their organizations. Sustainability needs to become part of the fabric of the organization. In addition, CEOs and board members need to possess “moral courage”: the courage to do the right thing, despite its consequences.

“The presence of “moral courage” should become the pre-eminent leadership competence above all others. Currently, no board reviews, director assessments, recruitment or succession processes explicitly address the question whether leaders have moral courage. Going forward, we should.”
-Stephen Langton, Board & CEO practice leader, Russell Reynolds Associates

3. Purpose, not simply profits, needs to be rewarded.

The board is responsible for establishing the metrics that will be used to determine promotion and remuneration throughout the organization. Today’s focus on short-term financial metrics needs to change to a broader set of financial and non-financial metrics to evaluate performance over longer time frames.

“Reputation has replaced Sales per square meter in our Long Term Incentive plans. This sends a message about what the company is serious about.”
-Gordon Cairns, chair, Woolworths Group

Our conversations with leading chairs in Australia, and our broader research with CEOs and boards globally, make it clear that sustainability is first and foremost a leadership issue and an imperative to a company’s short- and long-term success. Leaders can be more effective in achieving their strategic priorities by embedding sustainability in their company’s purpose, making sustainability (and moral courage) core to the DNA of the organisation, and rewarding the achievement of purpose as opposed to simply profits. This, in turn, will support their long-term competitiveness, their relationships with their primary stakeholders, and their success in attracting the best next generation of talent.

AUTHORS

Peter L. O’Brien leads Russell Reynolds Associates’ business across Asia Pacific and is a senior member of the firm’s Board & CEO Advisory Partners. He is based in Sydney.
Stephen Langton leads Russell Reynolds Associates’ Board & CEO Advisory Partners in Asia Pacific. He is based in Singapore.
Matt Guthridge is a member of Russell Reynolds Associates’ Energy & Natural Resources practice, leading the team in Australia and New Zealand. He is based in Melbourne.
Marieke van der Drift leads Russell Reynolds Associates’ Knowledge organisation in Asia Pacific. She is based in Singapore.

References

_{1. “Leadership for the Decade of Action.” Russell Reynolds Associates and United Nations Global Compact. 2020.}
2. Never Again (aph.gov.au)
3. AFR, June 2021 “Woolworths’ mea culpa after Dan Murphy’s review finds major failures”
4. ACSI, 2020, ESG Reporting Trends in the ASX 200