Leading in the age of ESG

The prolonged period of uncertainty during 2020 saw many organisations retain their CEOs, but now turnover is increasing. BHP chair Ken MacKenzie FAICD, a former chief executive himself, says the current operating context of higher scrutiny demands greater resilience.

The increasing focus on environment, social and governance (ESG) issues by investors and the community, and mega themes of climate change and cyber risk, presents boards with greater complexity and risk. The job of the boards is to find a way to bring clarity and simplicity to this, says BHP chair Ken MacKenzie FAICD. They also need to double down on their most important job: selection of a CEO for the times and planning their succession.

“There are higher expectations of companies and you can argue whether that is right or wrong, but you need to respond to reality,” he told Company Director magazine. “Community patience is short, expectations for accountability are high and stakeholders aren’t afraid to wade in on issues. The level of scrutiny is not going to get easier.”

The timeframe for decision-making is also tighter according to MacKenzie. “It’s new territory for everyone. So what’s required is dialogue between management and board to work out policy direction to agree action and objectives. We set the tone, but the CEO creates the leverage. If you get the right CEO and the right values, that’s a board’s best defence.”

Canadian Mike Henry has been CEO of BHP since January 2020. He was formerly operations president of the organisation’s Minerals Australia business.

MacKenzie says from his perspective, the biggest shift in capital markets over the past decade, and more specifically the past five years, is the focus on ESG. “This is a trend which is accelerating and being driven not only by NGOs and civil society, but by the investment community. It is this shift that is causing corporations to think more broadly about their stakeholders than ever before.

Occasionally, it is asserted that global capitalism and a focus on stakeholder interests are somehow inconsistent. That is plainly not the case.“

He says many companies have recognised for years that sustainable competitive returns are only made possible by a focus on the long term, and by an enduring commitment to the stakeholders upon whom they rely to run their business. “Investors are now also demanding greater transparency across a broad suite of ESG topics such as climate change, inclusion, equality and diversity, privacy and data security, Indigenous rights, water, modern slavery and biodiversity. It is this breadth of issues, greater transparency and urgency of action that is increasing complexity for boards. These ESG topics are business risks to be managed and represent both opportunity and threat.” So, how should boards best respond? “Boards need to find a way to bring clarity and simplicity to this complexity and help management focus on the ESG issues most relevant to their business success and the governance processes around them,” says MacKenzie, adding each organisation must find its own balance in its strategy, capability and culture.

“Every company needs to find its way. You have to identify the ESG issues most relevant to your business and determine how you’re going to handle them. That will be different for everyone.” And the tighter the linkage back to your business, the more effective it will be.

Plan for succession

Boards show leadership by constructively challenging management and by directors bringing their external perspectives into the organisation to help the executive team find the right balance, and place the right emphasis where there are difficult choices to be made. “One of the specific ways a board shows leadership, and arguably a board’s most important decision, is choosing the right CEO — the person who will, more than any other, have day-to-day responsibility for balancing the interests of various stakeholders,” says MacKenzie. “That’s why CEO succession is such a critical ongoing process, which should begin on day one of a new CEO’s term.”

This “ongoing process” means that the skills and capabilities required of future successors are discussed early in the tenure of each CEO. Henry took over the role from CEO of six years Sir Andrew Mackenzie, who had replaced Marius Kloppers in 2013. The objective of succession planning is to have a slate of internal successors and BHP’s approach development has so far worked well.

“We shouldn’t think of CEO succession as a single event. This is a multi-year development process and the board must be able to adjust and adapt to a changing business environment. Society, and this includes shareholders, is demanding more of companies. The overall expectations of accountability are historically high, with unprecedented levels of scrutiny and transparency demanded of our leaders. To be effective, boards must plan for this as part of the succession process.”

For example, at BHP the shift towards “social value” — how the company creates value beyond financial value — has been underway for some years. MacKenzie says in developing the CEO profile, the board determined that any candidate must also be skilled and comfortable in articulating social value, implementing policies and metrics and demonstrating leadership, in areas such as climate, inclusion and diversity, and Indigenous heritage.

Recruit for resilience

Another attribute a board must look and plan for is personal resilience — a quality demanded in large quantities during the global pandemic. Some people have it innately, but it can be learned, says MacKenzie. “Resilience is one of the core capabilities. It’s part of the toolkit of a modern leader.”

What to look for? The short answer is whether the leader demonstrates a growth mindset or a fixed mindset. “If a CEO is in the role long enough, they will likely encounter a crisis of one type or another,” says MacKenzie. “How a CEO reacts in a crisis and their own personal resilience are critical attributes. As events of the past 18 months have shown, leadership is so much more than technical and managerial. More than ever, leaders must be adaptable, resilient and visible.”

An engineer by training and a competitive sailor, the Canadian-born MacKenzie was with global packaging company Amcor for 23 years, managing director and CEO from 2005–15. He joined the board of BHP in 2016, succeeding Jac Nasser as chair a year later. Reflecting on his first time as a listed company CEO, which required recovery after Amcor was exposed in a cartel price-fixing scandal with rival Visy, MacKenzie found it almost overwhelming.

“Nothing really prepares you for that role,” he says. “One day, you find yourself in it and suddenly you have all these other stakeholders you never had to worry about.”

MacKenzie’s deep interest in leadership has led to him working in a pro bono capacity with Melbourne Business School dean Ian Harper AO FAICD on its New CEO Program. This involves a small cohort of new CEOs for each program with benefits coming from group learning and connections, and the understanding that all new CEOs are facing similar challenges.

Many people aspire to be CEO as the summit of their career, but MacKenzie says, “In reality, it is base camp. The biggest challenges of a CEO’s career lie ahead. Nothing can ever fully prepare a new CEO for the job. It is a unique experience and it challenges an individual’s leadership, strategic approach and stakeholder management skills. The learning curve for every new CEO is very steep.”

The New CEO Program brings together world- class experts including CEO adviser Stephen Miles, strategist Roger Martin, board effectiveness authority and Lendlease director Colin Carter AM FAICD — plus a panel of former CEOs including Paul O’Malley (BlueScope), James Gorman (Morgan Stanley) and Alison Watkins FAICD (Coca-Cola Amatil). Everyone donates their time. The course looks at the different components of a CEO role — leadership, strategy, stakeholder management, value creation and capital allocation — and provides practical skills to accelerate their impact. An important focus is the development of resilience.

Boards should coach succession planning as a development program, says MacKenzie. He notes it’s not rocket science, but about doing the work and being diligent. And the process should focus on identifying and closing gaps in the role profile ahead of time. “It’s also critical that the learning never stops. Boards should be thoughtful about how they support the ongoing development of a new CEO.”

Board skills

When it comes to skills around the board table, MacKenzie says that just as it does for the CEO, a board should regularly assess its own profile — its current skills, expected requirements for the future and resultant gaps — and then use that analysis to establish clear succession plans.

Following a recent assessment of its skills and experience matrix, the BHP board identified a need to enhance technology expertise. Mining has increasingly become a technology-enabled business and the board planned accordingly.

Most recently the BHP board has appointed former HP Inc president Dion Weisler — also a non- executive director of Thermo Fisher Scientific who formerly held senior executive roles at Lenovo Group and Telstra Corporation — and Xiaoqun Clever who previously held senior roles with software multinational SAP SE and media group Ringier AG. MacKenzie says recruitment should bring a unique, independent, collective view of the world and the leadership that is needed to create the right balance to succeed.

Climate transition

With climate change a material governance, risk and strategy issue, in FY20, the board undertook a deep dive on the risks and opportunities, reviewing a number of climate scenarios (including its 1.5°C scenario and a climate crisis scenario) and their implications. Its September 2020 Climate Change Report outlined plans to accelerate its move to net- zero operational greenhouse gas emissions, with a target to reduce its Scope 1 and 2 operational emissions by at least 30 per cent by FY30, and actions to support decarbonisation through reduction of Scope 3 emissions across the value chain. Performance against operational emissions and value chain measures now represent 10 per cent of the executive leadership team’s cash and deferred remuneration scorecard.

Social value

MacKenzie notes that BHP’s statement of purpose has evolved from “social licence” to creating “social value”. The concept of social value is a variation on what strategist Professor Michael Porter and Harvard lecturer Mark Kramer called “shared value” — a business strategy that is designed to solve social issues profitably. The company adopted this approach in 2019, making creation of social value one of its five key priorities — along with safety, portfolio, capital discipline, culture and capability.

“We have a clear responsibility to create value for our shareholders,” says MacKenzie. “The board must find ways to connect with its business, customers, suppliers and communities to get an objective view on the creation of social value. It must have clear alignment with its CEO and management and hardwire its expectations into the CEO profile and company strategy.”

MacKenzie emphasises it’s also important to seek expertise outside the board and organisation, particularly with emerging issues. Traditionally, this has come via dialogue with NGOs and investors, but new channels are being explored.

“At BHP, the board meets with civil society leaders in various fields of sustainability, to discuss a range of social and environmental issues,” says MacKenzie. “We call this the Forum on Corporate Responsibility. Sometimes they’re tough and uncomfortable conversations, but they help the board determine if they’re thinking broadly enough and effecting positive change.”

Advice from the chair

Big aspirations

“The value in big aspirations comes from the change they drive within an organisation. They are particularly helpful where you’re wanting to drive transformational and cultural change. It proves to our stakeholders that we’re serious about making progress and shows our co-workers we’re committed to our purpose, and encourages them to be, too.

For example, our data shows inclusive and diverse workforces outperform on safety, productivity and wellbeing. So, in 2016, we set an aspiration of gender balance by 2025, when our female representation was 17 per cent. It is now 27 per cent.

Will BHP achieve its aspiration? We’re trying hard and through these efforts are undoubtedly transforming the company — and the industry — in permanent and positive ways, which would not have been possible without a lofty goal.”

Succession steps

“To get this right, boards must be able to clearly articulate the profile of the next CEO.In my experience, to do that, they should establish the unique requirements of their business context and where it is heading, and then develop the specific profile of what the next CEO looks like to meet those needs.

Once the board has developed the profile for the role, the next step is to identify potential candidates, map the candidates’ current skills against the profile and establish development plans to close any gaps. The review of progress against these development plans is a key board responsibility.”

Climate change

“Climate change requires an urgent global approach. At BHP, we recognise as a leader in the resource industry, we need to be part of the solution. Our scenario modelling demonstrates that the more the world decarbonises, the more valuable BHP becomes. Opportunity comes from the fact that energy transition will require significantly more commodities such as copper (solar generation), nickel (batteries) and iron ore and metallurgical coal (wind turbines).

But if we are to support decarbonisation with our products, we must also operate in a long- term, sustainable and responsible way. If not done properly, this is a risk to our business. That’s why we’re working hard to establish a comprehensive leadership position with our climate agenda.

This appreciation is core to our business, and board and management understand the role we need to take to help lead through this transition.”