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Has ESG Turned the Boardroom into an Escape Room?
Tuesday, June 11, 2024

For those of you who have never participated in an escape room, it is a real-life game that confines a group of people (usually friends, co-workers or even family, for the adventurous types) to a room. The group then collaborates to solve a series of riddles necessary to allow the group to escape the room. The premise of the game, and presumably its entertainment value, is how groups of people optimize their skills and strengths with a goal to solve a shared problem, the achievement of which is the "win". While it may seem inapt to conflate a corporate director's duty to make good decisions on the corporation's behalf with a recreational diversion, the ESG strategies directors choose to implement (or not) might similarly be riddled with escape-room like tension as board directors struggle to choose ESG policies that best serve their businesses. The stakes of course are higher than a game – especially for the shareholders the board represents – but the seemingly conflicting no-way-out series of decisions relating to ESG highlight just how difficult it is for corporate boards to unlock the ESG enigma.

Today's Wall Street Journal article about “anti-woke” shareholders who oppose environmental and social initiatives drives this point home. The article notes that while anti-ESG activist proposals are not winning investor support (the article cites a 2% success rate), the movement's very existence invariably impacts corporate behavior because shareholders use these proposals to pressure boards to change policies the shareholders believe create corporate risk. The article cites as an example Target's experience during Pride month in 2023 and the shareholder lawsuit that followed. As I mentioned when that lawsuit was filed, the Target board faced a no-win situation: if its board failed to consider the short and long term consequences of DEI's impact on all of its stakeholders (including consumers and its employees), a shareholder claim might have been premised on that oversight failure. The irony of the risks associated with the “for or against" ESG divide is that lawsuits motivated by political agendas force corporate boards to consider a new risk: the risk that corporate actions might attract more lawsuits with political agendas.

And while we are on the topic of politics, as the line between politics and culture continues to blur in this election year, boards will be forced to make even more difficult decisions regarding how to address and manage the risks that political differences pose to stakeholders. Escape room winners typically display quick thinking and deploy creative teams who communicate, delegate, organize and manage their time, all at the direction of a strong leader. It is no mistake these qualities inform a well functioning board. Perhaps the escape room is an object lesson for boards looking to unlock ESG and other challenges in turbulent times.

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