“In matters of principle, stand like a rock; in matters of taste, swim with the current.”

~Thomas Jefferson (spurious quotation frequently attributed to Jefferson.)

Navigating the Role of the Board Amidst Shifting DEI and ESG Trends

In a meeting with a board last week, a question at the forefront was how boards are navigating the tectonic shifts in Diversity, Equity, and Inclusion (DEI) and Environmental, Social, and Governance (ESG) programs and approaches. As we have seen, recent corporate trends reveal a growing backlash against DEI and ESG initiatives. Companies like Walmart and BlackRock have scaled back DEI programs, citing legal challenges and political pressure, while others, such as American Airlines, face scrutiny over incorporating ESG considerations into decision-making. The tension reflects a need to balance external pressures with internal commitments to long-term values. Perhaps it is helpful to explore the role of the board in this context.

Questions that the Article Addresses or Answers

• What is the role of the board in navigating the shifting broad policy landscapes and more specific policy matters like DEI and ESG initiatives?
• How can boards balance external pressures with internal commitments to long-term corporate values?
• How can boards effectively distinguish between transient trends and enduring principles when responding to societal pressures?
• What are the broader responsibilities of boards beyond the internal corporate operations they traditionally oversee?
• How can boards adapt their decision-making processes to integrate societal, cultural, and regulatory forces?
• What role does rationality and emotional investment play in sound decision-making within the boardroom?
• How can boards move from closed governance systems to open models that incorporate diverse external perspectives?
• What processes should boards use to legitimize policy decisions, particularly in contentious areas like DEI and ESG?
• What are the practical steps boards can take to tap into external wisdom and adapt proactively to emerging societal trends?
• How can boards champion corporate values and mobilize support for controversial decisions?

Expanding the Compass of Board Responsibilities

Boards of directors often narrowly define their roles, focusing primarily on oversight of internal corporate operations. However, in today’s evolving landscape, the board’s compass of concern must expand to include the societal, cultural, and regulatory forces that significantly impact a corporation. This broader perspective is essential to effectively navigate the complex interplay between internal priorities and external expectations.

The classical tendency of boards to draw boundaries too tightly around their domain—a closed system of governance—limits their ability to respond to external realities. A useful analogy comes from an ancient Chinese proverb: The shrike hunting the locust is unaware of the hawk hunting him. This underscores the importance of situational awareness and the consequences of neglecting broader responsibilities, particularly in areas like DEI and ESG, where societal scrutiny can become a “hawk” for unprepared corporations.

Balancing Public Perception and Policy Leadership

Corporations today are viewed not just as economic entities but as quasi-public institutions with responsibilities that transcend profit-making. The public is increasingly concerned with not only what companies do but also how they define their role in society. This public expectation places boards in a critical position to legitimize corporate policy decisions, especially on contentious issues like DEI and ESG.

The board’s role is twofold: to provide oversight and mobilize support for corporate decisions. Oversight involves ensuring that corporate actions align with legal, ethical, as well as corporate social responsibilities. Mobilizing support requires boards to champion policies that align with long-term corporate values, even when they face external resistance. For example, as companies grapple with backlash against DEI initiatives, boards must navigate the fine line between adapting to external pressures and upholding principles that define their organization’s values.

Rationality and Sound Decision-Making

The first role of a director is to “legitimize” a corporation. The issue of social responsibility and the realities of human behavior have always been ultimate determinants of sound decision-making. However, as Lyceum often highlights, human thinking, decision-making, and behavior are not always rational. There is a classical clash between the rational “economic man” thesis and the non-rational, emotional, value-oriented “social man” thesis. According to psychologists, non-rational behavior is the natural state of humans, while rational conduct is artificial, must be manufactured, and has a cost. Resources therefore must be sacrificed to gain rationality. For the individual director emotional investment is required as well as self-discipline, moderation of self-interest, and a sense of collectivity with other members of the board.

Boards must balance the economic and social dimensions of decision-making, which often collide in policy deliberations. This balancing act is a juggling effort that reflects the imperfection inherent in governance. Rational decision-making demands that not just the individual directors, but the board as a whole, exercise self-discipline, moderation of self-interest, and collective thinking. The boundaries between governance and management—or between the corporation and its broader environment—require careful consideration to ensure effective and responsible oversight.

The Wisdom of Open Governance

In the words of Axel Gustaffson Oxenstierna, the 17th-century Swedish chancellor whose words become known as Oxenstierna’s Law: “If you knew, my son, with what little wisdom the world is governed!” This sentiment resonates in today’s boardrooms, where wisdom is often overshadowed by the urgency of immediate demands. To govern effectively, boards must transition from closed systems to open governance models that integrate diverse sources of wisdom, including external values, beliefs, and societal expectations. Corporations increasingly need to wire their governance intelligence network throughout global society. This enables boards to sense the winds of change, the impending key events, and trends in extrinsic affairs that impact governance. Such intelligence networks provide early signals on technological-economic, regulatory, sociocultural, and global interactivity forces.

This brings to mind the adage frequently, but spuriously, attributed to Thomas Jefferson: “In matters of principle, stand like a rock; in matters of taste, swim with the current.” In the context of the current debates and tectonic shifts in ESG and DEI, boards must ask: Are these shifts merely trends or fads, or are they grounded in principle—or perhaps both? Reflection on this question helps boards distinguish transient pressures from enduring values, ensuring governance remains anchored in the corporation’s foundational principles and enduring priorities. .

Defining the Board’s Role in a Changing Landscape

The board’s role in navigating shifts in policy, and in this case more specifically in DEI and ESG initiatives, is not to dictate specific strategies but to govern with a broad and searching perspective. This includes:

1. Legitimizing Policy Decisions: Boards must provide a degree of finality and legitimacy to policy decisions including those related to DEI and ESG initiatives, ensuring these policies align with the company’s long-term vision and societal expectations.
2. Balancing Competing Pressures: Boards are tasked with weighing short-term pressures against long-term commitments to values such as sustainability, inclusivity, and corporate responsibility.
3. Tapping External Wisdom: By integrating governance intelligence networks, boards can sense, discuss, and address emerging trends and adapt in anticipation of changes in the external environment.
4. Scenario Planning: Boards should develop future-oriented scenarios to anticipate and prepare for changes that could impact governance and operations.
5. Championing Corporate Values: Boards must mobilize support for decisions, particularly controversial ones, and articulate how these decisions reflect the organization’s core values and mission.

Conclusion

Responsible governance requires boards to embrace a broader compass of concern, integrating external realities into their decision-making processes. The tectonic shifts in DEI and ESG programs challenge boards to balance external pressures with internal commitments to long-term values. By adopting an open governance model, boards can navigate these changes effectively, ensuring that their organizations remain resilient and aligned with societal expectations. In this era of transformation, the role of the board is not just to oversee but to lead with foresight and wisdom.

Finally, in addressing these mounting obligations of good corporate governance outside the boardroom, boards must strive to adapt, innovate, and lead in ways that are principled, forward-looking, and resilient amid societal change.