More U.S. corporate boards are going green.
Amid rising investor worries over global warming and shrinking natural resources, directors are keeping a closer watch on environmental issues. Boards at Integrys Energy Group Inc., Quicksilver Resources Inc., Tesoro Corp. and elsewhere recently have created separate environmental panels – joining long-established ones at DuPont Co., Occidental Petroleum Corp. and Rohm & Haas Co. Other companies cover environmental issues with an existing board committee.
About 25 percent of Fortune 500 companies now have a board committee overseeing the environment, compared with fewer than 10 percent five years ago, estimates Mindy Lubber, president of Ceres, a national coalition of activists, investors and others concerned with the environment. Such panels typically try to make sure that executives effectively handle conservation efforts, new environmentally friendly ventures like wind power, compliance with environmental regulations and related business risks.
Shareholders are more active on environmental issues, too. The number of investor proposals related to the environment nearly doubled between 2004 and 2008, RiskMetrics Group Inc. says. Many proposals urge increased board attention to the issue.
The Earth’s sustainability ”has become a much more important part of every board’s activities,” observes Lester A. Hudson, chairman of American Electric Power Co.’s governance committee, which monitors environmental concerns.
AEP’s experience illustrates the new dynamic. The electric utility, based in Columbus, Ohio, is among the largest U.S. users of coal – and emitters of greenhouse gases.
In November 2003, public-employee pension funds offered a shareholder resolution urging independent directors to assess how AEP would deal with potential regulations to reduce carbon dioxide and other power-plant emissions. Mr. Hudson says three fellow directors formed a special panel to do a study, prompting the unions to drop their proposal.
The board members prepared an analysis following interviews with nearly 30 investors, environmentalists, experts, analysts and regulators. Their August 2004 report concluded that pending legislation likely wouldn’t impact AEP’s plan to invest $3.5 billion in cleaner coal-burning technologies by 2010. But the directors noted that AEP might want to consider scaling back plans for another $1.5 billion beyond that, because laws by that time might limit the use of coal altogether.
The study was a first for U.S. utilities, says Denise Nappier, treasurer for the state of Connecticut, which sponsored the 2003 resolution.
In 2006, Ceres gave AEP the highest U.S. ranking for board involvement in climate change, among 100 global businesses studied. That same year, AEP directors gave their governance committee oversight of its sustainability initiatives.
The panel now receives updates twice a year from Chief Executive Michael G. Morris and critiques drafts of his annual sustainability report. In the 2008 report, Mr. Hudson wrote that the board applauded AEP’s progress on offsetting growth in greenhouse-gas emissions, but ”expects and requires higher performance in the future.”
AEP directors also tightened environmental-performance targets that employees must meet to receive annual bonuses. In 2006, they docked $80,045 from Mr. Morris’ targeted $2 million bonus, after AEP received nine notices of possible environmental regulatory violations; the goal had been no more than five. Last year, the target dropped to four, and AEP received only two such notices. Businesses rarely link management rewards to environmental performance, according to Ceres.
Board committees responsible for environmental affairs elsewhere are turning up the heat, too. Steven Kline, chief environmental officer of PG&E Corp., told the board’s public-policy panel in June about plans to lower the company’s water consumption over several years – without promising a timetable.
They replied, ”That’s great. But let’s see if we can do it faster,” Mr. Kline recalls. He hopes to offer a water-reduction schedule for the energy holding company when the panel convenes again in October.
But focusing board committees on the environment doesn’t ensure eco-friendly behavior, activists say, citing Exxon Mobil Corp. The oil giant formed a public issues and contributions panel to monitor safety, health and the environment immediately after its Valdez oil spill in 1989.
The committee’s efforts have been ”more window dressing than anything else,” contends Ms. Lubber. She says the company reduced oil spills, but its climate-change performance ”is disappointing” – partly because it lacks a comprehensive strategy for lowering greenhouse-gas emissions.
Exxon takes climate change seriously and has invested more than $1.5 billion to reduce greenhouse-gas emissions since 2004, says spokesman Tony Cudmore.
Ms. Lubber also faults Exxon directors for rejecting investor requests during the past five years to talk face-to-face about environmental problems. W.V. Shipley, head of a board committee that handles corporate governance, wrote Ceres last year that directors prefer senior executives to hold such sessions. Mr. Shipley declined to comment for this article.
In another sign of investor dissatisfaction, seven environmental resolutions came to a vote at Exxon’s annual meeting in May. One proposal asked Exxon to set specific goals for greenhouse-gas emissions; it drew 30.9 percent of votes cast.