Corporate Governance and Sustainability: The Role of the Board of Directors [1st ed.] 978-3-030-18884-9;978-3-030-18885-6

Table of contents :
Front Matter ....Pages i-xx
Introduction (Marco Minciullo)....Pages 1-9
The Governance of Sustainability: A Theoretical Background (Marco Minciullo)....Pages 11-45
The Early Stage of the Governance of Sustainability in Italy and the UK: The Scenario in 2013 (Marco Minciullo)....Pages 47-96
The Evolution of Corporate Governance towards Sustainability in Italy and the UK: The Influence of Regulation (2017) (Marco Minciullo)....Pages 97-144
Appraising the Evolution of the Governance of Sustainability in 2018: An Overview of Italy and the UK (Marco Minciullo)....Pages 145-171
Conclusions (Marco Minciullo)....Pages 173-181
Back Matter ....Pages 183-185

Citation preview

Marco Minciullo

Corporate Governance and Sustainability The Role of the Board of Directors

Corporate Governance and Sustainability

Marco Minciullo

Corporate Governance and Sustainability The Role of the Board of Directors

Marco Minciullo Università Cattolica del Sacro Cuore Milan, Italy

ISBN 978-3-030-18884-9    ISBN 978-3-030-18885-6 (eBook) https://doi.org/10.1007/978-3-030-18885-6 © The Editor(s) (if applicable) and The Author(s), under exclusive licence to Springer Nature Switzerland AG 2019 This work is subject to copyright. All rights are solely and exclusively licensed by the Publisher, whether the whole or part of the material is concerned, specifically the rights of translation, reprinting, reuse of illustrations, recitation, broadcasting, reproduction on microfilms or in any other physical way, and transmission or information storage and retrieval, electronic adaptation, computer software, or by similar or dissimilar methodology now known or hereafter developed. The use of general descriptive names, registered names, trademarks, service marks, etc. in this publication does not imply, even in the absence of a specific statement, that such names are exempt from the relevant protective laws and regulations and therefore free for general use. The publisher, the authors and the editors are safe to assume that the advice and information in this book are believed to be true and accurate at the date of publication. Neither the publisher nor the authors or the editors give a warranty, express or implied, with respect to the material contained herein or for any errors or omissions that may have been made. The publisher remains neutral with regard to jurisdictional claims in published maps and institutional affiliations. This Palgrave Macmillan imprint is published by the registered company Springer Nature Switzerland AG The registered company address is: Gewerbestrasse 11, 6330 Cham, Switzerland

To my family, the foundation stone of my life

Acknowledgments

I am grateful to Mario, my mentor and guide, for inspiring me to become an actor of change in society through my commitment in academia. A special thanks to Matteo, for his support throughout the process. Gratitude goes to Margarethe and David, for their precious friendship, the valuable brainstorming, and their precious suggestions. I would like also to thank the CSR Manager Network for the support during the entire research project. I am also grateful to Gabriel, Madeleine, and the editorial staff, for their patience and support. Finally, my deepest gratitude goes to my family, for the endless support, and to my friends, for their patience during the last months.

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Contents

1 Introduction  1 1.1 Governing Sustainability   1 1.2 A New Legal and Regulatory Framework   2 1.3 The Research Project   4 1.4 Book Structure   5 References  7 2 The Governance of Sustainability: A Theoretical Background 11 2.1 Introduction  11 2.2 The Role of the Board of Directors in Corporate Governance 13 2.2.1 The Board of Directors  13 2.3 Common Law and Civil Law  15 2.3.1 Investor Protection under Civil and Common Law 17 2.3.2 Corporate Governance under Common Law and Civil Law  19 2.4 The Governance of Sustainability under Civil and Common Law: Comparing Italy and the UK  21 ix

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2.4.1 An Overview of Corporate Governance and Sustainability Regulation in the UK  22 2.4.2 An Overview of Corporate Governance and Sustainability Regulation in Italy  25 2.5 The Governance of Sustainability: A Literature Review  29 2.5.1 The Role of the Board of Directors towards Sustainability 29 2.5.2 The Integration of Sustainability in Corporate Governance through Board Committees  31 2.5.3 The Impact of External Factors on Board Committees 33 References 35 3 The Early Stage of the Governance of Sustainability in Italy and the UK: The Scenario in 2013  47 3.1 Introduction  47 3.2 The Perspective of Italian Boards of Directors in 2013  48 3.2.1 Methodology  48 3.2.1.1 The Research Phases  48 3.2.1.2 The Sample  50 3.2.1.3 The Structure of the Questionnaire  51 3.2.2 The Role of the Board of the Directors  53 3.2.2.1 The Integration of Sustainability within the Vision and Strategic Plan  53 3.2.2.2 The Implementation of SustainabilityRelated Practices  55 3.2.2.3 The Operational Model of the Board of Directors 56 3.2.2.4 Control/Risk Management and Stakeholder Engagement Related to Sustainability 57 3.2.2.5 Competences and Rewards Related to Sustainability 59 3.2.3 The Integration of Sustainability at the Organizational Level  60 3.2.3.1 Organizational Units and the Sustainability Manager  60



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3.2.3.2 Reporting Activities  61 3.2.3.3 Room for Sustainability during the Shareholders’ General Meeting  62 3.2.4 Emerging Approaches  64 3.2.4.1 The Results of Cluster Analysis  65 3.2.4.2 Clusters by Industry  71 3.2.5 The Role of the Sustainability Manager  71 3.2.6 The Point of View of Non-executive Independent Directors  75 3.2.6.1 Definition of the Vision and Socioenvironmental Strategy  76 3.2.6.2 The Perceived Benefits of Sustainability  77 3.2.6.3 Competences, Compensation, and Accountability 78 3.2.6.4 The Topics Discussed by the Board of Directors 79 3.3 The Governance of Sustainability According to 2013 Corporate Documents: Comparing Italy and the UK  82 3.3.1 Methodology  82 3.3.1.1 The Research Phases  82 3.3.1.2 Desk Analysis  83 3.3.1.3 The Sample  85 3.3.2 The Italian Context in 2013  85 3.3.3 The UK Context in 2013  87 3.3.4 A Comparison between Italy and the UK in 2013  88 3.4 Conclusions  89 References 94

4 The Evolution of Corporate Governance towards Sustainability in Italy and the UK: The Influence of Regulation (2017) 97 4.1 Introduction  97 4.2 The Perspective of Italian Boards of Directors in 2016  99 4.2.1 Methodology  99 4.2.1.1 The Research Phases  99 4.2.1.2 The Sample 101

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4.2.1.3 The Structure of the Questionnaire 102 4.2.2 The Role of the Board of the Directors 103 4.2.2.1 The Operational Model of the Board of Directors in Accordance with the New 103 Code of Corporate Governance 4.2.2.2 The Activities of the Board of Directors 105 4.2.2.3 Competences and Training towards the 110 Integration of Sustainability 4.2.2.4 Social and Environmental Performance 115 and Monetary Incentives 4.2.2.5 The Integration of SustainabilityRelated Goals within Firms’ Strategic Plans117 4.2.3 The Integration of Sustainability at the 119 Organizational Level 4.2.3.1 The Organizational Units and the 119 Sustainability Manager 4.2.3.2 Communication and Reporting Activities122 4.2.3.3 Sustainability Debate during the 125 Shareholders’ General Meeting 4.3 The Evolution of the Governance of Sustainability According to Corporate Documents: Italy and the UK between 2013 and 2016128 4.3.1 Methodology 128 4.3.1.1 Research Design 128 4.3.1.2 The Desk Analysis 129 4.3.2 The Italian Context in 2016130 4.3.3 The UK Context in 2016132 4.3.4 The Evolution of the Governance of Sustainability between 2013 and 2016132 4.3.5 The Dynamics of Change in the Governance of Sustainability135 4.4 Conclusions 137 References142

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5 Appraising the Evolution of the Governance of Sustainability in 2018: An Overview of Italy and the UK145 5.1 Introduction 145 5.2 The Integration of Sustainability in Corporate Governance According to Corporate Documents: 146 Patterns of Evolutions in Italy and the UK 5.2.1 Methodology 146 5.2.1.1 Research Design 146 5.2.1.2 Desk Analysis 147 5.2.2 The Background: Non-financial Disclosure 148 Requirements in Italy and the UK 5.2.3 The Italian Context in 2017150 5.2.4 The UK Context in 2017151 5.2.5 Following Up on the Changes in Corporate 152 Governance Mechanisms 5.2.6 The Origin of Sustainability Board Committees: 154 A Longitudinal Overview 5.2.7 Patterns of Evolution of the Corporate 158 Governance of Sustainability 5.3 The Influence of Sustainability Board Committees: A 162 Focus on Italian Firms 5.3.1 Sustainability Board Committee and Executive Remuneration162 5.3.1.1 Methodology 163 5.3.1.2 Sustainability-Related Compensation 163 5.3.1.3 Sustainability-Related Compensation 164 and Governance Model 5.4 Conclusions 166 References170 6 Conclusions173 6.1 The Demand for Governance of Sustainability 173 6.2 Filling the Research Gap 174

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6.3 Towards Sustainability-Oriented Governance 177 6.4 Limitations and Opportunities for Further Research 179 References181 Index183

About the Author

Marco  Minciullo is Adjunct Professor of Business Strategy at the Università Cattolica del Sacro Cuore and Research fellow at ALTIS-­ Graduate School Business & Society, both in Milan. He is also Visiting Researcher at University of California—Irvine (USA). Marco currently teaches Business Strategy, Corporate Strategy, and Green Management & Sustainability. His research interests are mainly related to Corporate Governance, Sustainability, CSR, and Strategic Philanthropy.

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List of Figures

Fig. 5.1 Patterns of evolution of the governance of sustainability in Italy (FTSE-MIB)158 Fig. 5.2 Patterns of evolution of the governance of sustainability in the 160 UK (FTSE 100)

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List of Tables

Table 3.1 Table 3.2 Table 3.3 Table 3.4 Table 3.5 Table 3.6 Table 3.7 Table 3.8 Table 3.9 Table 3.10 Table 3.11 Table 3.12 Table 4.1 Table 4.2 Table 4.3 Table 4.4 Table 4.5 Table 4.6 Table 4.7

The strategic relevance of sustainability for the board of directors54 The governance of social and environmental issues 56 Risk management, stakeholder engagement, and compensation58 The integration of sustainability at the organizational level 60 The sustainability report 62 The Shareholders’ General Meeting 63 Emerging approaches 66 Industry-based clusters 72 The influence of the sustainability manager 74 The topics discussed by the board of directors 80 Models of governance of sustainability 84 The governance of sustainability in 2013 (Italy and UK) 86 The governance of social and environmental issues 104 The allocation of sustainability-related activities 106 The allocation of sustainability-related activities: the evolution from 2013 109 Sustainability-related skills/competences within the board of directors110 Sustainability-related training programs 113 Sustainability-related performance and monetary incentives 116 The integration of sustainability in firms’ strategy 118 xix

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List of Tables

Table 4.8 Table 4.9 Table 4.10 Table 4.11 Table 4.12 Table 4.13

Sustainability at the organizational level Communication and reporting Shareholders’ General Meeting Models of governance of sustainability The governance of sustainability in 2016 (Italy and the UK) The evolution of the governance of sustainability between 2013 and 2016 (Italy and the UK) Table 4.14 The changes occurring in the governance of sustainability (Italy and the UK) Table 5.1 Models of governance of sustainability Table 5.2 The governance of sustainability in 2017 (Italy and the UK) Table 5.3 The evolution of governance of sustainability between 2013 and 2017 (Italy and the UK) Table 5.4 Origin of Sustainability and Delegate Board Committees Table 5.5 Sustainability-related compensation for executive directors Table 5.6 Sustainability-related compensation and governance of sustainability model

120 123 126 129 130 133 135 148 150 153 155 164 165

1 Introduction

1.1 Governing Sustainability In the last decade, the statements of the CEOs of the leading American and European firms have often cited sustainability as a topic of growing importance for corporate strategy (Beauchamp and O’Connor 2012). However, these statements have not always resulted in a tangible commitment towards social and environmental issues (Barkemeyer et  al. 2014), raising a question about which elements could really foster the integration of sustainability into a firm’s strategy. Considering the governance of a firm, the board of directors is recognized as one of the principal actors of good corporate governance (Hillman and Dalziel 2003), as it can oversee management and support the decision-making process (Hendry et al. 2010). The monitoring and supporting roles of the board of directors are relevant also for what concerns sustainability (Elkington 2006), as the directors can drive organizational change for desired sustainability-related outcomes (Galbreath 2016). Recently, the creation of ad hoc board committees has been defined as one of the most appropriate decisions that top corporate governance bodies may take (Gennari and Salvioni 2018). Setting up a board committee © The Author(s) 2019 M. Minciullo, Corporate Governance and Sustainability, https://doi.org/10.1007/978-3-030-18885-6_1

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with responsibility for guiding and monitoring the development of a sustainability strategy and its implementation is interpreted as a way to better monitor management in terms of its sustainability performance and as a tool to provide advice to management when dealing with social and environmental issues (Burke et al. 2019). The presence of board committees dealing with sustainability has grown significantly in the last few years, often under the pressures of international institutions (Vurro and Perrini 2011), but there are still specific country-level or regional characteristics that may imply a diverse effect on corporate governance mechanisms (Ortiz-de-Mandojana et al. 2016). With regard to board committees, extant research has focused on the mandatory or self-regulatory requirements regarding the overall quality of corporate governance, such as the presence of independent directors (Liao et al. 2015) or the adoption of global reporting standards (Vigneau et al. 2015). Nevertheless, the research on country-level external conditions that could affect the diffusion of board committees responsible for social and environmental issues has been limited (Gennari and Salvioni 2018). This research gap may be even more relevant taking into consideration that in the last years the legal and regulatory framework regarding sustainability has changed significantly, becoming really demanding for firms (OECD 2018).

1.2 A New Legal and Regulatory Framework The European Union has been one of the most committed institutions towards sustainability, in particular for what concerns the involvement of the private sector. In particular, in 2014 the European Union’s Non-­ Financial Reporting Directive (Directive 2014/95/EU) laid down the rules on disclosure of non-financial and diversity information by large firms in Europe, implying the obligation for most listed and/or large firms to include non-financial statements in their annual reports from 2018 onwards. The directive established the requirement for certain large firms to publish reports on the policies they implement in relation to

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environmental protection, social responsibility and treatment of employees, respect for human rights, anti-corruption and bribery, and diversity on company boards (in terms of age, gender, educational and professional background; Quinn and Connolly 2017). After this directive entered into force, European countries had a short time to frame their own national regulations. In December 2016, the UK government published the Companies, Partnerships and Groups (Accounts and Non-Financial Reporting) Regulations to implement the European “Non-Financial Reporting Directive.” The regulation, which applied for financial years beginning on or after January 1, 2017, amended the Companies Act 2006 requirements for the annual reports, and included diversity requirements in the Disclosure and Transparency Rules (DTR), but did not provide any other rule for board structure (Helfaya and Moussa 2017). As far as Italy is concerned, in contrast, one of the first reactions was the revision of the Code of Corporate Governance of firms listed on the Italian Stock Exchange. The new version of the code highlighted the opportunity for listed firms to create a specific committee responsible for sustainability issues by the end of 2016. At the same time, the legal accountability of the top management towards social and environmental issues was extended (Legislative Decree 231/01), increasing significantly the pressures on Italian listed firms. Finally, at the end of 2016 the Italian government approved Legislative Decree No. 254/2016, implementing the same European Union Directive 2014/95/EU. The enforcement of this law was expected to exert a stronger influence on Italian firms, as it indicated that the management of eligible firms was responsible for drafting the non-financial statement, but also considered the board of directors responsible for compliance with the law (Venturelli et al. 2017). Recent years have been characterized, indeed, by significant changes in the legal and regulatory framework concerning the governance of sustainability, but it is necessary to underline that these changes were not always homogeneous. Previous studies (La Porta et al. 1998) made evident that the enforcement of laws and regulations may vary according to the legal tradition of the country (e.g., civil law, common law), especially for what concerns sustainability issues (Hörisch et al. 2017). In particular, previous research has demonstrated that in civil law contexts there is a higher

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consideration for a broader category of stakeholders, whereas in common law countries the main focus is on shareholders (Collison et al. 2012). Thus, the research gap in the role of external pressures on the integration of sustainability within corporate governance, and the significant changes in the legal and regulatory framework that occurred in Europe, motivated this research project on the role of legal tradition in determining the implementation of sustainability within corporate governance through board committees.

1.3 The Research Project This research project started in 2013, by the recognition that sustainability issues may play a more significant role in firms’ strategy when integrated in corporate governance mechanisms. Since its beginning, the aim of this research was filling the gap regarding the role of legal tradition in determining the implementation of sustainability-related corporate governance mechanisms; that is, the creation of board committees devoted to social and environmental issues. In particular, the scope was to verify if the higher concern for stakeholders in civil law contexts affects also the governance of sustainability. Furthermore, as academic research was as yet unable to describe properly how governance structures related to sustainability evolved over time (Spitzeck 2009), this research project was intended to investigate also if and how a potential increase in the presence of sustainability board committees due to the legal context is also able to predict a higher concern for social and environmental issues, and to influence firms’ pathway towards sustainability through time. Thus, the project was designed as a longitudinal study, with multiple waves of data collection and analysis, focused on Italy and the UK, two countries representative, respectively, of the civil law and of the common law tradition (La Porta et al. 1998). The research project was developed around two distinct activities: an initial stream of investigation was carried out through multiple questionnaires addressed periodically from 2013 onwards to the firms listed on the FTSE-MIB index of the Italian Stock Exchange, which includes the most important firms in the country.

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In addition, to strengthen the results of the empirical investigations, a second stream of research was conducted by carrying out a longitudinal desk analysis of the main corporate documents that the same firms published from 2013 onwards. The desk analysis was carried out in parallel also with regard to the UK, by taking into consideration the firms belonging to the FTSE 100, the benchmark index of the London Stock Exchange.

1.4 B  ook Structure The book is divided in six chapters, aimed at providing a complete overview on the issue of the governance of sustainability. The introduction summarizes why corporate governance is becoming increasingly relevant to fully integrate sustainability within firms, starting from the discussion of recent academic debate and regulatory evolution. The summary of the contents of the chapters follows. Chapter 2 is about the theoretical background of the research project. The chapter starts by providing an overview of the most significant contributions, both academic and practitioner, related to corporate governance, and in particular to the board of directors. Then it covers the role of legislation in determining the configuration of corporate governance, looking at the two main legal traditions, and focusing specifically on the legal and regulatory framework in Italy and in the UK. The chapter ends by analyzing how the academic debate has investigated the topic of the governance of sustainability, looking in particular at the role of board committees, and on how these committees are influenced by external factors. Chapter 3 presents the results of the first phase of the research project, which started in 2013 around three distinct activities: the first investigation was carried out through a questionnaire addressed to the firms listed on the FTSE-MIB index of the Italian Stock Exchange, the main benchmark index of the Italian stock exchange; a second investigation was conducted by interviewing a benchmark sample composed of independent directors belonging to the board of directors of the analyzed firms; and a third investigation was conducted by carrying out a desk analysis of the main corporate documents that the FTSE-MIB firms published from

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2013 onwards. The desk analysis was carried out in parallel also with regard to the UK, by taking into consideration the firms belonging to the FTSE 100, the benchmark index of the London Stock Exchange. The chapter reveals that the issues related to sustainability in 2013 had already become part of the agenda of the board of directors of the main Italian listed firms, even if the integration of social and environmental issues was neither complete nor homogeneous. Moreover, the chapter derives a promising scenario for the governance of sustainability from the desk analysis, as sustainability issues were integrated by many firms listed in the top indexes of the Italian and London stock exchanges. Chapter 4 focuses on the second wave of the research project, which started in 2017, with regard to the period between 2013 and 2016. The research was developed around two distinct activities: the first line of research was realized by administering a questionnaire to the firms listed on the FTSE-MIB index of the Italian Stock Exchange, in order to assess how these firms have responded to the recommendations derived by the revision of the Code of Corporate Governance for listed firms (2015). A second line of research was carried out through a desk analysis of the main corporate documents that the same firms published between 2013 and 2016  in Italy and in the UK by the firms listed in the respective benchmark indexes; that is, FTSE MIB and FTSE 100. The chapter highlights the evolution of the governance of sustainability between 2013 and 2016, providing an overview of the development paths followed by the most relevant Italian and British firms. In particular, the chapter discusses the growing integration of sustainability within the corporate governance of the major Italian listed firms, due to the revision of the Code of Corporate Governance. In line with the first part of the study, the results of the desk analysis indicate that between 2013 and 2016 most Italian top listed firms changed their governance of sustainability, while in the UK there were fewer changes, equally distributed across time. Chapter 5 builds on the results presented in the previous chapters, to present the scenario of the integration of sustainability within corporate governance at the end of 2017. The chapter highlights the different effect of the non-financial disclosure regulation in Italy and in the UK, taking into consideration the evolution of sustainability-related governance from 2013 onwards. The results of the desk analysis are then compared

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with a further analysis of compensation related to sustainability, aimed at verifying the potential association between these two topics. The chapter discusses some interesting trends: first, the further growth of the presence of sustainability board committees, more emphasized in Italy than in the UK; and second, the decreasing presence of the board of directors with a supervisory role. Additionally, the study highlights here that sustainability-­ related compensation is present mostly in association with specific forms of governance, but that this trend is not homogeneous. The chapters end by presenting an evolutionary model which describes how firms have been changing their corporate governance structures to respond to private and public pressures, and the methodology adopted to design such a model. Finally, the conclusions will sum up the main findings of the project, linking the theoretical background with the results of the longitudinal analysis presented in the book, and will discuss the future challenges and the potential implications for both academics and practitioners.

References Barkemeyer, R., Comyns, B., Figge, F., & Napolitano, G. (2014). CEO statements in sustainability reports: Substantive information or background noise? Accounting Forum, 38(4), 241–257. Beauchamp, L. L., & O’Connor, A. (2012). America’s most admired companies: A descriptive analysis of CEO corporate social responsibility statements. Public Relations Review, 38(3), 494–497. Burke, J. J., Hoitash, R., & Hoitash, U. (2019). The heterogeneity of boardlevel sustainability committees and corporate social performance. Journal of Business Ethics, 154(4), 1161–1186. Collison, D., Cross, S., Ferguson, J., Power, D., & Stevenson, L. (2012). Legal determinants of external finance revisited: The inverse relationship between investor protection and societal well-being. Journal of Business Ethics, 108(3), 393–410. Elkington, J. (2006). Governance for sustainability. Corporate Governance: An International Review, 14(6), 522–529. EU. 2014. European Union Directive 2014/95/EU. Retrieved March 20, 2015, from https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX%3 A32014L0095.

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Galbreath, J. (2016). When do board and management resources complement each other? A study of effects on corporate social responsibility. Journal of Business Ethics, 136(2), 281–292. Gennari, F., & Salvioni, D. M. (2018). CSR committees on boards: The impact of the external country level factors. Journal of Management and Governance, 1–27. https://doi.org/10.1007/s10997-018-9442-8 (Online First 22 November 2018). Helfaya, A., & Moussa, T. (2017). Do board’s corporate social responsibility strategy and orientation influence environmental sustainability disclosure? UK evidence. Business Strategy and the Environment, 26(8), 1061–1077. Hendry, K. P., Kiel, G. C., & Nicholson, G. (2010). How boards strategise: A strategy as practice view. Long Range Planning, 43(1), 33–56. Hillman, A. J., & Dalziel, T. (2003). Boards of directors and firm performance: Integrating agency and resource dependence perspectives. Academy of Management Review, 28(3), 383–396. Hörisch, J., Burritt, R. L., Christ, K. L., & Schaltegger, S. (2017). Legal systems, internationalization and corporate sustainability. An empirical analysis of the influence of national and international authorities. Corporate Governance: The International Journal of Business in Society, 17(5), 861–875. La Porta, R., Lopez-de-Silanes, F., Shleifer, A., & Vishny, R. W. (1998). Law and finance. Journal of Political Economy, 106(6), 11131–11155. Liao, L., Luo, L., & Tang, Q. (2015). Gender diversity, board independence, environmental committee and greenhouse gas disclosure. The British Accounting Review, 47(4), 409–424. OECD. (2018). Global outlook on financing for sustainable development 2019. Retrieved December 23, 2018, from https://www.oecd.org/dac/financingsustainable-development/development-finance-topics/Global-Outlook-onFinancing-for-SD-2019.pdf. Ortiz-de-Mandojana, N., Aguilera-Caracuel, J., & Morales-Raya, M. (2016). Corporate governance and environmental sustainability: The moderating role of the national institutional context. Corporate Social Responsibility and Environmental Management, 23(3), 150–164. Quinn, J., & Connolly, B. (2017). The Non-Financial Information Directive: An assessment of its impact on corporate social responsibility. European Company Law, 14(1), 15–21. Spitzeck, H. (2009). The development of governance structures for corporate responsibility. Corporate Governance: The International Journal of Business in Society, 9(4), 495–505.

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Venturelli, A., Caputo, F., Cosma, S., Leopizzi, R., & Pizzi, S. (2017). Directive 2014/95/EU: Are Italian firms already compliant? Sustainability, 9(8), 1385. Vigneau, L., Humphreys, M., & Moon, J. (2015). How do firms comply with international sustainability standards? Processes and consequences of adopting the global reporting initiative. Journal of Business Ethics, 131(2), 469–486. Vurro, C., & Perrini, F. (2011). Making the most of corporate social responsibility reporting: Disclosure structure and its impact on performance. Corporate Governance: The International Journal of Business in Society, 11(4), 459–474.

2 The Governance of Sustainability: A Theoretical Background

2.1 Introduction The relationship between corporate governance and sustainability has become one of the most important topics in the academic debate (Morck and Steier 2005), as recent scandals fostered a significant concern for how effectively firms are governed, and about the importance of social and environmental issues (Gantenbein and Volonté 2012). In this regard, the board of directors has been recognized as one of the principal actors of good corporate governance, especially in what concerns sustainability (Elkington 2006), so that the creation of ad hoc board committees is now considered one of the most appropriate decisions that top corporate governance bodies may take (Burke et al. 2019). Extant research highlighted that originally board committees were mostly focused on ethics, as a tool to make visible their concern for social issues (Ashforth and Gibbs 1990). Afterwards, when the topics of corporate social responsibility and sustainability emerged, the relevance of these committees was renewed, because they were intended as a way to contribute to value creation and to manage the relationship with stakeholders (Freeman and Dmytriyev 2017). © The Author(s) 2019 M. Minciullo, Corporate Governance and Sustainability, https://doi.org/10.1007/978-3-030-18885-6_2

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Board committees dealing with social and environmental issues perform different activities, like the proposal and updating of the Code of Ethics, the assessment of resource allocation, the monitoring of firm activities, and the review of results with regard to social and economic development (Gennari and Salvioni 2018). Moreover, these board committees are also in charge of dealing with specific issues, such as corporate citizenship, the environment, employees, community, health and public safety, and stakeholder relationships (Felo 2001). Therefore, the role of these committees implies steering sustainability-oriented strategy towards the creation of a competitive advantage and mediating among possibly conflicting interests between shareholders and the other stakeholders through the creation of stakeholder value (shareholders included) according to a long-term perspective (Eccles et al. 2014). Notwithstanding the great potential of board committees devoted to social and environmental issues, extant research provided evidence that the diffusion of such bodies within the board of directors is not so common (Burke et al. 2019). Therefore, a growing number of countries have recently modified their legislative and regulatory frameworks in order to recommend or make mandatory the creation of board committee responsible for social and environmental issues (Rahim 2013). It is also necessary to note that a significant commitment of boards of directors towards sustainability has been registered also in countries that have no regulation (Rake and Grayson 2009). Thus, given the fact that the pathway to the integration of sustainability into business strategy is now considered a crucial issue, with the target of creating value for the firm, for its community, and for the environment where it operates (Were 2003), there is a potential interest in understanding which are the main determinants of the diffusion of such committees. Therefore, the following section will discuss the relevance of the board of directors in the general field of corporate governance, looking at the role of the legal and regulatory context. Subsequently, the chapter will consider how the academic debate has discussed the integration of sustainability in corporate governance.

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2.2 T  he Role of the Board of Directors in Corporate Governance One of the most acknowledged definitions of corporate governance summarizes it as “the structure of rights and responsibilities among the parties with a stake in the firm” (Aoki 2000: 11). In general, corporate governance is intended as the system of rules, practices, and processes by which a firm is directed and controlled (Turnbull 1997). Within a firm, in fact, it is necessary to balance the interests of various stakeholders (e.g., shareholders, managers, customers, suppliers, investors, government, and the community). One of the most important frameworks traditionally adopted to study corporate governance is agency theory. Generally, agency theory predicts that, as the firm can be represented as a series of contracts between principals (risk-bearing shareholders) and agents (managers with specialized expertise), a conflict of interests can emerge between the principal and the agent (Berle and Means 1932). When ownership and control are separate (Berle and Means 1932), the conflict of interests should be minimized to maximize principals’ returns through the implementation of mechanisms that can align the interests of the two parties (Fama 1980; Fama and Jensen 1983; Jensen and Meckling 1976). In fact, while shareholders are usually interested in maximizing their returns at a reasonable risk, managers may look more for personal interests (salary, prestige, power) and therefore take decisions that may imply higher risks (Amihud and Lev 1979). The separation of the decision-making process from the monitoring process is the most important way to curb agents’ opportunism (Fama and Jensen 1983), and this task is usually assigned to corporate governance (Jensen and Meckling 1976). From this perspective, the role of the board of directors is particularly relevant for granting alignment between potentially competing interests (Daily et al. 2003).

2.2.1 The Board of Directors The board of directors is the governing body of an incorporated firm, whose members (directors) are elected, normally by the shareholders of the firm, to govern the firm and look after the stakeholders’ interests

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(Tricker 2015). The board of directors, indeed, has the ultimate decision-­ making authority in the firm, and therefore it is expected to assist in managers’ decisions in order to create value (Oliver 1991), but also to ensure stakeholders’ expectations are met (Jensen 1993). Consequently, the board of directors is empowered to take the most important corporate decisions (firm’s policy, objectives, and overall direction; bylaws; appointments; compensation dividends), to oversee and monitor the activities of the firm, and to ensure that these activities are consistent with stakeholders’ expectations (Bhagat and Bolton 2008). Even if not engaged in the firm’s daily operations, the entire board of directors is held liable (under the doctrine of collective responsibility) for the consequences of the firm’s policies, actions, and failures to act (Demb and Neubauer 1992). The board of directors, in general, usually includes the most senior executives (called “inside directors” or “executive directors”), as well as experts or respected persons chosen from the wider community (called “outside directors” or “non-executive directors”; Tricker 2015). However, the board of directors may assign specific tasks to ad hoc committees in order to fulfill all its responsibilities effectively. In fact, by empowering committees for specific tasks, the board of directors can spend its time more efficiently; these committees, indeed, are able to take care of issues for which the board is responsible, but which will be difficult to manage as a collegial body, given the scarcity of time and resources (Harrison 1987). Board committees operate according to their tasks, as specified in their terms of reference, but can also invite executive directors to provide further insights about the firm’s activities or specific issues (Klein 2002). Although the presence of board committees is usually not mandatory, the Organisation for Economic Co-operation and Development (OECD) Principles of Corporate Governance, as well as the national corporate governance codes of many countries, strongly recommend that local firms, especially if listed, set up at least an audit committee (OECD 2015). When it comes to large firms, indeed, it is also recommended to create other committees, like the remuneration and nomination committees, but more and more frequently also ethics and risk committees are becoming widespread (Hayes et al. 2004). In recent years, after the various and significant financial scandals and environmental disasters that have occurred worldwide, the presence of board committees dealing also

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with social and environmental issues has started to grow, especially because of the rising diffusion of international standards and pressures for higher commitment of the board of directors towards sustainability-­ related issues (Gantenbein and Volonté 2012). However, the growing interest in the integration of sustainability issues into the agenda of the board of directors came from stronger legislation that entered into force worldwide, like the Sarbanes–Oxley Act in the USA, the CLERP 9 and ASX Principles in Australia, and the Combined Code in the UK (Cohen et al. 2010). The regulatory institutional context has been recognized as a driver of change in the behavior of firms, but it is important to underline that there is a significant variation in regulation worldwide, and it may therefore be difficult to identify a common trend (Rahim 2013). Besides, in the last decades the academic debate has developed two main models to categorize the different configurations of corporate governance: on the one hand, a stream of research considered the shareholder-oriented corporate governance model, also called Anglo-­ American, which refers mostly to the countries whose legal origin is common law; on the other hand, a stream of research devoted to investigating the stakeholder-oriented corporate governance model, also called continental European, which refers mostly to the countries whose legal origin is civil law (La Porta et al. 1998; Aguilera and Jackson 2003; Shleifer and Vishny 1997). Even if the recent evolution of the debate highlighted the need to combine different perspectives in order to properly analyze corporate governance (Aguilera et al. 2015; Haxhi and Aguilera 2017), the dichotomy between these two models remains valid. Therefore, the next section provides an overview of the two key legal frameworks that mostly represent the various legislation present in the world.

2.3 C  ommon Law and Civil Law When comparing the legal systems of two or more countries, it is mainly possible to take into consideration the focal dichotomy between common and civil law traditions. These legal traditions cover a broad spectrum of domestic legal systems in all continents, as the legal traditions have spread from their European roots to many other countries. These

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traditions mostly diverge because of a different foundation, as the bases of civil law are legislative decisions, whereas the basis of common law is represented by judicial decisions (Dainow 1967). The common law tradition emerged in England during the Middle Ages and was applied within British colonies across continents (Van Caenegem 1988). It is applied at present in England and in its former colonies, including the USA, Canada, India, Australia, and New Zealand, but also in some countries in Africa and South-East Asia. Furthermore, common law is generally uncodified, so that there is no comprehensive compilation of legal rules and statutes (excluding some scattered statutes). Instead, it is largely based on legal principles and on precedents, meaning the judicial decisions that have already been made in similar cases. By contrast, the civil law tradition, deriving from classical Roman law (specifically from the Justinian Code), developed in continental Europe and was applied in the colonies of European imperial powers, such as Spain and Portugal (Stein 1999). Civil law was also adopted in the nineteenth and twentieth centuries by countries formerly possessing distinctive legal traditions (e.g., Russia and Japan; Kraakman et al. 2009). Thus, civil law is applied at present in continental Europe, China, Japan, Russia, South America, and in most Asian and African countries. In addition, civil law is codified, as it relies on “codes”; that is, complete, coherent, and clear collections of laws regulating specific subjects, promoted by the government. Countries with civil law traditions have comprehensive, continuously updated legal codes (e.g., civil, penal, and commercial codes) that specify all matters capable of being brought before a court, the applicable procedure, and the appropriate punishment for each offense (Glaeser and Shleifer 2002). Furthermore, within the civil law tradition, it is possible to make a distinction also among the French or Napoleonic civil law tradition (applied in France, Spain, Italy, and Latin America), the German civil law tradition (applied in Germanic countries in Europe, and in East Asia), and Scandinavian civil law (applied in northern Europe). However, for the purpose of this study, it is possible to rely on the main distinction between civil and common law (Crettez et al. 2014), as it embodies the main differences with regard to governance mechanisms and investor protection. More specifically, the study will take into consideration, as

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representatives of the two legal traditions, two European countries whose legal systems have been mostly developed and modernized in recent years; that is, the UK for the common law tradition, and Italy for the civil law tradition (Mio and Venturelli 2013).

2.3.1 Investor Protection under Civil and Common Law One of the most significant differences between common law and civil law regards investor protection. Investor protection generally denotes legal support for investors in the public trading markets. The protection of small and unsophisticated investors derives from the recognition that one firm’s opportunism or deception in the public trading market imposes negative externalities on other firms and the market as a whole (Kraakman et al. 2009). Investor protection laws address two general issues: regulation of public trading markets, and firms’ and insiders’ conduct towards investors. At a firm level, the second is more relevant, as regulation mandates the release of credible information about issuers, limits the advantage of insiders, and determines the nature and scope of enforcement mechanisms. In general, laws are enacted by governments to define the basic principles of a specific matter, whereas regulations are prescribed by selected authorities in order to specifically ensure and enforce the laws (Morgan and Yeung 2007). However, for the purpose of this study, it is not necessary to distinguish between law and regulation, as the legal tradition encompasses both law and regulation (Kraakman et al. 2009). Therefore, the elements that investor protection laws determine at a firm level are referred to mandatory financial disclosure and enforcement mechanisms. With regard to mandatory financial disclosure, all legal systems set disclosure duties for public firms. The content of mandatory disclosure is not significantly different between common law and civil law systems. For example, public firms are required to present regularly a comprehensive set of financial statements (in accordance with international accounting practices), describing in detail the firm’s performance in the context of current and predicted market trends. Moreover, firms must disclose information about their management and large shareholders.

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However, the major differences between common and civil law systems regard enforcement mechanisms of investor protection, which can be public or private (Jackson and Roe 2009). By “public enforcement” we refer to all legal and regulatory actions brought by organs of the state; that is, criminal and civil suits, and ex ante rights of approval (e.g., initial public offering approval). By “private enforcement” we refer, instead, to civil lawsuits brought by private parties, such as shareholder derivative suits and class actions (Kraakman et al. 2009). In general, common law systems are characterized by numerous and effective enforcement mechanisms of investor protection. On the one hand, the USA adopts a more formal approach, based on prosecution; on the other hand, the UK prefers a more informal approach, mostly based on an ex ante screening and on deterrents (Armour et al. 2009). With regard to private enforcement, in the USA the main enforcement device is the shareholder class action for monetary damages, brought against directors, managers, firms, audit firms, and analysts. In the UK it is also possible to refer to the “group litigation order” as well as to derivative actions, even if the latter are actually less often applied (Bhagat et al. 1998). Among common law systems, the USA undoubtedly presents the most effective and applied mechanisms for private and public enforcement, but on average the interaction between public and private enforcement mechanisms can be considered significant across all common law systems (Scott 2002). In comparison, in civil law countries (e.g., France, Germany, Italy, and Japan) prosecution mechanisms are not fully developed, as the related requirements are difficult to satisfy, and the investor protection laws are less strict. Considering private enforcement, such legal systems lack a full class action device to threaten firms and their managers with massive private monetary damages for knowing or negligent misrepresentation or omissions in public disclosures. Hence, in these systems shareholders can rely only on listing requirements and codes of best practices about quality-­ control recommendations, backed by reputational sanctions implicit in the disclose-or-explain rule (Graff 2008; Kraakman et al. 2009). In summary, investor protection in civil law systems is less effective than in common law systems, because both private and public enforcement mechanisms are less structured and more difficult to apply.

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2.3.2 C  orporate Governance under Common Law and Civil Law The laws that determine corporate governance mainly establish boards’ and directors’ duties, responsibilities and rights, board structure and composition, as well as governance-related disclosure requirements (Baysinger and Hoskisson 1990). These laws are not significantly different between civil and common law systems: about boards’ and directors’ responsibilities and roles, both systems assign to the board of directors decision-making and oversight responsibilities and indicate the collective and personal responsibilities of each director. About governance-related disclosure, both systems require that shareholders are provided with all the information known to the directors when they present shareholders with a voting decision, as well as with information about ownership structure, executive compensation, and board functioning. However, the two legal systems discipline regulate board structure and board composition in different ways (La Porta et al. 1997, 1998). In common law countries (the USA and the UK) with regard to board structure, firms adopt a uniquely one-tier model, characterized by the presence of a single board provided with both decision-making and oversight responsibilities. In what concerns board composition, in common law systems firms are required to meet strict independence criteria. In general, a director will be viewed as independent “only if he or she is a non-management director free of any family relationship or any material business or professional relationship (other than the stock ownership and the directorship) with the corporation or its managements” (American Bar Association 2004). In addition, these conditions need to be valid also within the last three years before the appointment (Jungmann 2006). Therefore, in common law systems a significant portion of the board needs to be composed of independent directors. In particular, in the UK at least half of the board of directors must be independent, as well as the chairman (the same person cannot be appointed as CEO). Furthermore, the key oversight committees (audit, compensation, nomination/corporate governance) must be composed mostly of independent members, even if the managers can be invited to assist at their meetings (UK Corporate Governance Code).

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In the USA, public firms must have at least a majority of the board composed of independent directors, and no more than one or two directors can also be executives of the firm. All members of the key oversight committees (audit, compensation, nomination/corporate governance) must also qualify as independent directors. Further, the chairman does not need to be independent, but in such a case the independent directors formally designate one of their members to act as a lead director (Petra 2005). In comparison, in civil law countries there is not a unique board structure, as some countries adopt a one-tier model (Japan) while others adopt a two-tier model (Germany). In the two-tier model, main board responsibilities are allocated between two different organs; namely, a supervisory board, provided with oversight responsibility, and a management board, provided with decision-making responsibility. Furthermore, some countries (France and Italy) permit domestic firms to choose between the two systems (in Italy and Japan it is actually possible to consider a third model, based on the presence of the board of directors and the board of statutory auditors; Jungmann 2006). The issue of directors’ independence is less regulated in civil law systems, as the same definition of “independence” is often not defined by law, nor specifically stated in national regulations (La Porta et al. 2000). Likewise, civil law systems regulate board composition by requiring the presence of fewer independent directors than in common law systems. In general, only a minority of the board of directors (one-tier model) has to be composed of independent members (Italy: 2 if board size > 7; Japan: 1, but only for listed firms), but some countries have even no specific obligations (e.g., France). Two-tier boards are regulated similarly with regard to the management board (in Germany at least one independent member; in Italy only if board size > 4; in France there is no obligation), whereas the members of the supervisory board are intended to be individuated according to country-specific independence and honorability criteria (e.g., in Germany a third of the supervisory board is represented by labor unions). Given the small number of independent directors, their presence in key oversight committees (audit, compensation, nomination/ corporate governance) is not compulsory, but only recommended by national codes of conduct, as well as the separation between CEO and chairman (compulsory only in Germany).

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In brief, board independence in civil law systems is lower than in common law systems because: (a) these systems lack a precise and strict definition of “independence”; (b) only a minority of the board is composed of independent directors; and (c) key oversight committees do not necessarily have independent members (Kraakman and Hansmann 2017). In summary, the difference between common law and civil law systems is significant, in terms of its potential impact on investor protection and corporate governance. In fact, civil law systems have a minor and less effective enforcement of investor protection laws than common law countries (La Porta et al. 1997, 1999). In these systems investors have fewer opportunities to sue the firm and its managers for monetary damages. This may imply a minor effectiveness of the board in its oversight activity and, consequently, reduce the possibility to evaluate properly how managers’ actions influenced the firm’s performance. Furthermore, in civil law systems board independence is weaker than in common law countries. Less independent governance may affect the directors’ ability to evaluate properly managers’ actions, with the related consequences on the firm’s performance.

2.4 T  he Governance of Sustainability under Civil and Common Law: Comparing Italy and the UK Looking at the previous section, it is possible to state that corporate governance is strictly affected by the legal system in which the firm resides, and that for firms operating in civil law systems, it is possible to expect that corporate governance mechanisms will be generally weaker in terms of investor protection than for firms operating in common law systems. However, the scenario appears to be different in what concerns legislation and regulation dealing with the role of corporate governance towards social and environmental issues. In fact, in common law countries the focus of legislation is narrowed to the protection of investors, especially minority interests; differently, in civil law countries legislation and regulation are orientated towards broader stakeholder interests (Duran and Bajo 2014). Consequently, in civil law contexts there is a higher consideration for a

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broader category of stakeholders, which may include citizens, local community, employees, and so on, so that regulation regarding specifically social and environmental issues is tighter in these contexts than in common law countries (Hörisch et  al. 2017). Previous studies demonstrated that legislation on social and environmental issues in civil law countries is stronger than in common law countries (Collison et al. 2012), and is associated with higher social and environmental performance (Kock and Min 2016; Kim et al. 2017), but still failed to identify how the diverse legislation actually shapes differently the implementation of corporate governance mechanisms by firms. Hence, there is still a potential interest in examining how different legal systems encourage corporate governance practices devoted to social and environmental issues (Starbuck 2014). This research project aimed at analyzing the impact of the legislative and regulatory context on the implementation of corporate governance mechanisms devoted to sustainability in civil and common law countries. The study was centered on the comparison between the Italian context, as an exemplification of a civil law country, and the UK context, representative of common law countries (La Porta et al. 2000; Johnson et al. 2000; Albareda et al. 2006). For the purpose of the study, an overview of the most important features the legislative and regulatory context related to corporate governance is presented as follows.

2.4.1 A  n Overview of Corporate Governance and Sustainability Regulation in the UK In the UK, for the top listed firms a code-based approach to corporate governance has been adopted for almost 30 years. Through the presence of a code, a set of principles, requirements, and best practices was established, asking firms to “comply or explain”; that is, either to comply with the prescriptions, or to explain the reasons for not complying (Van Veen and Elbertsen 2008). The “comply or explain” corporate governance regime began in 1991 when the Financial Reporting Council (FRC) and the London Stock Exchange decided to create a task force to respond to public concerns raised by some reporting scandals (Stiles and Taylor 1993). The first out-

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come of the work of this task force was the so-called Cadbury Code, published in 1992, which introduced the principle of “comply or explain,” indicating a set of principles of good corporate governance that became part of the London Stock Exchange’s Listing Rules (Boyd 1996). After this first code, which basically introduced the principle of CEO/chairman separation, board independence, and audit committees, the governance codes were regularly updated, dealing with several issues, like remuneration of directors (in 1995), internal control (in 1999), and non-­ executive directors (in 2003). The Code, renamed in 2010 as the UK Corporate Governance Code, from 2012 to 2014 also introduced principles on disclosure, diversity, and risk management, whereas the most recent version, published in July 2018, introduced significant changes, by incorporating issues like corporate purpose, culture, stakeholder engagement, and diversity (Okaily et al. 2019). Beyond the Corporate Governance Code, UK listed firms have to follow rules related to corporate governance deriving from a set of norms and regulations, like the Companies Act (2006), the London Stock Exchange’s Listing Rules and Listing Authority Disclosure Guidance and Transparency Rules, as well as the UK Stewardship Code (Veldman and Willmott 2016). With regard to the board of directors, in its current version the UK Corporate Governance Code, together with other regulations provided by the FRC, indicates some principles and best practices for both boards of directors and board committees. In general, the UK Corporate Governance Code recommends that the board of directors of UK listed firms is composed for at least half of its members of independent, non-­ executive directors (NEDs), beyond executive and non-executive directors. Another recommendation regards the clear division of responsibilities at the head of the company, by discouraging CEO duality—that is, joint roles of chairman and chief executive—as well as the presence of a “senior independent director” who can act as an intermediary between the board of directors and the firm’s shareholders (Young 2000). Another important topic covered by the UK regulatory framework regards the presence of specific board committees within the board of directors, specifically the audit, remuneration (compensation), and nomination committees. The presence of an audit committee is imposed by

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the Disclosure Guidance and Transparency Rules, which enforced the duty set for listed firms by the European Union’s (EU) Statutory Audit Directive to have an audit committee (or equivalent body), and to shape it according to specific criteria (composition, duties, responsibilities; Collier and Zaman 2005). With regard to the presence of a remuneration committee, the regulatory framework established some limits to pay schemes, and made the remuneration committee accountable to shareholders for directors’ remuneration. This responsibility has been enhanced by the Companies (Miscellaneous Reporting) Regulations, which from 2018 require listed firms to annually publish and justify the pay difference between chief executives and their staff—known as “pay ratios” (Reddy 2019). Finally, the nomination committee is responsible for board recruitment, and it has to enhance the quality of nominees to the board of directors in order to increase the effectiveness of the board itself. In particular, the FRC’s Guidance on Board Effectiveness (2018) recommends the presence of a nomination committee, which should be in charge of planning directors’ succession, establishing criteria for appointments (e.g., diversity and independence), and describing the roles and capabilities required by the board to make a positive contribution to board effectiveness (Velte 2018). Nonetheless, considering social and environmental issues, in the UK there is not a specific norm or regulation dealing with the integration of sustainability within corporate governance mechanisms, as the board of directors is required only to state if risks to the sustainability of firms have been considered and addressed. It is possible to note that the UK Companies Act (2006) requires the board of directors to monitor (among other matters) the impact of the firm’s operations on the community and the environment (Mackenzie 2007), whereas the 2018 UK corporate governance code recommends that board of directors describe how the interests of the various stakeholders have been considered during its activities (Yeoh 2019). However, there is no specific mention of social and environmental issues in any of the laws and regulations that comprise the normative framework for corporate governance. Notwithstanding this, the UK has transposed the EU Non-Financial Reporting Directive through the Companies, Partnerships and Groups (Accounts and Non-­ Financial Reporting) Regulations in 2016. As this norm requires large

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companies to disclose certain information on the way they operate and manage social and environmental challenges (e.g., environmental protection; social responsibility and treatment of employees; respect for human rights; anti-corruption and bribery), but also diversity on the board of directors, it is expected to have a potential effect on governance structure (Helfaya and Moussa 2017). Beyond the legal requirements, however, UK firms are also exposed to pressures and expectations for firms and their boards to operate according to sustainability principles, to integrate these principles into corporate governance, and to disseminate more useful information about their activities and impacts on the environment (Gennari and Salvioni 2018).

2.4.2 A  n Overview of Corporate Governance and Sustainability Regulation in Italy The Italian civil code is the principal source of corporate governance-­ related norms for Italian firms, but listed firms are subject also to other rules, like the Consolidated Law on Finance (Legislative Decree no. 58/1998), and the rulings issued by the Italian Stock Exchange (Borsa Italiana S.p.A.) and by the National Commission for Companies and the Stock Exchange (Commissione Nazionale per le Società e la Borsa— CONSOB), the Italian authority which is responsible for supervision of the Italian securities market. With regard to corporate governance, after the Consolidated Law on Finance entered into force, in 1999 the Italian Stock Exchange created the “Committee for Corporate Governance,” in order to introduce a Code of Corporate Governance, according to the best practices already adopted in other countries of the EU and in the USA (Melis 2006). In its first version of 1999, the Code of Corporate Governance of Italian listed firms contained rules on the board of directors (structure, composition), on the role of the chairman, on the statutory and external auditors, and on the relationship with shareholders. Following the first edition in 1999, the Corporate Governance Code was subsequently amended and updated in subsequent years: the edition approved in 2006 introduced recommendations on the remuneration of

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directors and managers with strategic responsibilities, while in 2011 the Code introduced norms on independent directors, functioning of the internal committees of the board of directors, and shareholders’ participation, as well as initiatives aimed at facilitating the participation and exercise of the latter’s rights at company meetings. Afterwards, the editions published in 2014 strengthened the “comply or explain” rule, but one of the most significant changes was introduced in 2015, when the code recommended the creation of a specific board committee devoted to the supervision of sustainability issues, and also specified new duties on transparency and legal compliance. The latest version of the Corporate Governance Code, published in 2018, included some recommendations on diversity, including by gender, for the board of directors of listed companies (Drago et al. 2015). As already seen for the UK context, also in Italy the Corporate Governance Code is based on the “comply or explain” principle: the rulings are not mandatory, but the board of directors is required to declare in the corporate governance report attached to the financial statements which activities have been carried out to comply with the Corporate Governance Code. In case of any deviation, the board of directors has to explain the reasons for not applying the recommendations, in order to inform shareholders, investors, and the market, but no penalties are provided for non-compliance with the recommendations included in the Corporate Governance Code (Bianchi et al. 2011). With regard to the board of directors, the Italian Corporate Governance Code specifies the role of the board of directors, and the main activities and the duties of the directors. The role of the board of directors, as well as other features, depends on the structure of the board of directors, for which the civil Code distinguishes between traditional (board of directors and statutory auditors), dualistic (two-tier structure, with supervisory board and management board), and monistic (one-tier structure, with an internal controlling body) systems (see earlier). In addition, the Code provides recommendations on board composition, considering its size, the presence of independent and non-executive directors, as well as its diversity, especially by gender. Furthermore, the Corporate Governance Code establishes rules for the appointment process for board members, as well as the remuneration of directors (Borsa Italiana 2018).

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In particular, with regard to the presence of independent directors on the board, the Code provides the criteria for considering a director as independent (e.g., not directly or indirectly able to exercise a dominant influence over the issuer; no links with the firm in the preceding three fiscal years; etc.), and indicates the minimum quota of independent members within the board (not lower than one-third of the total; Ianniello 2015). Consistent with what has been observed in the UK, the Italian Code of Corporate Governance addresses in a specific section the issue regarding the presence of specific board committees within the board of directors. In general, for all companies the bye-laws or shareholders’ meeting can expressly permit the board of directors to delegate its functions to an executive committee formed by some of its members, excluding some important issues (e.g., issuance of convertible bonds; drafting of financial statements; mergers and acquisitions; etc.). In particular, the Code recommends the establishment of a series of committees that have the task of dealing, respectively, with proposals for the appointment of members of the board of directors (nomination committee), with remuneration of members of the board (compensation/remuneration committee), and with the internal control function on the correct functioning of the firm (control and risks committee). Although the Code also provides proposals for the composition of these committees—that is, on minimum size and presence of independent directors—it also allows listed firms to decide how to allocate more functions to the same committee (Drago et al. 2015). However, one of the most important changes in the regulation of corporate governance for Italian listed firms occurred in 2015, when a new version of the Code of Corporate Governance was aimed at incorporating the principles and guidelines on corporate social responsibility that emerged in the international and European context, especially Directive 2014/95/EU of the EU, which highlighted the need to raise the transparency of the social and environmental information provided by large firms in Europe. The purpose was to adapt the Code to the international regulatory framework of reference, also strengthening the monitoring activities, from the perspective of greater effectiveness of the principles of legality and transparency.

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Thus, in the new version of the Code of Corporate Governance, published in July 2015, article 1.c.1 was modified with the introduction of the need for the board of directors to operate “including in its assessment all risks that may be significant for the activities of the firm under the perspective of sustainability in the medium/long term.” The new code suggested that, for firms belonging to the FTSE MIB index, the board of directors evaluates “the opportunity to create a special committee devoted to the supervision of the sustainability issues related to the activities of the firm and to the dynamics of interaction with all stakeholders; alternatively, the board of directors could consider to gather or distribute these functions among other committees.” This recommendation, even if not mandatory, was expected to be implemented by the “year-end started in 2016.” This regulatory innovation had a great resonance due to the concurrent modifications occurring for other related topics. In fact, the Legislative Decree 231/01 was extended, making firms and their representatives legally responsible for potential felonies committed by the firm with regard to social and environmental issues. Furthermore, at the end of 2016, Legislative Decree No. 254/2016 was approved by the Italian government, to implement European Directive 2014/95/EU on the disclosure of non-financial and diversity information by large firms. This law, which was supposed to be applied starting from the annual reports on fiscal year 2017, required listed firms to publish an annual non-financial statement containing information regarding the impact of the firm’s operations on environmental, social, employment, human right, anti-­ corruption, and bribery matters. It indicated that the management of eligible firms was responsible for drafting the non-financial statement, but nonetheless also made the board of directors responsible for compliance with the law (Venturelli et al. 2017). Thus, in the last few years the legal and regulatory framework of corporate governance for Italian listed firms was affected by frequent and significant changes, which strongly recommended a reconsideration of the corporate governance structure to integrate independence, transparency, and sustainability principles, even if in a short span of time.

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2.5 T  he Governance of Sustainability: A Literature Review The relationship between corporate governance and sustainability has become one of the most important topics in the academic debate, as there is a growing concern for how effectively firms are governed and how corporate governance mechanisms can have an influence on the firm’s attitude towards social and environmental issues (Elkington 2006; Aras and Crowther 2008). With regard to the relationship between corporate governance and sustainability, the two most important research streams that have explored this topic are based on agency theory (Jensen and Meckling 1976) and stakeholder theory (Freeman 1984). Previous studies, in fact, argue that effective governance can reduce agency problems by holding managers accountable to a wide variety of stakeholders (Kolk 2008). Moreover, according to stakeholder theory, corporate governance can foster a better relationship between the firm and its firm– stakeholders by aligning the long-term goals of both actors (Michelon and Parbonetti 2012). Thus, it is possible to affirm that agency and stakeholder theories complement each other, and that is difficult to explain the relationship between corporate governance and sustainability using a single perspective (Spitzeck 2009). More specifically, extant research defined the board of directors as the supreme stakeholder of business firms, whose main role is to align the goals of management with those of the wider variety of stakeholders (Jensen and Meckling 1976), and, therefore, by dealing with the engagement of boards of directors towards sustainability, it is possible to rely on both theoretical frameworks (Hussain et al. 2018).

2.5.1 T  he Role of the Board of Directors towards Sustainability The board of directors has been recognized by the extant literature as one of the principal actors that can foster the integration of sustainability

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within a firm’s strategy (Jamali et al. 2008; Ingley 2008). Several studies investigated the commitment of the board of directors to sustainability (Burke et al. 2019; Elkington 2006), indicating that social and environmental issues have become a critical topic for directors, who also are becoming more and more accountable with regard to the related targets (Ricart et al. 2005). In connection with the board of directors, indeed, the existing research put in evidence that various board attributes can have a significant influence on sustainability (Rao and Tilt 2016). In particular, board composition is one of the most recognized factors that can affect the ability of the board of directors to deal with social and environmental issues. Previous studies focused on the size of the board of directors, on the tenure of the directors, and on the number of independent directors (Jizi 2017), but more and more studies afterwards focused on board characteristics, which include directors’ characteristics and personality (Ricart et al. 2005). Recently, board diversity, in terms of gender, age, ethnicity, nationality, and educational background (Brown and Caylor 2006), has emerged as a significant factor that can enhance the engagement of the board of directors towards sustainability issues (Cucari et al. 2018; Rao and Tilt 2016). Finally, a third important feature that has been investigated to highlight the role of the board of directors in social and environmental issues is board structure, which refers to the board’s organization; that is, the division of tasks among directors, the presence of board committees, the membership of these committees, and the coordination between these committees and the rest of the board of directors (Linck et  al. 2008). Extant research has extensively studied the relations between board structure and sustainability, looking at sustainability performance (Webb 2004), firm value (Jo and Harjoto 2011), disclosure (Mallin et al. 2013), as well as stakeholder engagement (Freeman and Dmytriyev 2017). However, the presence of a board committee in charge of dealing with social and environmental issues has been recognized as the crucial element which actually can indicate a proper engagement of the board of directors towards sustainability (Ricart et al. 2005).

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2.5.2 T  he Integration of Sustainability in Corporate Governance through Board Committees The structure of the board of directors expresses how it is organized internally, and how the various activities are allocated to different directors or committees, and also defines the involvement of directors in decisional and monitoring processes (Zahra and Pearce 1989). For important, specific, and peculiar issues, the creation of ad hoc board committees has been recognized by previous research as one of the most appropriate decisions that top corporate governance bodies may take (Spira and Bender 2004). In fact, the presence of a board committee implies the possibility of having a small group of directors in charge of promoting, supervising, and assessing the incorporation of a particular issue in the firm’s strategy and operations, and in the activities of its top corporate governance body (Carson 2002). With regard to sustainability, from the academic debate it emerged that firms may be interested in allocating the responsibility for social and environmental issues to a board committee in order to manage sustainability-­related issues in a better way, as well as to engage more effectively with the firm’s stakeholders (Michelon and Parbonetti 2012). There is not a unique structure for these committees, as they can combine different tasks, members, and procedures, as well as have different names (Burke et al. 2019). However, little research has been performed with regard to sustainability board committees (Eberhardt-Toth 2017). Previous studies investigated this specific type of board committee according to agency theory, legitimacy theory, and resource-based theory. Under the agency theory perspective (Jensen and Meckling 1976; Fama 1980), sustainability-­ related committees were considered suitable for leading to better social and environmental corporate performance (Walls et  al. 2012; Mallin et  al. 2013; Eberhardt-Toth 2017). According to legitimacy theory (Suchman 1995), instead, the presence of a board committee responsible for social and environmental issues allows the firm to meet most stakeholders’ expectations (Michelon and Parbonetti 2012; Amran et al. 2014; Helfaya and Moussa 2017). Finally, sustainability board committees are

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a particular form of resource allocation, intended to foster sustainable development for the firm (Miller and Serafeim 2014). From the perspective of stakeholder theory, the presence of a board committee devoted to sustainability-related issues represents also the firm’s commitment towards its stakeholders, which may benefit from obtaining more precise information on the social and environmental issues related to the firm’s activities (Mallin et al. 2013). In fact, a board committee dealing with sustainability issues will also focus on two elements that the extant research identified as a proxy for stakeholder engagement (Ayuso and Argandoña 2009); that is, the quality of the stakeholder engagement process and the firm’s sustainability reporting policies. The allocation of productive resources to improve the range of disclosures provided to stakeholders is supposed to lead to better stakeholder management, as stakeholders will interpret this effort as a sign of a real commitment to the integration of sustainability issues in the firm’s strategy (Hussain et al. 2018). Therefore, establishing the leadership of social and environmental responsibility issues at board level has been interpreted as a sign of an active strategic posture of the firm towards its stakeholders (Ullmann 1985). In fact, board committees devoted to sustainability issues are typically in charge of ensuring that firms’ socio-environmental values are considered in the strategy as well as in the operations of the firm; nonetheless, board committees participate in the reporting process of social and environmental information and are often legally responsible for the information disclosed (Post et al. 2002). Beyond the value for stakeholders, the academic debate has considered also the relationship between the presence of a board committee dealing with sustainability and the performance of the firm, both financial and socio-environmental. In general, previous research has found a positive relationship between traditional board committees (audit, nomination, and remuneration committees) and financial performance (Baxter et al. 2013; Beasley 1996). Conversely, the findings about socio-environmental performance have not been consistent, as some studies did not identify any specific relationship between sustainability-oriented board committees and performance (Berrone and Gomez-Mejia 2009; Rodrigue et  al. 2013), or between

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sustainability-oriented board committees and the quality of socio-­ environmental disclosure (Michelon and Parbonetti 2012; Rupley et al. 2012). Other studies, instead, acknowledged that board committees dealing with sustainability issues can have a positive impact on the implementation of sustainable practices (Spitzeck 2009), on environmental reporting (Arena et al. 2015), and on disclosure (Amran et al. 2014; Liao et al. 2015). More recently, various contributions highlighted that not all governance mechanisms foster triple-bottom-line performance, and also revealed that the presence of a board committee responsible for social and environmental issues may enhance only specific dimensions of sustainability (Hussain et al. 2018). Similarly, another study motivated the different effects of board committees on the various typologies of social and environmental performance by making reference to shared value creation (Burke et al. 2019), and verifying that sustainability committees are associated with stronger performance when these committees are focused on a specific stakeholder group.

2.5.3 T  he Impact of External Factors on Board Committees Previous studies investigated the issue of the governance of sustainability at a global level (Scherer et al. 2006), taking into consideration cultural differences in governance systems (Aguilera et al. 2006) and the difference between industrialized and developing countries (Jamali et al. 2008). The investigation of the role of corporate governance mechanisms, especially board committees, in developing countries offered different outcomes in comparison to previous studies, which had been undertaken mostly in developed countries (Aguilera et al. 2006). Thus, it was verified that, despite convergence pressures arising from globalization, corporate governance is strongly influenced by local socio-politico-institutional environments (Filatotchev et  al. 2013; Peters et  al. 2011; Jamali et  al. 2008). In fact, even if it was argued that the pressures of international institutions reduce the possibility of having significant differences in corporate governance practices at an international level (Vurro and Perrini

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2011), extant research provided evidence that contextual institutional factors affect the implementation of corporate governance practices, which may significantly differ across countries (Ertuna and Tükel 2012). In particular, there are still some specific country-level or regional characteristics that may imply a diverse effect of corporate governance mechanisms, such as different enforcement of laws or the ownership structure (Shleifer and Vishny 1997; Ortiz-de-Mandojana et al. 2016). With regard to board committees, little attention was paid to the external pressures that may affect the structure of the board of directors, as few studies focused on the mandatory or self-regulatory requirements regarding the overall quality of corporate governance, such as the presence of independent directors (Liao et al. 2015) or the adoption of global reporting standards (Vigneau et al. 2015). Recently, a seminal study embraced institutional theory (Meyer and Rowan 1977) to deepen investigation of the board committees responsible for social and environmental issues (Gennari and Salvioni 2018). This contribution explored through secondary data analysis the growing presence of sustainability board committees in European countries, looking for country-level ­external conditions that could sustain this growing trend for their presence on boards (Salvioni et al. 2016). This new stream of researcher builds on previous contributes deriving from institutional theory, which highlighted the importance of coercive mechanisms (rules, laws and regulations) in determining firms behavior (Raynard et al. 2015); however, it was also registered the presence of isomorphic mechanisms, that push firms to replicate initiatives implemented by successful firms, particularly in case of environmental ambiguity and uncertainty (DiMaggio and Powell 1983). However, it is possible to state that there is a gap in the literature, with regard to the role of external factors in determining the presence of board committees devoted to sustainability. In the perspective of this research project, the institutional differences existing among the various countries in the world can be summarized by categorizing countries by legal origin, according to the dichotomy between civil law and common law (La Porta et al. 1998; Aguilera and Jackson 2003; Shleifer and Vishny 1997). As already discussed, previous research has demonstrated that in civil law contexts there is a higher consideration of a broader category of stakeholders, whereas in common law countries the main focus is on share-

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holders (Collison et al. 2012). Thus, in civil law countries the regulation regarding specifically social and environmental issues is tighter in than in common law countries (Hörisch et  al. 2017), and, as a consequence, firms operating in these countries have better social and environmental performance (Kock and Min 2016; Kim et al. 2017). Hence, this research project aims at filling the gap regarding the role of legal tradition in determining the implementation of sustainability-­ related corporate governance mechanisms—that is, the creation of board committees devoted to social and environmental issues—by verifying if the higher concern for stakeholders in civil law contexts affects also the governance of sustainability. Furthermore, so far academic research has been unable to describe properly how governance structures related to sustainability evolved over time (Spitzeck 2009). Thus, this research project aims at investigating if and how a potential increase in the presence of sustainability board committees due to the legal context is also able to predict a higher concern for social and environmental issues, if there are intermediate forms of ­governance that firms may adopt in their pathway towards sustainability, and how the activities of the board of directors change according to the governance of sustainability structure.

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Suchman, M.  C. (1995). Managing legitimacy: Strategic and institutional approaches. Academy of Management Review, 20(3), 571–610. Tricker, B. (2015). Corporate governance: Principles, policies, and practices. Oxford University Press. Turnbull, S. (1997). Corporate governance: Its scope, concerns and theories. Corporate Governance: An International Review, 5(4), 180–205. Ullmann, A. A. (1985). Data in search of a theory: A critical examination of the relationships among social performance, social disclosure, and economic performance of US firms. Academy of Management Review, 10(3), 540–557. Van Caenegem, R. C. (1988). The birth of the English common law. Cambridge University Press. Van Veen, K., & Elbertsen, J. (2008). Governance regimes and nationality diversity in corporate boards: A comparative study of Germany, the Netherlands and the United Kingdom. Corporate Governance: An International Review, 16(5), 386–399. Veldman, J., & Willmott, H. (2016). The cultural grammar of governance: The UK Code of corporate governance, reflexivity, and the limits of ‘soft’ regulation. Human Relations, 69(3), 581–603. Velte, P. (2018). Does gender diversity in the audit committee influence key audit matters’ readability in the audit report? UK evidence. Corporate Social Responsibility and Environmental Management, 25(5), 748–755. Venturelli, A., Caputo, F., Cosma, S., Leopizzi, R., & Pizzi, S. (2017). Directive 2014/95/EU: Are Italian firms already compliant? Sustainability, 9(8), 1385. Vigneau, L., Humphreys, M., & Moon, J. (2015). How do firms comply with international sustainability standards? Processes and consequences of adopting the global reporting initiative. Journal of Business Ethics, 131(2), 469–486. Vurro, C., & Perrini, F. (2011). Making the most of corporate social responsibility reporting: Disclosure structure and its impact on performance. Corporate Governance: The International Journal of Business in Society, 11(4), 459–474. Walls, J. L., Berrone, P., & Phan, P. H. (2012). Corporate governance and environmental performance: Is there really a link? Strategic Management Journal, 33(8), 885–913. Webb, E. (2004). An examination of socially responsible firms’ board structure. Journal of Management and Governance, 8(3), 255–277. Were, M. (2003). Implementing corporate responsibility—The Chiquita case. Journal of Business Ethics, 44(2–3), 247–260. Yeoh, P. (2019). Corporate governance codes in the UK: The risk of overreliance? Business Law Review, 40(1), 19–27.

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Young, S. (2000). The increasing use of non-executive directors: Its impact on UK board structure and governance arrangements. Journal of Business Finance & Accounting, 27(9–10), 1311–1342. Zahra, S. A., & Pearce, J. A. (1989). Boards of directors and corporate financial performance: A review and integrative model. Journal of Management, 15(2), 291–334.

Legislative References Australia: CLERP 9; ASX Principles Europe: Directive 2014/95/EU France: Commercial Code Germany: Civil Code; Commercial Code Italy: Civil Code; Code of Corporate Governance; Consolidated Law on Finance (Legislative Decree no. 58/1998); Legislative Decree 231/01; Legislative Decree No. 254/2016 Japan: Companies Act, Commercial Code UK: Financial Services and Market Act 2000; Companies Act 2006; FRC’s Guidance on Board Effectiveness (2018); UK Combined Code; UK Corporate Governance Code; Companies (Miscellaneous Reporting) Regulations 2018; FRC’s Guidance on Board Effectiveness 2018. USA: The Delaware General Corporation Law (Title 8, Chapter 1 of the Delaware Code); Securities Act 2005; Sarbanes–Oxley Act 2002.

3 The Early Stage of the Governance of Sustainability in Italy and the UK: The Scenario in 2013

3.1 Introduction This research project started in 2013, with the idea of providing a representation of the existing engagement of the boards of directors of Italian and British listed firms with regard to social and environmental issues. These two contexts were considered relevant as representatives respectively of the civil and common law traditions (Mio and Venturelli 2013). Furthermore, while the UK context had been extensively studied (Rake and Grayson 2009), the Italian context at that time had been narrowly investigated (Allegrini and Greco 2013), and it was interesting as it did not have any specific regulation for the inclusion of sustainability-related issues in corporate governance. Thus, the first phase of the research began in 2013, and was developed around three distinct activities: an initial investigation was carried out through a questionnaire addressed to the firms listed on the FTSE-MIB index, the main benchmark index of the Italian Stock Exchange, which is representative of about 80% of the total market capitalization and sectoral composition of the Italian stock market. A second investigation was conducted by interviewing a benchmark sample composed of ­independent © The Author(s) 2019 M. Minciullo, Corporate Governance and Sustainability, https://doi.org/10.1007/978-3-030-18885-6_3

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directors belonging to the boards of directors of the analyzed firms. A third investigation was conducted to strengthen the results of the empirical investigations, by carrying out a desk analysis of the main corporate documents that FTSE-MIB firms published in 2013. The desk analysis was carried out in parallel also with regard to the UK, by taking into consideration the firms belonging to the FTSE 100, the benchmark index of the London Stock Exchange. The main topics that were analyzed in this study are the following: • the role of the board of the directors (operational model, strategic value of sustainability, sustainability activities, competences and rewards); • the integration of sustainability at the organizational level (organizational units and the sustainability manager, reporting, Shareholders’ General Meeting); • the emerging approaches of FTSE-MIB firms’ board of directors (cluster analysis, cross-industry analysis); • the governance models of sustainability as expressed by the corporate documents of top listed Italian and British firms. The chapter will discuss first the results of the two investigations realized by collecting primary data through the administration of the cited surveys to Italian firms, and then the results of the desk analysis conducted by analyzing corporate documents.

3.2 T  he Perspective of Italian Boards of Directors in 2013 3.2.1 Methodology 3.2.1.1  The Research Phases This section of the research project was carried out between May 2013 and July 2014 through four phases. The details of the research phases are summarized below.

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Step 1: Research design The first phase of the research had the objective of defining the research model, in order to find the most appropriate design suitable to achieve the goals of the study. Given the difficulty of having access to the documents discussed by the boards of directors and the minutes of various meetings of the board, this part of the study centered on the administration of a questionnaire to the secretariats of boards of directors of the sample firms, as well as a questionnaire to a sample of independent directors. Through the questionnaires, in fact, it would have been possible to get directly the perception of the firms and their directors with regard to the degree of integration of sustainability in the firm’s corporate governance. Step 2: Questionnaire design The second phase of the research, leveraging on the results of the literature review, was aimed at defining the two questionnaires. The items for evaluating the degree of integration of sustainability in corporate governance were adapted from extant research, which is mostly centered on the Anglo-Saxon context (Strandberg 2008; Mackenzie 2007; Kakabadse et al. 2009; Rao and Tilt 2016), to the Italian context. The first questionnaire, administered to the secretariats of the sample firms, was intended to collect data related to activities of the board of directors, and to the organizational structure of sustainability (Strandberg 2008; Mackenzie 2007; Kakabadse et al. 2009; Rao and Tilt 2016). The second questionnaire was administered to a sample of non-executive directors, with the aim of taking into account the individual points of view of the firm’s representatives (Kakabadse et  al. 2001; Strandberg 2008; Rao and Tilt 2016). Step 3: Data collection The third phase of this part of the research was aimed at the collection of data, which was performed by administering a questionnaire to the secretariats of the firms listed on the FTSE-MIB index, as well as to two control samples.

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The first control sample consisted of firms listed on the FTSE Italia All-Share index of the Italian Stock Exchange, without the firms from the FTSE-MIB. The second control sample, instead, consisted of a group of unlisted firms, but was still comparable to the FTSE-MIB firms in terms of size and capitalization. Data were collected between September and November 2013, through a questionnaire with closed-ended answers, administered through an online platform. First, those in the samples were invited to participate in the survey via email, and then also through a telephone call. Afterwards, the participants received a hard copy of the questionnaire in advance, and then answered the questionnaire through the online platform. An adapted version of the questionnaire was then administered to a randomized sample of non-executive directors belonging to the boards of directors of FTSE-MIB firms, who were invited to participate in the survey through the firms’ secretariats. Also in this case the questionnaire with closed-ended answers was administered through an online platform. Step 4: Data analysis The data collected through the administration of the questionnaires were subsequently analyzed using three methods: analysis of descriptive statistics, analysis of variance (ANOVA), and realization of a cluster ­analysis. The information collected was analyzed to describe in what form sustainability had been integrated into the activities of the boards of directors of the investigated firms, and how this integration was carried out at an organizational level. Furthermore, it allowed a synthetic representation to be provided of the most common behaviors of listed firms towards sustainability.

3.2.1.2  The Sample The research was centered on the firms listed on the FTSE-MIB index, the main benchmark index of the Italian Stock Exchange. This index was selected not only for its relevance in terms of total market capitalization,

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but also as it has always played a pioneering role in managerial and governance trends. Furthermore, the firms listed on this index traditionally have the highest requirements concerning corporate governance, as the Italian Code of Corporate Governance usually establishes specific and stricter requirements for these firms (Mazzotta and Veltri 2014). All the firms belonging to the FTSE-MIB index were invited to answer a questionnaire; 31 firms out of a total of 40 firms listed on the FTSE-­ MIB index answered the questionnaire, a response rate of 77.5%. Beyond the principal sample, two control samples were identified, in order to facilitate the interpretation of the results. The first control sample consisted of 40 firms listed on the FTSE Italia All-Share index of the Italian Stock Exchange. The index comprises all the members of the Italian Stock Exchange indexes, but the control sample excluded firms from the FTSE-MIB Index and those incorporated outside of Italy. Of a total of 40 firms listed on the FTSE-MIB index, 22 answered the questionnaire, a response rate of 55%. The second control sample, instead, consisted of a group of 20 private firms, but still comparable to the FTSE-MIB firms in terms of size and capitalization. In particular, this stratified-random sample consisted of mid- to large-capitalization firms not listed on the Italian stock market, including firms that had been previously delisted. The analysis of the control samples was considered useful to make a comparison with those belonging to the FTSE-MIB index, to better understand the nature of these firms’ commitment to sustainability. Concerning the second questionnaire, the sample was instead composed of a random benchmark of non-executive directors, members of the boards of directors of firms belonging to the FTSE-MIB index. The non-executive directors were invited to participate in the research through Nedcommunity, the association of Italian non-executive directors.

3.2.1.3  The Structure of the Questionnaire The questionnaire addressed to the secretariats of the investigated firms was aimed at collecting data on the characteristics and activities of the board of directors (Strandberg 2008; Mackenzie 2007; Kakabadse et al.

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2009; Post et al. 2011), on the organizational structure devoted to sustainability issues (Strandberg 2008; Harjoto and Jo 2011), on communication/reporting practices (Morsing and Schultz 2006; Kolk 2010), and on the shareholders’ meeting (Strandberg 2008) as well. The second questionnaire was administered to a sample of non-executive directors, with the aim of taking into account the individual point of view of a firm’s representative (Kakabadse et al. 2001; Strandberg 2008). In this case, the aim of the questionnaire was to investigate the perception of non-­ executive directors with regard to the activities of the board and the organizational structure dealing with social and environmental issues. The questionnaire consisted of four sections. The first section was aimed at obtaining personal data on the firm and on the respondent. The second section was intended to collect information about the link between sustainability and strategy, and about the activities of the board. Particular attention was paid to the commitment shown by the board of directors to fostering the development of social and environmental initiatives, and to the integration of sustainability-related issues into the vision and strategic plan of the firm. This section also focused on accountability systems and monetary incentives specifically related to sustainability policies, as well as on corporate governance mechanisms related to drafting, approval, and publication of the sustainability report. The third section of the questionnaire investigated the organizational structure of sustainability, in order to detect the main characteristics of the organizational units that deal with the theme, and the presence of specialized committees within the board of directors. In particular, the questions in this section took into consideration the presence of a managerial figure responsible for the management of socio-­ environmental issues, and the potential presence of collaboration with an organizational unit. This section also investigated if and how the board has delegated responsibility for socio-environmental issues, by checking whether there is a collegial approach or whether the board has appointed one director, or one or more committees. The fourth section analyzed in detail the activities of the board of directors related to sustainability issues, looking at the levels of responsibility and expertise. In particular, the questions in this section investigated how often the board is informed about the social and environmental

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risks related to the firm’s operations and about stakeholder feedback, and then analyzed the presence of social and environmental issues in the mix of skills/experience represented within the board of directors.

3.2.2 The Role of the Board of the Directors 3.2.2.1  Th  e Integration of Sustainability within the Vision and Strategic Plan The integration of sustainability issues within the vision and strategy of a firm represents the first useful element for analyzing the integration of sustainability policies into top management activities. The results indicated that the issues related to sustainability were already part of the agenda of the board of directors in the main Italian listed firms. The novelty of the research offers many interesting results that contribute to outlining a framework of the context. In 2013, most of the FTSE-MIB listed firms had already adopted a definition of sustainability (71%), to a considerably greater extent than the samples of listed and unlisted firms (see Table 3.1). In fact, the control sample of listed firms shows that less than half of the board of ­directors of the considered firms (42.9%) specified the meaning of sustainability for the firm. Within the sample of unlisted firms, indeed, the results indicate that this definition was officialized only in one in three firms (33.3%). Similarly, the board of directors defined and publicly communicated its commitments on social and environmental issues in more than three in five firms on the FTSE-MIB index (64.5%). In this case, the benchmarks differ in quite an evident manner, as only a few listed firms (14.3%) announced these commitments, while higher values were found in the unlisted firms (40%). The analysis also verified the presence of social and environmental issues in firms’ official strategic documents. The results highlighted a large discrepancy between the number of firms declaring the desire to integrate sustainability into the business strategy and the number of boards of directors which actually translated it into a specific commitment. Almost

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Table 3.1  The strategic relevance of sustainability for the board of directors FTSE-­MIB All-­Share Unlisted (%) (%) (%) Integration of sustainability within the vision and strategic plan  The board of directors has adopted a specific definition of sustainability  The board defined and publicly communicated commitments on social and environmental issues  The socio-environmental issues are integrated into the code of ethics  The socio-environmental issues are integrated into the strategic plan Implementation of sustainability-related activities  The board of directors reviews and approves the corporate policies on sustainability  The board of directors approves the plan for sustainability-related activities  The board of directors regularly reviews the progress of sustainability-related activities  The board of directors received specific training on sustainability-related issues

71.0

42.9

33.3

64.5

14.3

40.0

90.3

85.7

73.3

41.9

42.9

53.3

51.6

14.3

26.7

25.8

0.0

20.0

41.9

28.6

20.0

38.7

41.3

26.7

all firms in the FTSE-MIB, in fact, made reference to s­ustainability in their code of ethics (90.3%), while fewer made the same reference in the strategic plan (41.9%). Sustainability-related issues were, therefore, widely considered within the ethical code or within the code of corporate governance, but still struggled to be part of the strategic plan. However, the number of firms that integrated social and environmental objectives within their overall strategic plan could be considered significant, and potentially destined to grow. The results of the benchmarks registered that the same trend as with the FTSE-MIB applied to the listed firms, since more firms (85.7%) considered socio-environmental issues within their code of ethics than within their strategic plan (42.9%). Conversely, the unlisted firms reported slightly lower values for the code of ethics (73.3%), but also better results regarding the strategic plan, which included references to sustainability in more than half of the sample (53.3%). This result may indicate that

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unlisted firms had an approach to sustainability that was more focused on strategic issues than on values, revealing a sort of pragmatic style.

3.2.2.2  Th  e Implementation of Sustainability-Related Practices The study sought to analyze the commitment of the board of directors to sustainability issues, considering whether and on what occasions these issues were part of the agenda of the various board meetings (see Table 3.1). The results indicate that the board of directors of the firms listed on the FTSE-MIB index were engaged in activities related to sustainability to a greater extent compared to the firms listed on other indices or unlisted. In particular, looking at the results it is possible to state that the majority of the boards of directors of FTSE-MIB firms have approved corporate policies on sustainability (51.6%), demonstrating a widespread strategic approach to sustainability. This value is significantly higher in FTSE-MIB firms than in the benchmarks, as the approval of sustainability policies occurs in 14.3% of FTSE Italia All-Share listed firms, and in 26.7% of the unlisted sample. At a more operational level, approval of plans for sustainability-related activities is not really widespread (25.8%), whereas there is a higher commitment to monitoring the progress of such activities. In fact, the results indicated that a significant portion of the FTSE-MIB firms (41.9%) used to run regular reviews of ongoing sustainability-related practices. Considering the control samples, the results highlighted significant differences between the two contexts. In the FTSE Italia All-Share sample, indeed, approval of plans for sustainability-related activities was not performed by the board of directors of any firm, whereas monitoring activities appeared to be slightly more frequent (28.6%). In the unlisted sample, conversely, one in five firms (20%) approved plans for sustainability-­related activities, and also reviewed the progress of these activities. The results, therefore, indicated that the majority of the FTSE-MIB firms were engaged in defining specific policies regarding sustainability,

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and that almost the same number of firms regularly reviewed the achievement of the consequent plans and goals. The fact that the board of directors was involved in the operational aspects related to sustainability issues in a smaller but significant section of FTSE-MIB firms could be interpreted as a sign that sustainability was starting to become part of the agenda of boards of directors. Furthermore, this study investigated whether the boards of directors of the analyzed firms received specific training regarding social and environmental issues. This type of training involves lectures, videos, and hands-­on or live-action training on the most important social and environmental issues that may involve the firm (Felo 2001). The results put in evidence that in more than one-third of FTSE-MIB firms (38.7%), the board of directors received specific training on social and environment topics. Sustainabilityrelated training for the board of directors was less common within the two control samples, as the registered values are lower both in the FTSE Italia All-Share sample (14.3%) as well as in the unlisted sample (26.7%).

3.2.2.3  The Operational Model of the Board of Directors After analyzing the activities of the board of directors related to sustainability issues, the study intended to explore the ways in which these activities were carried out, and the main actors involved (see Table  3.2). Specifically, the survey took into consideration which form of governance was chosen with regard to social and environmental issues. The respondents had to indicate whether the board of directors had been dealing with Table 3.2  The governance of social and environmental issues FTSE-MIB All-Share Unlisted (%) (%) (%) The governance of social and environmental issues…  has been specifically assigned to the board 29 of directors  was not defined, but the board of directors 12.9 has been monitoring these issues  was not defined, but one of the directors 0.0 has been monitoring these issues

14.3

13.3

14.3

13.3

0.0

6.7

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these issues by working as a collegial body, or through the presence of a board committee, or thanks to the specific contribution of single directors. The results related to the FTSE-MIB sample showed that in a significant number of firms the board of directors operates through the presence of board committees dealing with both social and environmental issues (29%). Furthermore, other firms reported that their boards of directors merely monitored these topics (12.9%), without a specific allocation of responsibilities. The trends are different in the benchmarks: starting from the listed firms, the results show that the diffusion of committees overseeing both social and environmental issues is lower than in FTSE-MIB firms (14.3%). The same value was registered with regard to the presence of an unspecified monitoring approach (14.3%). In the benchmark of unlisted firms, instead, the results show that the diffusion of committees debating both social and environmental issues was even lower (13.3%) than in the other samples, but also that it was equivalent to the adoption of unspecified monitoring activity of social and environmental issues. Concerning the contribution of individual directors with regard to specific social or environmental issues, this was not verified in any of the firms in the FTSE-MIB sample, and the same situation occurred in the control sample of listed firms. Surprisingly, the presence of individual directors presenting social and environmental issues to the board of directors occurred in a small but unique niche of the control sample of unlisted firms (6.7%). In conclusion, the analysis of the data emphasized that the moments of debate specifically specializing in sustainability during meetings of the boards of directors occurred only in a limited number of firms, and that the contribution of individual directors with regard to specific sustainability-­related issues was rarely verified.

3.2.2.4  C  ontrol/Risk Management and Stakeholder Engagement Related to Sustainability In order to understand the level of integration of corporate social responsibility (CSR) policies within the activities of the boards of directors of FTSE-

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MIB firms, this study also investigated the involvement of the board of directors in control/risk management processes, and the stakeholder engagement practices which involved the board with regard to sustainability. The first subject of analysis was represented by recurring updates to the board of directors on the social and environmental risks related to the firm’s activities (see Table  3.3). Within the FTSE-MIB sample, almost two-thirds of firms declared that the board of directors was regularly updated with regard to socio-environmental-related risks (64.5%). The results indicated that the board of directors was frequently updated on socio-environmental risks also within the FTSE Italia All-Share benchmark, where most firms had already introduced such practices (57.1%). In the unlisted sample, indeed, the presence of this type of update is less common but still relevant (40%). A second element which was analyzed regarded stakeholders’ engagement practices, which put the board of directors into contact with the main categories of stakeholders. The analysis was focused on recurring updates to the board of directors about stakeholders’ feedback, mostly from consumers and communities. The results showed that most FTSE-­ MIB firms were up to date on stakeholders’ feedback (64.5%), whereas the two control samples demonstrated a lower engagement with stakeholders (listed: 42.9%; unlisted: 33.3%). Table 3.3  Risk management, stakeholder engagement, and compensation FTSE-­MIB All-­Share Unlisted (%) (%) (%) Risk management and stakeholder engagement  The board of directors is regularly updated about the social and environmental risks of the firm  The board of directors is regularly updated about stakeholders’ feedback Competences and monetary incentives  Social and environmental issues are considered in the skills/experiences represented on the board of directors  Part of the variable remuneration of the executive directors is linked to social/ environmental performance

64.5

57.1

40

64.5

42.9

33.3

38.7

28.6

40.0

25.8

28.6

0

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3.2.2.5  Competences and Rewards Related to Sustainability From the perspective of this study, the integration of sustainability within the board of directors is expressed also by board composition. For this reason, a section of the questionnaire was intended to highlight whether social and environmental issues were part of the various skills/experiences represented on the board. The analysis of the data (see Table 3.3) demonstrated that social and environmental issues were represented within the various skills/experiences possessed by the directors in a considerable number of firms (38.7%), but also indicated that most firms did not have directors specialized in sustainability issues. By comparing this data with what has been stated in previous sections, it appears clear that some firms had already started the process for integrating sustainability within corporate strategy and governance, but without having any directors expert in the field. This assumption could imply that these firms were relying on the support of managerial figures to accomplish this type of initiative. The presence of skills/experiences related to sustainability is lower within the benchmark of listed firms (28.6%) and similar among unlisted firms (40%). In parallel with the theme of competences, the study investigated the presence of monetary incentives for executive directors tied to social and environmental performance. The results provided evidence that, within the FTSE-MIB sample, one in four firms adopted practices to tie the compensation of executive directors to the social and environmental performance of the firm (25.8%). These data imply that for a quarter of the surveyed firms, therefore, sustainability was crucial to corporate strategy, so that some monetary incentives were implemented to foster the integration of social and environmental issues within the firm’s activities. It was also possible to verify that, within the firms that had linked part of the executive directors’ remuneration to social and environmental performance, a large majority (66.7%) also adopted some tools for performance measurement, and in many cases this performance was publicly disclosed (58.3%). The results are similar in comparison to the benchmark of listed firms (28.6%), whereas in the unlisted control sample the presence of economic incentives is not verified or disclosed.

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3.2.3 T  he Integration of Sustainability at the Organizational Level 3.2.3.1  Organizational Units and the Sustainability Manager For a more extensive evaluation of the level of integration of sustainability within firms’ strategies, the study also investigated how sustainability was hinged at the organizational level. In particular, the interviews were structured in order to point out whether firms had an organizational unit or manager responsible for the management of sustainability practices (for the purpose of this study we refer to sustainability manager as a synonym for CSR manager, corporate responsibility officer, sustainability officer, etc.). From the data (see Table 3.4), it is possible to see that the figure of the sustainability manager was already widespread in 2013 within the FTSE-­ MIB sample (77.4%), whereas it was less common in both the FTSE Italia All-Share sample (42.9%) and the unlisted one (26.7%). The same trend was found with reference to the presence of a specific sustainability unit. The results indicated that an organizational unit focused on sustainability issues was already present in two in three firms in the FTSE-MIB Table 3.4  The integration of sustainability at the organizational level FTSE-­MIB All-­Share Unlisted (%) (%) (%) Last year during the board of directors’ meetings…  the firm has a manager specialized in sustainability (e.g. sustainability manager)  the firm has an organizational unit specialized in sustainability (e.g. sustainability unit) The management of social and environmental issues has been assigned to…  sustainability manager and/or unit  communications/PR department  internal audit  managerial sustainability committee  none

77.4

42.9

26.7

67.7

42.9

26.7

80.7 6.5 3.2 3.2 6.4

42.9 28.5 0 14.3 14.3

33.3 0 0 6.7 60.0

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sample (67.7%). Also in this case, both the control sample of listed (42.9%) and unlisted firms (26.7%) revealed a lower presence of a sustainability unit. In the FTSE-MIB sample, therefore, the presence of both a sustainability manager and a specific organizational unit was very frequent already in 2013. The analysis of the organizational structure of sustainability also highlighted which organizational unit has the responsibility for managing sustainability issues. The results demonstrated that most of the FTSE-­ MIB firms (80.7%) assigned the management of sustainability-related issues to these two dedicated organizational components (sustainability manager or unit). The data also indicated that FTSE-MIB firms ­alternatively assigned the management of these issues to a managerial sustainability committee (3.2%), to the communications/public relations (PR) department (6.5%), or to the internal audit department (3.3%). Within the control samples, instead, the management of socio-­ environmental issues was realized in different ways between listed and unlisted firms. In listed firms, most firms assigned the management of social and environmental issues to the sustainability manager or to the specific unit (42.9%), but the communications/PR department was also frequently chosen (28.6%) for this purpose. Moreover, the managerial sustainability committee (14.3%) was revealed to be a valid alternative for the listed control sample, but there was also a group of firms that did not assign these issues to a specific organizational body (14.3%). In the unlisted sample, finally, one-third of firms chose the sustainability manager and the sustainability unit as an organizational point of reference for sustainability issues (33.3%), but it is important to underline that most firms in the sample had not yet assigned sustainability issues to any specific function (60%).

3.2.3.2  Reporting Activities The research project also aspired to examine practices relating to reporting, to verify whether and how the analyzed firms disclosed information regarding their sustainability-related activities (see Table 3.5). In particular, the study focused on the sustainability report, which is one of the

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Table 3.5  The sustainability report

The sustainability report (or a similar document)…  was published by the firm in the last year  was reviewed and approved by the board of directors  was reviewed/audited by a third-party organization

FTSE-MIB (%)

All-Share (%)

Unlisted (%)

80.7

71.4

26.7

77.4

23.6

13.3

70.6

23.6

13.3

most important stakeholder dialogue and communication tools (Morsing and Schultz 2006). Thus, the results show that four in five firms in the FTSE-MIB sample published a sustainability report (80.7%), a tool which had become common and was considered an essential element of the sustainability strategy of large firms, especially multinational corporations. The strategic value of this instrument is confirmed by the fact that in almost every firm publishing a sustainability report, this report was subject to the approval of the board (77.4%) and reviewed by a third-party organization (70.6%) in order to certify its validity. The situation is different in the two control samples, given that the sustainability report is very present in FTSE Italia All-Share firms (71.4%), but despite high diffusion, approval by the board of directors (23.6%) and external review (23.6%) are not very frequent. Within the unlisted sample, indeed, the diffusion of the sustainability report is much lower, as only one in four firms had already implemented this reporting practice. However, half of the firms publishing a sustainability report had already implemented both approval by the board and an external audit (13.3%).

3.2.3.3  R  oom for Sustainability during the Shareholders’ General Meeting The governance of a firm is of course explained by the role of the board of directors, but it is important also to underline the role of the

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Shareholders’ General Meeting, one of the fundamental governing mechanisms for firms (Apostolides 2010). The meeting is a crucial moment in the life of the firm, as an occasion at which shareholders can exercise their vote with the right of participation. During the meeting, in fact, the shareholders of the firm adopt resolutions about matters required by law or by the firm’s corporate bye-laws. For this reason, a section of the study aimed at verifying whether sustainability had become part of the agenda of Shareholders’ General Meetings, and how much room was allocated for the discussion of sustainability issues. In particular, the study focused on the approval of the financial statements, on the presentation of the sustainability report, on the presentation of sustainable practices/initiatives, and on the debate over socio-environmental issues. The results indicated that many firms listed on the FTSE-MIB (see Table  3.6) presented the sustainability report during the Shareholders’ General Meeting for the approval of the 2013 financial statements (61.3%). The analysis of the control sample, instead, indicated that such presentation was less common for both listed (28.6%) and unlisted firms (20%). With regard to the presentation of specific sustainability initiatives, this occurred in almost one-third of the FTSE-MIB sample (35.5%). In this case, the analysis recorded an opposite trend in comparison with the sustainability report, as the presentation of this type of initiative was more frequent in the benchmark of listed firms (57.1%), while in the unlisted one the figures were very low (6.7%). Table 3.6  The Shareholders’ General Meeting FTSE-­MIB All-­Share Unlisted (%) (%) (%) Last year during the board of directors’ meetings…  the sustainability report was presented during the Shareholders’ General Meeting  specific sustainability initiatives were presented during the Shareholders’ General Meeting  ESG/ethical funds participated in the debate during the Shareholders’ General Meeting

61.3

28.6

20

35.5

57.1

6.7

25.8

14.3

13.3

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Finally, the study investigated whether ESG (environmental, social, and governance) funds or ethical funds participated in the debate during the General Meeting. The active presence of this type of investor can foster a deeper discussion and disclosure in relation to the effective approach of the firm to sustainability (Escrig-Olmedo et al. 2010). With regard to this topic, the figures showed show that the participation in the assembly debate of ESG/ethical funds occurred in almost a quarter of the FTSE-MIB firms (25.8%), and that it was even more sporadic in the listed control sample (14.3%), as well as in the unlisted benchmark (13.3%). It is possible to explain these data by considering that the Italian capitalistic model is usually strongly concentrated, and the participation of institutional investors is not so common in comparison with other financial markets (Mancinelli and Ozkan 2006).

3.2.4 Emerging Approaches In order to understand in more depth how Italian firms have integrated sustainability within their corporate governance, a cluster analysis was carried out to offer a synthetic representation of the approaches emerging in the various fields which were investigated. A cluster analysis consists in the identification of groups of homogeneous statistical units according to the answers given in the questionnaire. To determine these groups it was necessary to build an indicator of similarity between the statistical units, and to group the closest to each other for successive aggregations (Hair and Black 2000). From the perspective of this study, an approach with two phases was used in the clustering, using first a hierarchical algorithm, and then a K-means clustering procedure (Punj and Stewart 1983). The first phase of this clustering process consisted, therefore, in determining the number of groups contained in the sample, if present, using hierarchical methods. In particular, the most commonly used method, the so-called Ward method (the square root of the sum of the squares of the differences of values for each variable), was employed to identify the number of clusters within the sample (Malhotra 1996). The second phase of the process, based on the number of segments (k) found in the hierar-

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chical clustering procedure, saw the use of non-hierarchical K-means to define the membership of the cluster. The K-means analysis gives businesses various clusters. Finally, we used discriminatory analysis to determine whether the clusters were clearly distinguished from each other on the basis of other variables collected from the study of the surveyed firms. In the following descriptive analyses the clusters obtained were defined and compared, using variables not included in the initial analysis. The clusters were also tested and verified by looking at the difference between the averages of the variables between clusters, and the statistical significance of differences between means, through the use of non-parametric tests (Kruskal-Wallis and χ2) adequate for the different levels of ­measurement adopted.

3.2.4.1  The Results of Cluster Analysis The four clusters, as evidenced by Table 3.7, differ significantly on the basis of a series of corporate governance variables. The results showed that the first group is composed of 12 enterprises (38.7% of the sample), that the second group has 3 members (9.6%), while the third group has 11 members (35.6%), and the fourth has instead 5 members (16.1%). Overall, a large group of firms have integrated sustainability issues into their strategic activities, albeit in different forms, while another group of firms consider socio-environmental issues mainly as a hazard to be managed with a risk management approach. The last group of firms, finally, declare a generic commitment to sustainability, but this declaration is not associated with their actual conduct or translated into organizational or operational terms. A detailed profile of each cluster follows. Group 1: Integrated and collegial (38.7%) This group includes the firms in which the board of directors was engaged in sustainability issues through a collegial approach. In this type of firm, the board of directors has specific sustainability competences/ experience, but is also supported by the presence of a sustainability manager.

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Table 3.7  Emerging approaches

The board of directors has adopted a specific definition of sustainability The board defined and publicly communicated commitments on social and environmental issues The socio-­ environmental issues are integrated into the code of ethics The socio-­ environmental issues are integrated into the strategic plan The board of directors reviews and approves the corporate policies on sustainability The board of directors approves the plan for sustainability-­ related activities The board of directors regularly reviews the progress of sustainability-­ related activities

Integrated and collegial (38.7%)

Integrated with committees (9.6%)

Oriented to risks Simulated (35.6%) (16.1%) ANOVA

0.92

1.00

0.27

1.00

0.00∗

0.92

1.00

0.27

0.60

0.00∗

0.92

1.00

0.91

0.80

0.83

0.75

0.00

0.09

0.60

0.00∗

0.75

0.67

0.18

0.60

0.04∗

0.33

0.67

0.00

0.40

0.06∗

0.92

0.67

0.00

0.00

0.00∗

(continued)

67

3  The Early Stage of the Governance of Sustainability in Italy…  Table 3.7 (continued)

The board of directors received specific training on sustainability-­ related issues A committee of the board of directors discussed socio-­ environmental topics A committee of the board of directors discussed only social topics A committee of the board of directors discussed only environmental topics The board of directors is regularly updated about the social and environmental risks of the firm The board of directors is regularly updated about stakeholders’ feedback Social and environmental issues are considered in the skills/experiences represented in the board of directors

Integrated and collegial (38.7%)

Integrated with committees (9.6%)

Oriented to risks Simulated (35.6%) (16.1%) ANOVA

0.50

0.33

0.36

0.20

0.73

0.42

1.00

0.09

0.00

0.00∗

0.25

1.00

0.00

0.00

0.00∗

0.08

1.00

0.00

0.00

0.00∗

0.83

0.67

0.73

0.00

0.01∗

0.92

1.00

0.36

0.40

0.01∗

0.75

0.00

0.27

0.00

0.00∗

(continued)

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Table 3.7 (continued)

Part of the variable remuneration of the executive directors is linked to social/ environmental performance The sustainability report was presented during the Shareholders’ General Meeting Specific sustainability initiatives were presented during the Shareholders’ General Meeting ESG/ethical funds participated in the debate during the Shareholders’ General Meeting Sustainability manager Sustainability unit The firm published a sustainability report

Integrated and collegial (38.7%)

Integrated with committees (9.6%)

Oriented to risks Simulated (35.6%) (16.1%) ANOVA

0.58

0.33

0.00

0.00

0.00∗

0.92

0.33

0.36

0.60

0.03∗

0.58

0.33

0.18

0.20

0.21∗

0.50

0.00

0.09

0.20

0.10∗

1.00

1.00

0.73

0.20

0.00∗

1.00 1.00

1.00 1.00

0.45 0.45

0.20 1.00

0.00∗ 0.00∗

∗ p 15 members), the figures indicate that half of the subsample (50%) is composed of firms whose board of directors has not a single member with competences or previous experience in social or environmental issues, whereas the remaining half of the subsample (50%) is composed of firms whose board of directors has a quarter or fewer of its members experienced in sustainability. It is possible to get some interesting insight from these data. First, the hypothesis that the larger the board of directors, the larger the variety of skills and experiences provided by the board members may not necessarily imply the presence of skills and competences related to sustainability, as many firms with a large board of directors have no board members

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experienced in sustainability. Second, the results showed that the larger the board, the smaller the percentage of board members competent in sustainability. Thus, it would be possible to assume the existence of a significant standard threshold of board members with social and environmental skills/competences, which does not vary according to the increasing size of the board of directors. The presence of competences and skills related to sustainability within the board of directors is not related only to the background of board members, but can be also fostered through sustainability-related training programs. This part of the questionnaire took into consideration training regarding social and environmental issues, in order to determine the manner and the time in which it was provided. The results (see Table  4.5) show that, within FTSE-MIB firms, the board of directors has been involved in training programs geared specifically to socio-environmental issues in almost half of the sample (43.5%). Compared to 2013, the results indicate a slight increase for the FTSE-­ MIB sample (38.7%). With regard to the control sample, the results indicate that a quarter of the analyzed firms (25%) have implemented sustainability-oriented training programs for their board of directors. Table 4.5  Sustainability-related training programs

The board of directors…  participated in sustainability-related training programs (2017)  a participated in sustainability-related training programs (2014)   ∆ Considering the firms with training programs, how frequently did they occur?  Once (assignment to the board of directors)  More than once  Regularly Considering the firms with training programs, by whom are they provided?  Only internal specialists  Only external specialists/consultants  Both internal and external specialists

FTSE-MIB (%)

All-Share (%)

43.5

25.0

38.7

14.3

+4.8

+10.7

60.0 30.0 10.0

66.7 33.3 0.0

50.0 0.0 50.0

66.7 0.0 33.3

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This figure is lower in comparison to the FTSE-MIB sample, but also in this case there is an increase compared to 2013 (14.3%). An interesting insight has been obtained by comparing these figures with those related to the presence of socio-environmental skills/experiences within the board of directors. In fact, it is possible to note that only a proportion of the FTSE-MIB firms in which the board of directors already has competences in socio-environmental issues then provides the board with supplementary training on the same issues through ad hoc programs, whereas in the control sample training programs occur in all similar cases. A further analysis was conducted on the firms that have offered specific training programs on sustainability issues to their board of directors, in order to disclose the frequency of these programs. The results for the FTSE-MIB sample indicate that in most firms (60%) the board of directors participated in a training session focused on sustainability only once, a unique occasion which usually corresponds with the moment of assignment to the board. Almost one-third of the firms listed on the FTSE-­ MIB (30%), instead, have established for their board of directors more than one session of training on social and environmental issues, but there is also a small but significant group of firms (10%) which have established regular training programs offered to the members of the board. With regard to the firms listed on the FTSE Italia All-Share index, the results show similar data in comparison to the main sample. In fact, considering only the firms that provide their board of directors with training programs, in two in three firms (66.6%) these programs are held only once, right after the assignment of the board members. In the remaining third of the control sample (33.3%), training programs are offered to the board of directors more than once, whereas there are no firms that have established training programs as a regular event. Finally, the study analyzed the type of sustainability experts who are in charge of training the board of directors with regard to social and environmental issues. The scope of this in-depth analysis was to investigate whether firms prefer to entrust socio-environmental training programs to specialists working within the firms and/or to external specialists/consultants. The results indicate a general preference for internal specialists (e.g., sustainability manager, supply chain manager, etc.), as their presence has been verified in every case. Looking at the FTSE-MIB firms, in

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fact, the figures demonstrate that in half the cases (50%) training programs focused on sustainability are tutored only by specialists who are part of the firms, while the other half are tutored by either internal or external specialists/consultants. In the control sample, instead, most firms (66.6%) have entrusted their training programs only to in-house specialists, while the remaining firms (33.3%) have involved both internal and external specialists/consultants. A significant insight of this analysis is the fact that none of the analyzed firms has entrusted training programs focused on social and environmental issues exclusively to specialists/consultants who are not part of the firm. From these data it is possible to deduce that the firms prefer to ensure a strong connection between the content of socio-environmental training and the perspective of the firm. Hence, this behavior indicates that the objective firms want to achieve by offering training programs to the board of directors is to provide each board member with a minimum set of competences that can be useful in evaluating how social and environmental issues can have an impact on the firm’s activities.

4.2.2.4  S  ocial and Environmental Performance and Monetary Incentives Another topic which is closely linked to the accountability of the board of directors on sustainability issues is the presence of monetary incentives for executive directors (Fabrizi et al. 2014). Thus, the study investigated if and how the analyzed firms have implemented remuneration mechanisms that link part of the remuneration of executive directors to the social and environmental performance achieved by the firm. The results show that, within the FTSE-MIB sample, more than 40% of the firms (see Table 4.6) have adopted remuneration mechanisms that tie the variable part of the total remuneration of executive members of the board of directors to the social and environmental performance of the firm (43.5%). These data represent a significant improvement in comparison to the figure recorded in 2013 (25.8%). This result also symbolizes that, for a significant group of firms, sustainability has become such an important issue that it has been decided to provide the board of direc-

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Table 4.6  Sustainability-related performance and monetary incentives

Part of the variable remuneration of executive directors…  is linked to social/environmental performance (2017)  is linked to social/environmental performance (2014)   ∆ Considering the firms with sustainability-related remuneration…  performance is measured by quantitative parameters (2017)  performance is measured by quantitative parameters (2013)  performance is publicly disclosed (2017)  performance is publicly disclosed (2013)  regularly The share of variable remuneration linked to social/environmental performance…  has not been disclosed  is ≤5%  is ≤5% to ≤10%  is ≤10% to ≤20%  is ≤20% to ≤30%

FTSE-MIB (%)

All-Share (%)

43.5 25.8 +17.7

8.3 28.6 −20.3

100.0

100.0

66.7

n/a

60.0 58.3 10.0

0.0 n/a 0.0

20.0 20.0 40.0 10.0 10.0

100.0 0.0 0.0 0.0 0.0

tors with monetary incentives in order to promote the integration of social and environmental issues within the overall business strategy. This behavior, however, is not verified in the firms listed on the FTSE Italia All-Share index, where it is not possible to detect a significant presence of monetary incentives. In fact, the results indicate that the share of firms belonging to the control sample that have introduced monetary incentives tied to sustainability performance dropped between 2013 (28.5%) and 2017 (8.3%), perhaps because of the lack of regulatory duties. Furthermore, the study verified that all the firms belonging to the FTSE-MIB index that had tied part of the variable remuneration of executive board members to social and environmental performance then also adopted mechanisms for measuring such performance. The adoption of these mechanisms occurred in the same way in the control sample, since it was verified in all the considered firms.

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With regard to the disclosure of mechanisms for measuring socio-­ environmental performance, the majority of firms listed on the FTSE-­ MIB index that implemented these mechanisms also engaged in communicating publicly and transparently how these mechanisms work (60%). Public disclosure regarding performance measurement is not present in any of the firms belonging to the control sample (0%). In particular, the results regarding the FTSE-MIB firms appear to be even more significant if compared to the results of the study conducted in 2013. The comparison with the previous wave of the research highlights an increase in the number of firms that have adopted specific metrics for performance evaluation, as this has gone from two-thirds (66%) to the total of the sub-sample (100%), while the number of firms that disclose this information externally remained almost the same (2013: 58.3%; 2017: 60%). Finally, the research was aimed at obtaining some detailed information on the sustainable performance-related share of executive directors’ variable remuneration in the FTSE-MIB firms with monetary incentives linked to social and environmental performance. More specifically (see Table 4.6), the results indicate that in more than half of these firms, this percentage is equal to or less than 10% (≤5% = 20%; ≤10% = 40%). The figures also indicate that in a fifth of the considered sample, this percentage is between 10% and 30% (≤20% = 10%; ≤30% = 10%). In summary, 20% of FTSE-MIB firms that have linked part of the remuneration of executive directors to social and environmental performance declined to share specific data on the extent of this remuneration, as did the entire sub-sample of FTSE Italia All-Share firms.

4.2.2.5  Th  e Integration of Sustainability-Related Goals within Firms’ Strategic Plans In the first wave of this study, a starting point in the analysis was represented by the integration of sustainability policies into business strategy. The extent of this integration had been deduced by looking at the presence of a specific definition of sustainability provided by the board of directors, and at the presence of social and environmental issues in the

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strategy-related business documents (Figge et  al. 2002). The results showed that the issues related to sustainability were already playing a significant role for the FTSE-MIB firms. In fact, in 2013 most FTSE-­ MIB firms had already adopted their own definition of sustainability (71%) and had cited sustainable issues within their code of ethics (90.3%). The strategic plan, instead, less frequently (41.9%) included explicit references to social or environmental issues. The same encouraging trend emerges from the results of this survey, which was more focused on the parallels between sustainability and strategic objectives. The questionnaire investigated the presence of social and environmental objectives in the strategic plan, to highlight what is the effective integration of sustainability issues with respect to key business strategies. The analysis of the results of the questionnaire addressed to the firms listed on the FTSE-MIB index denotes (see Table 4.7) that FTSE-­ MIB listed firms have specifically mentioned these objectives in their strategic plan to a considerable extent (73.9%). This figure indicates a significant increase since 2013, when less than half of the sample had indicated sustainability-oriented goals in their strategic plan (41.9%). With regard to the control sample, instead, the presence of social and environmental objectives in the strategic plan is still evident, albeit to a Table 4.7  The integration of sustainability in firms’ strategy

The analyzed firms…  integrated sustainability-related goals into the strategic plan (2017)  integrated sustainability-related goals into the strategic plan (2013)   ∆  disclosed sustainability-related goals in a specific document Considering the firms with sustainability-related goals integrated into the strategic plan…  the goals were expressed by both quantitative and qualitative parameters  the goals were expressed by qualitative parameters  the goals were expressed by quantitative parameters  the goals were not disclosed

FTSE-MIB (%)

All-Share (%)

73.9

50.0

41.9

42.5

+32 69.6

+7.5 33.3

64.7

100.0

17.6 11.8 5.9

0.0 0.0 0.0

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lesser extent (50%). Also in this case the results indicate an increase in comparison to the previous research (from 42.5% to 50%). In addition, the collected data demonstrated that more and more firms have disclosed their strategic goals related to sustainability (69.6%) through a specific document (e.g., a sustainability plan). Within the firms of the FTSE Italia All-Share benchmark, the presence of a specific document is less frequent, as just one-third of the firms (33.3%) have already adopted this type of strategic document. Afterwards, this study focused on the sub-sample of firms that have integrated environmental and social goals within the strategic plan, in order to investigate the type of goals that were included in the plan. Within this sub-sample, most FTSE-MIB firms have included objectives expressed in both quantitative and qualitative terms (64.7%). Other FTSE-MIB firms have expressed their socio-environmental objectives in the strategic plan only in a qualitative (17.6%) or quantitative form (11.8%), while the remaining firms did not disclose the type of goals (5.9%). Within the control sample, indeed, all the firms that have included sustainability-related objectives in the strategic plan chose to express these objectives in both quantitative and qualitative terms (100%). Consequently, it can be assumed that there is an increasing commitment of firms to translating a growing interest in sustainability as a strategic tool into a detailed and transparent set of strategic goals.

4.2.3 T  he Integration of Sustainability at the Organizational Level 4.2.3.1  Th  e Organizational Units and the Sustainability Manager The analysis of the organizational structure that firms have adopted for managing sustainability is particularly important to thoroughly understand how the decisions of the board of directors are then applied and translated into specific actions. For this reason, in 2017 firms were also interviewed with regard to the presence of managers or organizational units entitled to manage the firm’s social and environmental issues.

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The results (see Table 4.8) indicate that the majority of firms listed on the FTSE-MIB index (85%) have integrated sustainability within their organization through the presence of a specific managerial figure; for the purpose of this study we refer to sustainability manager as a synonym for corporate social responsibility (CSR) manager, corporate responsibility (CR) officer, sustainability officer, and so on. In parallel, the results indicate that a slightly lower number of firms (77.5%) have also created an organizational unit in charge of dealing with social and environmental issues. The large diffusion of organizational forms handling sustainability issues is not a recent phenomenon: the comparison with the previous wave of the study confirms a positive trend and consolidated growth. In Table 4.8  Sustainability at the organizational level FTSE-MIB All-Share (%) (%) The firm…  has a manager in charge of sustainability (e.g., sustainability manager) (2017)  has a manager in charge of sustainability (e.g., sustainability manager) (2013)   ∆ The firm…  has an organizational unit in charge of sustainability (e.g., sustainability unit) (2017)  has an organizational unit in charge of sustainability (e.g., sustainability unit) (2013)   ∆ The sustainability manager…  is a head of department or top manager  is a middle manager The sustainability manager…  reports directly to the CEO  is separated from the CEO by a single intermediate level  is separated from the CEO by two intermediate levels  is separated from the CEO by multiple hierarchical levels

85

41.7

77.4

42.9

+7.6

−1.2

77.5

41.7

67.7

42.9

+9.8

−1.2

73.9 26.1

n/a n/a

43.5 30.4

n/a n/a

21.7 4.4

n/a n/a

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fact, the presence of the sustainability manager in the context of FTSE-­ MIB firms registered an increase compared to 2013 (from 77.4% to 85%). A similar increase was seen concerning the presence of a sustainability unit, as in 2013 these units were present in two in three firms on the FTSE-MIB list (67.7%), whereas in 2017 they were present in three in four firms (77.5%). The fact that the presence of sustainability managers is higher than the presence of sustainability units indicates that a small number of firms have so far preferred to assign the management of social and environmental issues to a single figure. Such a difference may be interpreted as a sign of a minor level of integration of sustainability within firms’ activities, or to a minor level of complexity, because of the limited scope of sustainability-related initiatives. With regard to the control sample, instead, the analysis of the data highlighted that the presence of a sustainability manager within the FTSE Italia All-Star index (41.7%) is lower in comparison to the FTSE-MIB firms. These data are in line with the previous wave of the study, which testified to a similar presence (42.9%) of a managerial figure in charge of managing sustainability issues. The same trend was verified with regard to the presence of a sustainability unit in the control sample, which actually occurs in exactly the same number of firms that have a sustainability manager (41.7%). Even in this case, the results indicate no significant difference in comparison to 2013, where the diffusion was slightly higher (42.9%). In addition to the presence of the sustainability manager, the study investigated the importance of sustainability at the organizational level by analyzing the job title of these managers, and the hierarchical positioning compared to the CEO. First, the results indicate that, within FTSE-MIB firms, the sustainability manager (or equivalent) is more often a head of department or a top manager (73.9%), rather than a middle manager (26.1%). This result implies that the officers who are responsible for managing sustainability issues have significant decisional power within the firm, and consequently a proper level of compensation. Furthermore, this study investigated how many hierarchical levels separate the sustainability manager from the CEO (Fassin and Van Rossem 2009). The results indicate that the hierarchical distance between the sustainability manager and the CEO is usually low. In the most frequent

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organizational configuration, in fact, this figure reports directly to the CEO (43.5%). In almost one-third of cases (30.4%), instead, the sustainability manager is separated from the CEO by a single intermediate level. Finally, the results indicate that in one in five firms (21.7%) on the FTSE-MIB index, the distance between the sustainability manager and the CEO is equal to three (two intermediate levels), whereas the number of firms with multiple hierarchical levels is residual (4.4%). Thus, these data indicate that the sustainability manager is often a top manager reporting directly to the CEO, and this organizational positioning implies that decisions regarding social and environmental issues are a matter of discussion at the higher level of the organization.

4.2.3.2  Communication and Reporting Activities The 2013 wave of this study had shown a large discrepancy between the number of firms declaring a willingness to integrate sustainability within their business strategy and the number of those who had actually translated this aim into concrete objectives. The definition of specific social and environmental commitments assumes greater relevance when it is associated with an adequate communication and reporting policy (Du et al. 2010). In fact, by communicating and disclosing the real and tangible goals associated with sustainability, firms become accountable for such commitments made in front of the various categories of stakeholders, from customers to public institutions (Kolk 2008). Considering how important are the communication and disclosure of information related to the attitude of the firm to social and environmental issues, this study focused on the shape that these activities took (see Table 4.9). Therefore, the firms participating in the study were asked to indicate by what means of communication they handle the disclosure of information related to sustainability. The analysis of the results shows that a predominant role is attributed to the communication made through the firm’s website. In FTSE-MIB listed firms, more than four in five firms (88.3%) have created a specific section of their corporate website to present their commitment to sustainability. The second means of

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Table 4.9  Communication and reporting

The sustainability-related communication tools implemented by the firm are …  section of the website  sustainability report  sustainability guidelines Considering the firms that publish a sustainability report (SR) …  the SR was published as a stand-alone document  the SR was published as an integrated report  the SR was published both as a stand-alone document and as an integrated report Considering the firms that publish a sustainability report …  the SR was approved by the board of directors  the SR was compiled in accordance with an international standard The sustainability-related communication tools…  declared publicly sustainability-related targets (2017)  declared publicly sustainability-related targets (2013)   ∆ Considering the firms that declared their sustainable targets …  the sustainable vision/strategy of the firm was disclosed  information about specific initiatives/targets was disclosed

FTSE-MIB (%)

All-Share (%)

88.3 85.2 47.8

41.7 41.7 16.7

86.2 3.5 10.3

100.0 0.0 0.0

85.2 91.3

33.3 66.7

73.9 64.5 +9.4

41.7 14.3 +27.4

82.9

68.6

100.0

100.0

communication, in terms of diffusion, is the sustainability report, ­considered in its various forms. Within the FTSE-MIB sample, this document is present in a significant number of firms (85.2%), slightly higher in comparison with 2013. In fact, the previous wave of this study highlighted that four in five firms had already published a sustainability report. Finally, the results indicate that the publication of a document/ paper summarizing the guidelines of the firm’s approach to sustainability is significantly less widespread. In fact, such a document is present in slightly less than half of the firms listed on the FTSE-MIB index (47.8%). With regard to the control sample, the results highlight a different situation. In fact, two in five firms (41.7%) created a section on their

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corporate website to present their commitment to sustainability. The same figure was verified with regard to the sustainability report, which has been published by the same number of firms. Similar to what was found for the FTSE-MIB firms, also in the control sample the publication of a document/paper summarizing the guidelines to the firm’s approach to sustainability was significantly less widespread (16.7%). The research also aspired to examine in more depth the sustainability report, which is still one of the most important closure and communication tools. As already stated, the strategic value of the sustainability report as an information tool is confirmed by the fact that it is frequently reviewed or approved by the board of directors (85.2%). Considering only the firms that publish a sustainability report, the analysis of the results regarding the structure of the document indicates that many FTSE-MIB firms disclosed their goals and activities related to sustainability by publishing a stand-alone document (86.2%). The form of an integrated report was particularly rare (3.5%), whereas a relatively larger group of firms published both the sustainability report as a stand-­ alone document and the integrated report (10.3%). In addition, this study highlighted that most firms belonging to the FTSE-MIB index have compiled their sustainability report in accordance with an international standard (91, 3%) in order to certify its validity. Within the control sample, the situation is slightly different, since it has been verified that all firms published the sustainability report as a stand-alone document, and that approval by the board of directors took place in a third of cases (33.3%). Considering only the firms that publish a sustainability report, it emerged that the application of an international standard is done in two-thirds of the considered cases (66.7%). Even if the firms belonging to the control sample have fewer obligations in terms of regulation, the relatively few firms that publish a sustainability report are usually interested in certifying its validity. This situation, however, was expected to change significantly in the near future, to coincide with the entry into force of Legislative Decree no. 254/2016, which introduced for the first time in Italy the obligation for many large and listed firms to integrate into their financial statements a non-financial report on their environmental, social, and governance activities. The accountability for non-financial performance, in fact, was considered likely to encourage the diffusion of the integrated report, as a

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reporting tool suitable to meet jointly both the transparency obligations imposed by the legislation, and the higher transparency expectations of stakeholders, who are becoming more and more sensitive to environmental and social issues. Finally, the study investigated the content of the communication tools described so far. In 2017 there was an increase in the number of firms that publicly announced their social and environmental objectives. For FTSE-MIB firms the results indicate an increase from 64.5% to 73.9%, probably due to the recent and stricter regulatory obligations. With regard to communication, the results also show a more significant increase within the control sample (from 14.3% to 41.7%), since previously only a meager percentage of these firms had announced their commitments. The study also investigated the sub-sample of firms engaged in communication/disclosure activities, to individuate what type of information firms have disclosed. The results indicate that all the firms in the sub-­sample belonging to the FTSE-MIB index are eager to communicate detailed information about specific initiatives/targets (100%). Surprisingly, fewer firms use communication tools for presenting their sustainable vision/strategy (82.9%), probably because the definition of the strategic value of social and environmental issues may be easier to misinterpret. The same trend is verified within the FTSE Italia All-Share sub-sample, where the preference for detailed information (100%) over strategic directions (68.6%) is much more evident. However, by comparing these data with the previous ones, it is possible to note that the number of firms that declared sustainability-related goals is lower than the number of firms that created a sustainability section on their website. These data could mean that some firms are mostly using their website to communicate their commitment externally, but the absence of a disclosure of their objectives and activities related to social and environmental issues may be misinterpreted.

4.2.3.3  S  ustainability Debate during the Shareholders’ General Meeting The second wave of this study kept its focus on the Shareholders’ General Meeting, as this event represents a crucial moment in a firm’s activity,

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particularly concerning its main strategic decisions (Apostolides 2010). For this reason, the interviewed firms were asked to disclose how much room had been allocated to discussing sustainability issues on the occasion of the Shareholders’ General Meeting for the approval of the annual financial statements. This event, in fact, represents the main occasion for shareholders to participate in the firm’s decisions by expressing their vote. For this reason, the study investigated if and how firms took the chance of this important meeting to unveil their sustainability report, to present specific sustainability-related initiatives, or to invite the shareholders to debate specific social and environmental issues. In general, the results indicate that a growing number of firms considered this important event an occasion to demonstrate to their shareholders the real commitment of the firm to activities related to sustainability. More specifically, the number of firms listed on the FTSE-MIB index that have chosen to unveil their sustainability report in conjunction with the approval of the financial statements has grown significantly from 2013. In fact, in 2017 (see Table  4.10) more than four in five firms Table 4.10  Shareholders’ General Meeting FTSE-MIB All-Share (%) (%) During the Shareholders’ General Meeting …  the sustainability report was unveiled to the shareholders (2017)  the sustainability report was unveiled to the shareholders (2013)   ∆ During the Shareholders’ General Meeting …  specific sustainable initiatives were presented to the shareholders (2017)  specific sustainable initiatives were presented to the shareholders (2013)   ∆ During the Shareholders’ General Meeting …  the shareholders made speeches/asked questions related to sustainability issues (2017)  ethical funds delegates made speeches/asked questions related to sustainability issues (2017)  ethical funds delegates made speeches/asked questions related to sustainability issues (2013)   ∆

82.6

33.3

61.3

28.6

+21.3

−15.4

65.2

41.7

35.5

57.1

+29.7

0.0

56.5

8.3

34.8

0.0

25.8

14.3

+9

−14.3

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(82.6%) presented their sustainability report to shareholders during the annual General Meeting, whereas in 2013 the figures were still high, but lower (61.3%). With regard to the presentation of specific initiatives related to sustainability, it is possible to note also in this case a significant diffusion among FTSE-MIB firms (65.2%). These data indicate a considerable increase compared to what was recorded in 2013 (35.5%). This is testimony to the fact that, during the annual Shareholders’ General Meeting, sustainability is not an object of attention only in terms of simple reporting, but there is also room to present specific activities related to social and environmental issues. The interest of shareholders is confirmed also by the trend emerging from the investigation of the speeches and questions of shareholders with regard to sustainability-related issues. The results indicate that the shareholders asked a question or made a speech regarding environmental or social issues during the annual General Meeting in more than half of the firms listed on the FTSE-MIB index (56.5%). In parallel, speeches or questions from the representatives of ethical funds occurred in more than a third of cases (34.8%). This figure represents a significant increase from 2013, when this type of shareholder activism was less usual (25.8%). These questions are particularly important, since they foster debate and requests for clarification on the firm’s effective approach to sustainability. In the control sample, instead the results indicate generally lower figures, albeit a relative increase. In fact, only one-third of FTSE Italia All-­Share firms presented the sustainability report to the shareholders, but still in 2013 the figures were lower (28.6%). The presentation of initiatives related to sustainability occurred less frequently than in FTSE-MIB firms (41.7%), but also less frequently in comparison to 2013 (57.1%). Finally, the debate with shareholders on sustainability appears to be a peculiarity of the FTSE-MIB, as the figures are much lower in the control sample. In fact, it has emerged that shareholders participate rarely (8.3%), whereas the ethical funds did not participate in the debate, even if they did in the past (14.3%). This trend indicates that the firms in the control sample not only are not stimulated by regulation, but are also discouraged by the presence of a clear benchmark in the FTSE-MIB sample.

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4.3 The Evolution of the Governance of Sustainability According to Corporate Documents: Italy and the UK between 2013 and 2016 4.3.1 Methodology 4.3.1.1  Research Design This section of the research project was carried out from January 2017 until June 2017, after the annual reports relating to 2016 were published. The second wave of the desk analysis (Kothari 2004) was conducted in accordance with the first one, by filling out a grid prepared in accordance with previous research (Grayson and Kakabadse 2013). The desk analysis was aimed at highlighting how the governance of sustainability evolved from 2013 to 2016, considering also the significant changes in the regulatory and legal context. In this second wave, the sample was composed of firms that on December 31, 2016 were members of the following stock indices: • 40 Italian firms listed on the FTSE-MIB index; • 100 UK firms listed on the FTSE 100 index. In addition, this second wave also investigated a benchmark sample of Italian firms listed on the FTSE Italia All-Share index of the Italian Stock Exchange. From this index, which comprises all members of the Italian Stock Exchange indices, the firms from the FTSE-MIB index and those incorporated outside of Italy were excluded, and the 70 firms with the highest capitalization were then chosen from the remainder. The study took into consideration the corporate documents (annual report, corporate governance report, sustainability report, compensation report, website pages, etc.) of the sample firms over the period that included fiscal years from 2013 until 2016.

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4.3.1.2  The Desk Analysis In accordance with the first wave of the desk analysis conducted with regard to 2013, corporate documents were analyzed in order to isolate information suitable for the identification of the model of governance of sustainability. Governance-related information was manually collected, in order to assess whether it explicitly included elements related to sustainability. The data collected from corporate documents were divided by year, classified, and then elaborated according to the model (see Table 4.11) already used for the previous version of the study, building on previous contributions (Grayson and Kakabadse 2013). As already stated in the previous chapter, this classification ranks different board structures to represent the incremental integration of sustainability within corporate governance, considering a sustainability board committee as the highest form of integration, because of its specialized approach, and the management committee as the form which does not involve the board of directors, whereas it considers as undisclosed firms that did not make any reference to sustainability in their corporate documents. Also in this case, the emerging results were disTable 4.11  Models of governance of sustainability Structure

Description

(Undisclosed)

There is no formal allocation of responsibility related to sustainability A committee formed only by managers is responsible for sustainability issues. A single director and/or the entire board of directors supervise sustainability issues, but without formal responsibilities or procedures. A committee formed by both managers and directors is responsible for sustainability issues. A board committee with other functions (e.g. risk, audit…) is also formally responsible for sustainability issues, but without specific procedures. A board committee is fully responsible for sustainability issues, also in association with other functions. Specific procedures are present to deal with social and environmental issues.

1. Management committee 2. Supervision

3. Two-tier committee 4. Delegate board committee 5. Sustainability board committee

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cussed with academics, top managers, and sustainability professionals in order to increase the validity of the discussions (Yin 2003).

4.3.2 The Italian Context in 2016 In 2016 the diffusion of corporate governance mechanisms to integrate sustainability was much higher than in 2013, as a consequence of the new version of the Code of Corporate Governance published in 2015. In fact, the updated Code included a recommendation for FTSE-MIB firms “to create a special committee devoted to the supervision of sustainability issues” by December 31, 2016. Thus, the results of the desk analysis (see Table  4.12) indicate that, within the FTSE-MIB sample, only a small number of firms (5%) did not disclose any detail regarding the governance of sustainability, whereas the majority of firms (70%) complied with the Code of Corporate Governance requests by allocating responsibility for social and environmental issues to a committee within the board of directors. However, the actual results indicate a significant diversity in the actual structures individuated by these firms. In fact, one in four firms (27.5%) preferred not to create a new committee and allocated the responsibility for sustainability-related issues to a committee which already existed (e.g., control and risk committee, corporate governance committee, compensation committee). The pressure deriving from the new Code of Corporate Governance manifested its effect in the significant proportion of firms (42.5%) that at the end of 2016 had set up within the board of directors a committee specifically devoted to social and environmental Table 4.12  The governance of sustainability in 2016 (Italy and the UK) FTSE-MIB (%) All-Share (%) FTSE 100 (%) (Undisclosed) 1. Management committee 2. Supervision 3. Two-tier committee 4. Delegate board committee 5. Sustainability board committee

5 5 15 5 27.5 42.5

40 4 42 1.4 4 7.1

0 8 30 19 4 39

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issues. It is also possible to put in evidence that, among these committees, less than half were denominated specifically “sustainability committee,” whereas the rest of the committees carried the name “sustainability” in conjunction with other names (e.g., “control, risk, and sustainability”). Nonetheless, a minority of these firms (10%) decided to create a two-­ tier committee, with both managers and directors, while the presence of a committee composed only of managers was registered only in two cases (5%), as a consequence of the formal recommendation to assign the responsibility for sustainability issues to the top decisional level. Moreover, some FTSE-MIB firms (15%) just indicated the entire board of directors as a point of reference for sustainability issues, but only in terms of supervision. In 2017, the study took into consideration also a sample from the FTSE Italia All-Share index, comprising the 70 firms with the highest capitalization not included also in the FTSE-MIB index. As these firms were not affected by the new Code of Corporate Governance, the analysis of this sample was intended to verify whether the new regulation stimulated a voluntary approach among other public firms. First of all, the figures indicate that a significant number of firms (40%) did not disclose any information regarding the governance of sustainability. This is not surprising, as the voluntary and unsolicited nature of this decision led many to avoid the compelling task of modifying their corporate governance. In addition, most of the investigated firms (42.9%) adopted a supervision model, indicating that the board of directors was monitoring both social and environmental issues. Given the relevance of the first two components, the remaining models of the governance of sustainability were identified in few cases. More specifically, the data represent a situation where the decisional level with regard to sustainability is rarely located at managerial level, as proved by the fact that three firms (4.3%) chose a management committee, while only one firm (1.4%) chose a two-tier model. Besides, a few firms in the FTSE Italia All-Share sample assigned the responsibility for sustainability-related issues to a committee composed only of members of the board of directors. In particular, sustainability board committees were more present (7.1%) than delegated board committees (4.3%).

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4.3.3 The UK Context in 2016 The first figure (see Table 4.12) worth presenting with regard to the diffusion of corporate governance mechanisms related to sustainability in the UK is the total absence of firms which did not disclose information on this issue (0%). Secondly, the most represented group of firms includes those that created a sustainability board committee (39%). This figure is particularly relevant because in the UK there were no regulations or laws prescribing any specific behavior in this regard. When it comes to integrating sustainability within governance, UK firms belonging to the FTSE 100 index preferred to adopt specific sustainability committees, rather than allocating social and environmental responsibilities to an existing committee, as proved by the fact that the delegate board committee was rarely chosen (4%). By adding to these figures the data related to the presence of two-tier committees (19%), it is possible to note that, even in the different forms, more than six in ten firms (62%) on the FTSE 100 index clearly allocated to the board of directors the responsibility for sustainability issues. Conversely, the supervision model was adopted by less than one-third of the total sample (30%), whereas managerial responsibility was present in a residual number of firms (8%).

4.3.4 T  he Evolution of the Governance of Sustainability between 2013 and 2016 Comparing the configuration of governance models adopted by the FTSE-MIB firms between 2013 and 2016, it is possible to note that the changes were not only numerous, but also significant (see Table 4.13). In the firms belonging to the FTSE-MIB index, the results highlight a significant increase in the number that chose to assign sustainability issues to a specific committee (from 25% in 2013 to 70% in 2016). In particular, the number of FTSE-MIB firms that have set up a specific committee within the board of directors has grown considerably (from 12.5% to 42.5%). At the same time, there was an increase in the number of firms

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Table 4.13  The evolution of the governance of sustainability between 2013 and 2016 (Italy and the UK) FTSE-MIB

(Undisclosed) 1. Management committee 2. Supervision 3. Two-tier committee 4. Delegate board committee 5. Sustainability board committee

All-Share

FTSE 100

2013 (%)

2016 (%)

2013 (%)

2016 (%)

2013 (%)

2016 (%)

7.5 5

5 5

55.7 1.4

40 4.3

2 6

0 8

57.5 5 12.5

15 5 27.5

40 0 0

42.9 1.4 4.3

40 16 3

30 19 4

12.5

42.5

2.9

7.1

33

39

that entrusted social and environmental issues to one of the existing committees, according to the form of a delegate board committee (from 12.5% to 27.5%). In addition, as indicated by the 2015 formulation of the Code of Corporate Governance for listed firms, the number of firms that used to assign to the board of directors just the task of overall supervision of sustainability issues dropped considerably (from 57.5% to 15%). A similar trend was registered in the other two samples. Considering the FTSE Italia All-Share index, the results demonstrate that supervision by the board of directors remained the predominant form of governance of sustainability issues (from 40% to 42.9%). With regard to the committees, an increase, albeit reduced, occurred from 2013 onwards. In fact, in 2013 only two firms (2.9%) had a sustainability committee, while the other committees (two-tier and delegate) were not present at all. Thus, it is possible to give a positive interpretation to the fact that in 2016 the number of sustainability board committees almost tripled (from 2.9% to 7.1%), while the delegate board committees (from 0% to 4.3%) and the two-tier committees (from 0% to 1.4%) started being present. As a consequence, from the analysis of the data it has been possible to notice a drop in the number of firms that had not adopted any form of governance (from 55.7% to 40%), and these data bear evidence of an initial change of perspective among these firms, even if they were not affected by the regulations.

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In the FTSE 100 sample, which already saw the presence of a governance structure in the majority of firms, the data highlight an overall increase in the diffusion of committees devoted to sustainability which specifically involve at least some directors (from 52% to 62%). This is particularly true concerning the sustainability board committee (which grew from 33% to 39%) and the two-tier committee (from 16% to 19%), whereas the diffusion of the delegate committee was almost stable (from 3% to 4%). Conversely, this increase in the diffusion of committees was compensated for by the decrease in the number of firms which opted for a form of governance based on the supervision by the board of directors (from 40% to 30%). Moreover, the last two firms which in 2013 had not implemented any form of governance of sustainability eventually chose to create a management committee (from 6% to 8%), leading to a complete range of sustainability-related governance mechanisms. Comparing the three samples, it is possible to note immediately a sharp reduction in the gap between the Italian and British contexts. The analysis carried out for 2013 had demonstrated, in fact, a much lower commitment of Italian FTSE-MIB firms towards the formalization of the role of the board of directors with respect to issues of sustainability. This tendency was confirmed by the greater propensity of Italian firms for a governance model of socio-environmental issues based on simple supervision by the board of directors, without formal allocation of any responsibility. On the contrary, as early as 2013 the majority of firms listed on the FTSE 100 index had attributed responsibility for social and environmental issues to the board of directors, albeit in different forms, and with only a minority of firms that had not yet taken steps in this direction. The analysis carried out in 2017 shows a more balanced situation, especially comparing the two main indices. Within both the FTSE-MIB and the FTSE 100, in fact, the number of firms without an appropriate governance system was almost nil or very much lower. In addition, the firms that assigned only a monitoring role to the board of directors were even less represented in Italy than in the UK (25% vs. 30%).

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4.3.5 T  he Dynamics of Change in the Governance of Sustainability The most striking result revealed by the analysis is the fact that the period from 2013 to 2016 was very rich in changes to corporate governance structures, in both Italy and the UK (see Table  4.14). In particular, it stands out that more than half of the firms listed on the FTSE-MIB changed their governance structure to include sustainability issues (52.5%). This phenomenon took place within the FTSE-MIB sample in a much more significant way, compared to the FTSE Italia All-Share (26.8%) and the FTSE 100 index of the London Stock Exchange (25%). The magnitude of the change in the FTSE-MIB was twice as big as in the other two indices, and this difference can certainly be explained by looking at the modifications introduced by the new formulation of the Code of Corporate Governance for listed firms. This assumption is justified also by the analysis of the temporal distribution of these changes. Within the FTSE-MIB sample, in fact, most changes (51.4%) occurred during 2016, as recommended by the regulator, whereas in the previous Table 4.14  The changes occurring in the governance of sustainability (Italy and the UK)

Firms changing governance of sustainability (2013–2016) (%) Distribution of changes in governance across time  % firms changing governance of sustainability (2014)  % firms changing governance of sustainability (2015)  % firms changing governance of sustainability (2016) Size of change  One change (%)  More than one change (%) Type of change  Incremental (%)  Radical (%)

FTSE-­ MIB

All-­ Share

FTSE 100

52.5

26.8

25

22.9

30.8

38.9

25.7

33.3

25

51.4

35.9

36.1

66.7 33.3

37.9 62.1

74.9 25.1

52.4 47.6

79 21

44 56

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years many fewer changes occurred. In the other two samples, instead, the changes are almost equally distributed through time (approximately 36% in 2016 for both samples). The analysis of the data also made it possible to obtain an insight into how many times the investigated firms changed their structure for the governance of sustainability. In this case, it is possible to note that two-­ thirds of the firms listed on the FTSE-MIB index over the years usually opted for a single change (66.7%), whereas the remaining third of firms (33.3%) changed their governance structure more than once. A similar pattern was found with regard to firms listed on the FTSE 100 index, as three in four firms made changes to their governance only once (75%). It was the opposite case for firms listed on the FTSE Italia All-Share, where instead the majority of firms changed their structure more than once (62.1%). The analysis of the changes also allowed investigation of the extent of the change made to the governance structure, according to the classification of the forms of governance previously reported. The change was defined as “incremental” when it registered a shift to the next form of governance (e.g., from “undisclosed” to “management committee” or “supervision,” from “two-tier committee” to “sustainable board committee” or “delegate board committee”); it was instead defined as “radical” when it registered a shift to a more complex form of governance (e.g., from “undisclosed” to “two-tier committee,” or from “management committee” to “sustainable board committee” or “delegate board committee”). The results of this analysis indicate that the majority of changes made by firms listed on the FTSE-MIB were incremental (52.4%), so they did not disrupt the existing governance structure. In the remaining cases (47.6%) there was a radical change, so that firms chose to implement in a short time a more complex form of governance. For the firms listed on the FTSE Italia All-Share this trend is even clearer, as more than three in four (79%) opted for an incremental approach. In the UK, by contrast, the majority of firms that changed their governance opted to implement a radical change in governance structure (56%). By correlating these data with the previous ones, it is possible to state that the majority of firms listed on the FTSE-MIB accomplished over the years a single

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incremental change, while the firms listed on the FTSE 100 mostly adopted a single change, but in this case it was often a radical one. The incremental approach of firms in the All-Share segment, finally, fits with the large number of newly detected changes. With reference to FTSE-MIB firms, indeed, it was also interesting to analyze how radical and incremental changes were distributed over time. The results indicate that the percentage of radical changes constantly grew from 2013 (7%) to 2016 (18%). When close to the deadline indicated by the regulator as a limit for the implementation of the new Code of Corporate Governance, an increasing number of firms had to choose a radical change to their governance of sustainability in order to meet the requirements in time. At the end of 2016, the diffusion of governance mechanisms related to sustainability in Italy and the UK was much more similar than in 2013. The main difference between the two countries lay in the greater propensity of British boards of directors to engage in sustainability-related issues through different types of board committee. Conversely, in Italy the decisions of the board of directors were strongly influenced by regulation, and so models with a committee composed only of directors were preferred. Although the regulations recommended a specific committee, a considerable number of firms delegated social and environmental issues to board committees with different functions, and many firms still did not comply with the directive. However, a further incentive was put in place by the Italian government at the very end of 2016, when a new law regarding the disclosure of non-financial performance was announced.

4.4 Conclusions In line with the first wave of this research project, this study focused on the major Italian and UK listed firms, analyzing their approach to sustainability in terms of corporate governance. It has been possible to consider the evolution of this phenomenon between 2013 and 2016, so that the results provide an overview of the development paths followed by the most relevant Italian and British firms, which usually lead the way for the entire economic sector.

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First, the study made evident that by 2016 sustainability was a strategic issue for Italian firms. The integration of sustainability within corporate governance is confirmed by the finding that objectives related to sustainability are now part of the strategic objectives of the major Italian listed firms, as demonstrated by some particular data: • Over 70% of the FTSE-MIB firms included social and environmental objectives in their strategic plan (from 40% reported in 2013). • The number of FTSE-MIB firms that assigned the governance of social and environmental issues to the board of directors leaped from 29% to 73.9%. • The majority of FTSE-MIB firms (56.5%) chose to entrust sustainability issues to a specific committee. If the previous search demonstrated that an interest in sustainability was present, but without a proportionate implementation of practices, this study confirmed that this issue has acquired considerable importance. This growing importance was confirmed by the more and more active role of the board of directors in dealing with social and environmental issues. The study highlighted the activities most frequently undertaken by the board of directors, noting in particular how the different tasks are distributed between the collegiate board and specific committees. Specifically, the study showed the following: • When present, committees are responsible for most of the activities related to the governance of sustainability. • Two in three boards of directors are engaged in examining and approving corporate sustainability policies. • The proportion of boards of directors that specifically approved the plan for sustainability activities more than doubled from 2013 (from 25.8% to 65.4%). • The monitoring of the implementation of sustainability policies is much more widespread than in 2013 (72% vs. 42%). The greater involvement of the board of directors in social and environmental issues was also reflected by a change in the usual configuration:

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• 65.2% of the firms considered the presence of social and environmental issues among the set of skills/experiences represented within the board of directors, on the rise compared to 2013. • Four in five boards of directors included members with skills/experience on sustainability issues. • 43.5% of the boards of directors participated in specific training programs related to sustainability issues, usually held by in-house experts. • The share of firms that have adopted practices to tie part of the variable remuneration of executive directors to corporate social and environmental performance rose from 25.8% to 43.5%. • Sustainability-related performance was measured by quantitative parameters and often communicated publicly. The findings suggest, therefore, that Italian firms recognize the importance of integrating specific social and environmental responsibilities within the board of directors. Consequently, directors have been trained through specific training programs, and encouraged to commit to sustainability through incentives linked to social and environmental performance. The higher strategic relevance of sustainability implies also a consistent effort in communication. Compared to 2013, the transparency of firms on their commitment to sustainability significantly increased, narrowing the gap between what firms communicated about sustainability, and what they actually managed to report: • 74% of the FTSE-MIB firms presented their social and environmental objectives in both quantitative and qualitative forms. • Sustainability objectives were clearly communicated to stakeholders by three in four firms, through various forms of communication and reporting. • FTSE-MIB firms preferred to demonstrate their commitment to sustainability by communicating detailed information rather than giving a proprietary definition of the strategic value of social and environmental issues. • The number of firms that presented their initiatives in the area of ​​sustainability during the Shareholders’ General Meeting doubled from 2013 (35.4%).

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With regard to communication, the sustainability report is confirmed as one of the main communication/reporting tools adopted by Italian firms, and also one of the most relevant for the board of directors. In addition, the compulsory reporting of non-financial performance stimulated in previous years a greater involvement of top management in the dissemination of social and environmental information concerning the firm: • The growing importance of the sustainability report was confirmed by its frequent approval by the board of directors (85.7%), although that is not mandatory, and by the great adherence to international reporting standards (91.3%). • A growing number of firms opted to publish an integrated report (13.8%), usually in addition to the sustainability report. • Almost 80% of FTSE-MIB firms created an ad hoc section of their website to present strategies, objectives, and initiatives related to sustainability, with a significant growth in comparison with 2013. As sustainability becomes more important and challenging for firms, proving that the commitment to these issues is real emerges as a crucial element. Therefore, more and more firms are paying attention to reporting activities, involving also the board of directors. Additionally, direct contact with stakeholders is increasingly seen as a fundamental element to enhance the commitment to sustainability, and this explains the growth of communication through the firm’s website. The higher relevance of sustainability was reflected also at the organizational level, as a way of supporting the board of directors. The results confirm the consolidated tendency of large Italian listed firms to manage sustainability through specialized figures and organizational units. Compared to 2013, when the analysis showed a lack of interaction between these units and top management, the results denote that it is common for FTSE-MIB firms to have a sustainability manager reporting directly to the CEO (43%), while in a third of cases there is only a single intermediate level. The direct contact between the organizational units specialized in sustainability and the board of directors highlights the strategic value of

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these activities, as well as the preference for an organizational structure that permits greater control. The role of top management, including the board of directors, is no longer limited to the strategic direction, but implies a broader involvement in the management of social and environmental issues. Moreover, the second wave of investigation of the corporate documents published by the main Italian and British firms for the fiscal years between 2013 and 2016 highlighted how differently the diffusion of corporate governance mechanisms related to sustainability evolved in Italy and the UK. Analyzing corporate governance structures, it has been possible to register the following: • Over half of the FTSE-MIB firms changed their governance of sustainability, almost twice as many as on the FTSE 100, while the number of firms not disclosing any information in this regard became almost irrelevant. • Most changes took place in 2016, as a consequence of the recommendations provided by the new Code of Corporate Governance (2015), whereas the changes in the UK were more distributed across time. These results indicate that the corporate governance of top listed firms has evolved significantly since 2013, with more and more frequent integration of sustainability issues, albeit in different forms. The changes to the Italian Code of Corporate Governance undoubtedly played a key role in determining the changes among FTSE-MIB firms, as confirmed by the fact that many changes occurred only in proximity of the indicated deadline. In contrast, FTSE 100 firms, in the absence of any specific regulation, also opted for governance models that implied the presence of managers, both with and without directors, keeping the decisional level closer to the managerial perspective. In summary, this study confirms sustainability as one of the most important and vibrant issues for firms, particularly after the entry into force of the amendments to the Code of Corporate Governance of listed firms on the Italian Stock Exchange. By the will of the regulator, in fact, sustainability, which was frequently present in many CEO statements but much less present on the agenda of the board of directors, has gained

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importance and assumed space within the decisions of the board of directors. Italian firms were asked to reconsider their approach to sustainability, changing their decision-making and organizational models. UK firms, even if not affected by any specific regulation, kept their focus on sustainability within corporate governance, but with a more customized approach.

References Amran, A., Lee, S. P., & Devi, S. S. (2014). The influence of governance structure and strategic corporate social responsibility toward sustainability reporting quality. Business Strategy and the Environment, 23(4), 217–235. Apostolides, N. (2010). Exercising corporate governance at the annual general meeting. Corporate Governance: The International Journal of Business in Society, 10(2), 140–149. Bear, S., Rahman, N., & Post, C. (2010). The impact of board diversity and gender composition on corporate social responsibility and firm reputation. Journal of Business Ethics, 97(2), 207–221. CG. (2015). Corporate Governance Code. Borsa Italiana. Retrieved March 9, 2016, from https://www.borsaitaliana.it/comitato-corporate-governance/ codice/2015engclean.en.pdf. Drago, C., Millo, F., Ricciuti, R., & Santella, P. (2015). Corporate governance reforms, interlocking directorship and company performance in Italy. International Review of Law and Economics, 41, 38–49. Du, S., Bhattacharya, C. B., & Sen, S. (2010). Maximizing business returns to corporate social responsibility (CSR): The role of CSR communication. International Journal of Management Reviews, 12(1), 8–19. Fabrizi, M., Mallin, C., & Michelon, G. (2014). The role of CEO’s personal incentives in driving corporate social responsibility. Journal of Business Ethics, 124(2), 311–326. Fassin, Y., & Van Rossem, A. (2009). Corporate governance in the debate on CSR and ethics: Sensemaking of social issues in management by authorities and CEOs. Corporate Governance: An International Review, 17(5), 573–593. Figge, F., Hahn, T., Schaltegger, S., & Wagner, M. (2002). The sustainability balanced scorecard–linking sustainability management to business strategy. Business Strategy and the Environment, 11(5), 269–284.

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Grayson, D., and Kakabadse, A. (2013). Towards a sustainability mindset: How boards organize oversight and governance of corporate responsibility. London: Business in the Community. Retrieved May 5, 2014, from https://www.bitc. org.uk/resources-training/research/towards-sustainability-mindset-howboards-organise-oversight-and. Harjoto, M. A., & Jo, H. (2011). Corporate governance and CSR nexus. Journal of Business Ethics, 100(1), 45–67. Helfaya, A., & Moussa, T. (2017). Do board’s corporate social responsibility strategy and orientation influence environmental sustainability disclosure? UK evidence. Business Strategy and the Environment, 26(8), 1061–1077. Kakabadse, N.  K., Kakabadse, A.  P., & Lee-Davies, L. (2009). CSR leaders road-map. Corporate Governance: The International Journal of Business in Society, 9(1), 50–57. Kock, C., & Min, B. (2016). Legal origins, corporate governance, and environmental outcomes. Journal of Business Ethics, 138, 507–524. Kolk, A. (2008). Sustainability, accountability and corporate governance: Exploring multinationals’ reporting practices. Business Strategy and the Environment, 17(1), 1–15. Kolk, A. (2010). Trajectories of sustainability reporting by MNCs. Journal of World Business, 45(4), 367–374. Kothari, C. R. (2004). Research methodology: Methods and techniques. New Age International. Mackenzie, C. (2007). Boards, incentives and corporate social responsibility: The case for a change of emphasis. Corporate Governance: An International Review, 15(5), 935–943. Mazzotta, R., & Veltri, S. (2014). The relationship between corporate governance and the cost of equity capital. Evidence from the Italian stock exchange. Journal of Management & Governance, 18(2), 419–448. Minciullo, M., & Pedrini, M. (2015). Knowledge transfer between for-profit corporations and their corporate foundations: Which methods are effective? Nonprofit Management and Leadership, 25(3), 215–234. Morsing, M., & Schultz, M. (2006). Corporate social responsibility communication: Stakeholder information, response and involvement strategies. Business Ethics: A European Review, 15(4), 323–338. Perrini, F., Russo, A., & Tencati, A. (2007). CSR strategies of SMEs and large firms. Evidence from Italy. Journal of Business Ethics, 74(3), 285–300. Post, C., Rahman, N., & Rubow, E. (2011). Green governance: Boards of directors’ composition and environmental corporate social responsibility. Business & Society, 50(1), 189–223.

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Rao, K., & Tilt, C. (2016). Board composition and corporate social responsibility: The role of diversity, gender, strategy and decision making. Journal of Business Ethics, 138(2), 327–347. Spitzeck, H. (2009). The development of governance structures for corporate responsibility. Corporate Governance: The International Journal of Business in Society, 9(4), 495–505. Strandberg, C.  T. (2008). The role of the board of directors in corporate social responsibility. Conference board of Canada. Retrieved February 3, 2013, from https://www.conferenceboard.ca/e-library/abstract.aspx?did=2657&As pxAutoDetectCookieSupport=1. Yin, R. K. (2003). Case study research: Design and methods. Thousand Oaks, CA: Sage Publications.

5 Appraising the Evolution of the Governance of Sustainability in 2018: An Overview of Italy and the UK

5.1 Introduction This research project, since its beginning in 2013, aimed at representing the status quo of the integration of sustainability within the corporate governance of Italian and British firms, looking in particular at the engagement of the board of directors. The research project was developed in three waves, around two distinct research lines. An initial line of investigation was carried out through multiple questionnaires addressed periodically from 2013 onwards to firms listed on the FTSE-MIB index of the Italian Stock Exchange, which includes the most important firms in the country. In addition, to strengthen the results of the empirical investigations, a second line of investigation was conducted by carrying out a desk analysis of the main corporate documents that the same firms published from 2013 onwards. The desk analysis was carried out in parallel also with regard to the UK, by taking into consideration firms that belonged to the FTSE 100, the benchmark index of the London Stock Exchange. In this third study, however, it was decided to deepen the investigation by analyzing how the governance of sustainability is associated with © The Author(s) 2019 M. Minciullo, Corporate Governance and Sustainability, https://doi.org/10.1007/978-3-030-18885-6_5

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e­ xecutive compensation. An additional desk analysis was carried out in relation to the Compensation Report published by the FTSE-MIB with regard to the fiscal year 2017. In summary, the main topics that were analyzed in this study are the following: • The governance models of sustainability as expressed by the corporate documents of top listed Italian and British firms. • The changes in the governance of sustainability between 2013 and 2017. • The patterns of evolution of the governance of sustainability in Italy and the UK. • The relevance of sustainability-related compensation. • The influence of the governance of sustainability on sustainability-­ related compensation.

5.2 The Integration of Sustainability in Corporate Governance According to Corporate Documents: Patterns of Evolutions in Italy and the UK 5.2.1 Methodology 5.2.1.1  Research Design This section of the research project was carried out by realizing the third wave of the desk analysis from January 2018 until June 2018, as the annual reports related to 2017 were published. The study built on the work conducted with regard to the years 2013–2016, adding to the desk analysis (Kothari 2004) the corporate documents published by the main Italian and British listed firms with regard to fiscal year 2017. In this third wave the sample was still composed of firms that on December 31, 2017 were components of the following stock indices:

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• 40 Italian firms listed on the FTSE-MIB index. • 100 UK firms listed on the FTSE 100 index. The study took into consideration the corporate documents analyzed in the previous waves (annual report, corporate governance report, sustainability report, compensation report, website pages, etc.), but also considered the non-financial disclosure reports published in 2017. The desk analysis was aimed at highlighting how the governance of sustainability changed year by year from 2013 onwards, considering also the effect of a new change in the legal context for Italian firms.

5.2.1.2  Desk Analysis The third wave of desk analysis (Vartanian 2010) was realized in accordance with the previous studies, by analyzing corporate documents in order to isolate information suitable for identifying the model of governance of sustainability. The evidence regarding the integration of sustainability into firms’ corporate governance was hand collected. Given the nature of this type of analysis, data quality was carefully assessed, especially with regard to the codification of the information collected; hence, the data collected from corporate documents were divided by year, classified, and then elaborated according to the classification already seen in the previous chapters (see Table 5.1). This classification, developed building on Grayson and Kakabadse’s model (2013) and further elaborated according to the level of integration of sustainability within corporate governance, was considered valid also for this wave of the desk analysis, as no significant alternative models were individuated. Given that firms whose documents had no reference to sustainability were classified as “undisclosed,” this classification starts with the management committee form, which does not involve the board of directors at all, and arrives at the sustainability board committee, which is considered as the highest form of integration, as it implies a specialized and focused engagement of a sub-group of the board of directors in social and environmental issues. To keep the validity of the results, the final c­ lassification

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Table 5.1  Models of governance of sustainability Structure

Description

(Undisclosed)

There is no formal allocation of responsibility related to sustainability A committee formed only by managers is responsible for sustainability issues. A single director and/or the entire board of directors supervise sustainability issues, but without formal responsibilities or procedures. A committee formed by both managers and directors is responsible for sustainability issues. A board committee with other functions (e.g. risk, audit…) is also formally responsible for sustainability issues, but without specific procedures. A board committee is fully responsible for sustainability issues, also in association with other functions. Specific procedures are present to deal with social and environmental issues.

1. Management committee 2. Supervision

3. Two-tier committee 4. Delegate board committee 5. Sustainability board committee

of Italian and UK firms was discussed with academics, top managers, and sustainability professionals (Yin 2003).

5.2.2 T  he Background: Non-financial Disclosure Requirements in Italy and the UK The results of the third wave of desk analysis provide some interesting insights into how non-financial disclosure regulation could affect the integration of sustainability within the corporate governance of listed firms in Italy and in the UK. In fact, as previously anticipated, in 2014 the European Union (EU) Non-Financial Reporting Directive (Directive 2014/95/EU) laid down the rules on disclosure of non-financial and diversity information by large firms in Europe, implying the obligation for most listed and/or large firms to include non-financial statements in their annual reports from 2018 onwards. The new non-financial reporting regulations applied to large public-interest firms with more than 500 employees, including listed firms, banks, insurance firms, and other firms designated by national authorities as public-interest entities, and was intended to applied on a consolidated basis to groups, whereas for

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i­ndependent firms it was supposed to be drafted on stand-alone basis (Venturelli et al. 2017). Moreover, the directive established the requirement for the firms involved to publish reports on the policies they implement in relation to environmental protection, social responsibility and treatment of employees, respect for human rights, anti-corruption and bribery, and diversity on company boards (in terms of age, gender, and educational and professional background). With regard to the form of the report, Directive 2014/95/EU gave firms significant flexibility. In fact, firms were allowed to disclose such relevant information in the way they consider most useful; given this flexibility, they could decide to produce their own statements or rely on international, European, or national guidelines, such as the UN Global Compact, the Organisation for Economic Co-operation and Development (OECD) guidelines for multinational enterprises, and ISO 26000 (Quinn and Connolly 2017). The European Commission published its guidelines for the disclosure of environmental and social information in 2017 (EC 2017), but these indications were not mandatory, as firms could decide on the guidelines that most fitted their own characteristics or business environment. After this directive entered into force in December 2016, the UK government published the Companies, Partnerships and Groups (Accounts and Non-Financial Reporting) Regulations, which implemented the European Non-Financial Reporting Directive. The regulation, which applied to financial years beginning on or after January 1, 2017, amended the Companies Act 2006 requirements for annual reports, and included diversity requirements in the Disclosure and Transparency Rules (DTR), but did not provide any other rules for board structure (Helfaya and Moussa 2017). In terms of Italy, on December 30, 2016 the Italian government approved Legislative Decree No. 254/2016, implementing the same EU Directive 2014/95/EU. The new disclosure provisions of the decree came into effect on January 25, 2017, and applied beginning with annual reports on fiscal year 2017. The content of the non-financial statement, as indicated by the EU Directive, regarded environmental, social, and employment issues, as

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well legal issues, like human rights, anti-corruption, and bribery; additionally, the Italian law established that it must be compliant also with Italy’s Legislative Decree No. 231/2001, which defined corporate criminal liability (Crosio and Vastola 2017). The enforcement of this law was expected to exert a stronger influence on Italian firms, as it indicated that the management of eligible firms were responsible for drafting the non-financial statement, but also considered the board of directors responsible for compliance with the law. Furthermore, the law implied significant fines (from €20,000 to €150,000) if the non-financial statement (i) is not filed, (ii) does not comply with the Decree’s provisions, or (iii) provides untrue or incomplete information (unless the conduct is criminally relevant), and indicates the Italian securities market regulator, CONSOB, as responsible for investigating and sanctioning infringements (Venturelli et al. 2017).

5.2.3 The Italian Context in 2017 The results of the desk analysis conducted on Italian firms with regard to fiscal year 2017 actually reflect the combined effect of the new law on non-financial disclosure, and the long-lasting effect of the changes applied to the Code of Corporate Governance in 2015 (see Table 5.2). In fact, the figures highlight clearly that four in five firms (80%) in the FTSE-MIB index have attributed to a committee of the board of directors responsibilities related to social and environmental issues. More specifically, the form of the delegate board committee was chosen still by a relevant number of firms (22.5%), which preferred to keep the existing governance structure. However, an interesting finding of the third wave Table 5.2  The governance of sustainability in 2017 (Italy and the UK) (Undisclosed) 1. Management committee 2. Supervision 3. Two-tier committee 4. Delegate board committee 5. Sustainability board committee

FTSE-MIB (%)

FTSE 100 (%)

2.5 5 10 2.5 22.5 57.5

0 17 24 12 4 43

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of the desk analysis is that sustainability board committees were identified in a large majority of FTSE-MIB firms (57.5%), indicating that the further legal obligations convinced most firms to implement a governance structure specifically devoted to social and environmental issues. Furthermore, the denomination of these committees highlights an increase in the number of firms that set up a committee devoted exclusively to sustainability-related issues. In fact, six firms (15%) opted for a committee denominated the “sustainability committee.” With regard to the other committees, the most recurrent denominations were “territory and sustainability,” “control and risk and sustainability,” “corporate governance and sustainability,” “sustainability and scenarios,” and “appointments and sustainability.” The results also put in evidence that FTSE-MIB firms which did not set up a committee chose mostly to indicate an overall commitment of the board of directors, according to the supervision model (10%). Moreover, few firms decided to involve managers in the decisional process related to sustainability, as the management committee was identified only in two firms (5%), while the two-tier committee was present in a single firm (2.5%). Finally, only one firm did not disclose any information about the governance of sustainability (2.5%).

5.2.4 The UK Context in 2017 The analysis of the UK context provides some interesting insights into how firms belonging to the stock index which is usually considered a benchmark in Europe—that is, the FTSE 100—kept integrating sustainability issues within their corporate governance mechanisms (see Table 5.2). In general, almost half of FTSE 100 firms (47%) assigned responsibility for social and environmental issues to a committee of the board of directors. However, within this group, only a small number of firms (4%) chose to assign these issues to a committee principally in charge of other issues, according to the delegate board committee. As a consequence, most of these firms (43%) chose a sustainability board committee

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s­ tructure, in order to have within the board of directors a body devoted to these issues. With regard to the denomination, more than half of these committees (22%) are in charge exclusively of social and environmental issues, as the name of the committee refers only to sustainability. In the other committees (21%), sustainability-related issues are instead addressed in conjunction with other topics, like compliance and health and safety. The board of directors is partially involved also in the firms that adopted a two-tier model, with both directors and managers. This model has a minor but significant diffusion (12%), but if considered in conjunction with the diffusion of the management committee (17%), it is possible to affirm that more than one firm in four adopted a governance model for sustainability which involves the managerial level directly. Finally, almost one-quarter of the FTSE 100 firms (24%) implemented a model of governance indicating the board of directors as point of reference for social and environmental issues, even in the absence of a formal allocation of responsibilities, according to a supervisory perspective. The analysis of the UK context, thus, highlighted a very high variety of governance models related to sustainability. In general, the board of directors may be engaged in social and environmental issues in different ways, but it may also not necessarily be involved at all.

5.2.5 F ollowing Up on the Changes in Corporate Governance Mechanisms The third wave of desk analysis provides further elements to evaluate how the governance of sustainability evolved in Italy and the UK under different legal and regulatory contexts (see Table 5.3). Considering the FTSE-MIB sample, the data indicate that the majority of the sustainability board committees have been created since 2016, when the new Code of Corporate Governance for listed firms entered into force. Specifically, less than one-third of these committees (31%) were created in 2016, and around one-quarter (27%) were created in 2017, when the non-financial disclosure norms were introduced.

153

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Table 5.3  The evolution of governance of sustainability between 2013 and 2017 (Italy and the UK) FTSE-MIB

(Undisclosed) 1. Management committee 2. Supervision 3. Two-tier committee 4. Delegate board committee 5. Sustainability board committee

FTSE 100

2013 (%)

2016 (%)

2017 (%)

2013 (%)

2016 (%)

2017 (%)

7.5 5

5 5

2.5 5

2 6

0 8

0 17

57.5 5 12.5

15 5 27.5

10 2.5 22.5

40 16 3

30 19 4

24 12 4

12.5

42.5

57.5

33

39

43

The research undertaken in 2017 had already highlighted how changes in corporate governance structure had occurred between 2013 and 2016, whether radical or incremental. With regard to the changes between 2016 and 2017, indeed, the results of the third wave of desk analysis indicate a total of 13 firms that modified their corporate governance of sustainability. Among these changes, more than two-thirds were incremental (69%), meaning that the firms progressively increased the integration of sustainability within their governance (e.g., from “undisclosed” to “management committee” or “supervision,” or from “two-tier committee” to “sustainable board committee” or “delegate board committee”). In the remaining cases (31%), instead, the changes occurred in a radical way, so that the firms opted to introduce immediately a more complex form of governance (e.g., from “undisclosed” to “two-tier committee,” or from “management committee” to “sustainable board committee” or “delegate board committee”). Furthermore, considering the evolution from 2013, the results indicate that the number of firms which did not disclose information on their governance of sustainability has been progressively decreasing. The presence of the managerial committee remained stable during the years, while the two-tier model slightly reduced its presence. A dramatic change occurred for the supervision model, which in 2013 was present in the majority of firms (57.5%), while in 2017 it was adopted by only a small

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group of firms (10%). As a consequence, the data demonstrated that the presence of the sustainability board committee has been constantly growing, especially from 2016 onwards, whereas the delegate board committee was growing until 2016, and then gave way to the sustainability committee. With regard to the UK context, instead, it is possible to note that the evolution of the governance of sustainability followed a precise and constant trend of growth, which led to a full diffusion of governance mechanisms among the sample. With regard to the breadth of the changes, the previous wave had highlighted that the majority of changes had occurred in a radical way. This trend was not confirmed between 2016 and 2017, when all the registered changes were incremental. In particular, the presence of board committees with the responsibility for sustainability issues grew slightly between 2016 and 2017 (from 39% to 43%), but more significantly in comparison to the period 2013–2016 (from 33% to 39% in three years). The delegate board committee remained almost stable, whereas the two-tier committee grew between 2013 and 2016, and then gave way to governance forms composed only of directors, or only of managers. In fact, the relevance of the management committee increased significantly in the last period (from 8% to 17%). Finally, also in the UK context the data highlight that the number of firms that assigned to the board of directors the task of monitoring sustainability-related issues has been decreasing constantly (from 40% to 24%). The trends described so far may be interpreted as a sign of the preference for a specific allocation of social and environmental responsibilities. In fact, the firms belonging to the FTSE 100 index opted for committees specifically devoted to sustainability, be it composed of directors or, in the absence of any regulation, of managers. Conversely, the distribution of responsibilities between directors and managers, for the one task of supervision, has been gradually losing relevance.

5.2.6 T  he Origin of Sustainability Board Committees: A Longitudinal Overview The analysis of the governance structures adopted by listed firms in Italy and the UK from 2013 onwards to integrate sustainability has high-

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lighted that the choice of establishing board committees has gradually become more and more predominant in both countries. For this reason, it is useful to examine in more depth which paths have led listed firms progressively to adopt this form of governance. The desk analysis, in fact, offered the possibility of reconstructing the different processes that listed firms followed to integrate sustainability within their corporate governance structure, by identifying the sequence of progressive forms of governance adopted year after year. In particular, this specific analysis focused on the form of governance that preceded the creation of a sustainability board committee or a delegate board committee, based on the previously mentioned classification. The data indicate (see Table 5.4) that, considering the committees identified at the end of 2017 (23), in more than one-fifth of cases the responsibility for social and environmental issues was already entrusted to a board committee specifically devoted to sustainability issues (sustainability board committee already present in 2013: 22%). However, the largest group of firms listed on the FTSE-MIB index which created a sustainability board committee in 2013 had previously assigned to the board of directors a generic task of monitoring sustainability-related issues (supervision: 43%). In addition, in more than one-sixth of cases, the task of managing social and environmental issues had been previously assigned to a board committee with other functions (delegate board committee: 18%). In a few cases, Table 5.4  Origin of Sustainability and Delegate Board Committees Sustainability board committees  (Undisclosed)  Management committee  Supervision  Two-tier committee  Delegate board committee  Already present in 2013 Delegate board committees  (Undisclosed)  Management committee  Supervision  Two-tier committee  Already present in 2013

FTSE-MIB (23) (%)

FTSE 100 (43) (%)

9 4 43 4 18 22 FTSE-MIB (9) (%)

2 0 11 5 5 77 FTSE 100 (4) (%)

0 0 89 0 11

0 0 75 25 0

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instead, the sustainability board committee was created starting from a two-tier committee (1 case: 4%) or from a management committee (1 case: 4%), as these two forms have been rarely identified across the fiveyear analysis. Finally, the analysis indicated that a small but significant group of firms has been able to reach full integration of sustainability in their corporate governance structure even if starting from the absence of any formalized structure, as confirmed by the fact that two firms (9%) in 2013 had not disclosed their corporate governance of sustainability. Furthermore, with regard to the presence of delegate board committees, considering the committees identified at the end of 2017 (9), only in one case was this type of committee already present in 2013 (11%). Conversely, in all the other cases the firms have chosen to allocate the responsibility for social and environmental issues to an existing board committee following a previous situation in which their board of directors had only a generic monitoring role, without any formalized responsibility. Referring to the FTSE 100 sample, the trend found in the FTSEMIB firms was partially verified also in the UK, as the initial conditions were significantly different. In fact, considering the firms that at the end of 2017 had assigned responsibility for social and environmental issues to a sustainability board committee (43), in more than three in four firms (77%) this type of committee was already present in 2013. These results indicate that for most of these firms the integration of sustainability within their corporate governance had already been achieved before this phenomenon became common throughout Europe (Rake and Grayson 2009). With regard to the remaining firms with a sustainability board committee, the analysis put in evidence that the most relevant group of firms which changed their corporate governance is represented by firms that in 2013 had only their board of directors supervising ­sustainability-­related issues (supervision: 11%). Further, the highest form of integration of systemic ability within corporate governance was reached by firms that in 2013 had entrusted social and environmental issues to a board committee with other functions (delegate board committee: 5%) or to a two-tier committee (5%). Finally, the longitudinal analysis also demonstrated that in one case (2%) it was possible to pass from a situation where there was no disclosure about

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sustainability issues in corporate governance to the creation of a sustainability board committee. Furthermore, the longitudinal analysis covered also the evolution of the presence of delegate board committees within FTSE 100 firms. Considering the committees identified at the end of 2017 (4), in one case this committee was chosen following a previously established two-tier committee (25%). In three cases, instead, the firms considered in 2013 had their board of directors acting as a supervisor of sustainability-related issues (75%). In summary, the longitudinal analysis offered the possibility to understand the initial status of corporate governance within the firms that eventually had a sustainability board committee by 2017. Comparing the Italian and British contexts, it is possible to underline some commonalities and some differences in the origins of these type of committees which integrate sustainability within their set of responsibilities. First, in both samples most of the firms which in 2013 had not already created or entrusted a board committee with sustainability-related issues actually had at least assigned to the board of directors the role of monitoring social and environmental issues that could affect the firm’s activities. Second, in both samples there are examples of firms which in 2013 did not disclose any information regarding sustainability in their corporate governance, but eventually were able to create sustainability board committees by 2017. Conversely, the results confirm that the integration of sustainability within corporate governance in Italian firms was much more fragmented in 2013, but also that even the firms which had barely considered social and environmental issues eventually decided to opt for assigning a more significant role to the board of directors. From this point of view, it appears clear that the role of the changes in the regulatory and legal context in Italy was very influential in determining the degree of the e­ volution of corporate governance for firms listed on the FTSE-MIB index. In the UK, instead, the allocation of responsibility for social and environmental issues to a specific committee or a committee with other functions has been a novelty only in a relatively small number of firms, as most of the FTSE 100 firms considered had already adopted a form of governance of sustainability in 2013. Moreover, the firms which upgraded their corporate

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governance to better integrate sustainability-related issues actually already had assigned responsibility for these topics to the board of directors, even if with different forms. In fact, almost every firm which eventually created a sustainability board committee by 2017 had previously assigned a supervisory role to the board of directors, or had entrusted the topic of sustainability to a committee composed at least partially of the firm’s directors.

5.2.7 P  atterns of Evolution of the Corporate Governance of Sustainability The analysis of forms of governance adopted by the investigated firms during the five-year interval (2013–2017) considered in this study did not offer only the possibility of identifying the origin of recent governance structures; in fact, this longitudinal analysis provided the tools to identify the most relevant patterns of evolution of the governance of sustainability in both major Italian and British firms. Hence, by ­reconstructing how the forms of governance gradually progressed, it has been possible to outline the main patterns of evolution followed in the two countries. The analysis of the evolution of corporate governance mechanisms related to sustainability in Italy (see Fig. 5.1) demonstrates that the typical pattern followed by the FTSE-MIB firms starts with the supervision model. In fact, the allocation of a generic supervisory duty to the board of directors has been the most usual way to introduce the topic of sustainability within corporate governance, especially when starting from the

Undisclosed

Sustainability Board Committee

Supervision

Delegate Board Committee Fig. 5.1  Patterns of evolution of the governance of sustainability in Italy (FTSE-MIB)

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absence of any disclosure. Subsequently, FTSE-MIB firms’ preferences have been split in two main directions. On the one hand, a significant group of firms opted for reaching the highest level of integration of sustainability directly within corporate governance by establishing a sustainability board committee. This choice was of course stimulated by the external pressure of incremental changes in regulations and legislation which occurred in the country in during the interval under consideration. However, as the same regulations and legislation did not require the compulsory creation of sustainability board committees, it is possible to interpret this choice of Italian firms not only as a signal of the desire to comply immediately with extant rules. This choice, indeed, also represents a recognition of the opportunities that this type of committee could open up for firms themselves even in a short horizon, in terms of strategic integration and risk management (Galbreath 2017). On the other hand, for many firms the most appropriate way to develop their corporate governance of sustainability implied entrusting social and environmental issues to an existing committee of the board of directors, in accordance with the form of the delegate board committee. By doing so, FTSE-MIB firms were able to comply with the new rules in a relatively short time, and also without altering their corporate governance structure. However, this choice may also be motivated, as seen in previous chapters, by the absence of directors with specific skills or experience in the field of sustainability, or, more simply, by the fact that social and environmental issues were perceived more as factors that could be integrated only within a specific part of the decisional process, like risk management activities. Nonetheless, for some firms the form of the delegate board committee represented an intermediate step before creating a sustainability board committee. The results confirm, in fact, that in many cases FTSE-MIB firms adopted a delegate board committee for one to three years, and then established a sustainability board committee, but there are also many cases where firms opted for switching to a more complex form of governance of sustainability, even many years after having located this type of responsibility within an existing committee. With regard to the UK context, instead, the analysis of patterns of evolution highlighted a very different trend (see Fig. 5.2). In fact, considering the initial situation, where already in 2013 almost every firm had

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Two-Tier/ Delegate Board Committee Sustainability Board Committee

Supervision Management Committee

Fig. 5.2  Patterns of evolution of the governance of sustainability in the UK (FTSE 100)

somehow integrated sustainability within its corporate governance, the data indicate that there was not such a massive change in the governance of FTSE 100 firms. Additionally, the results indicate that the changes did not follow the same directions as presented for the Italian context. In order, in 2013 almost three in four firms had adopted the supervision model (40%) or the sustainability board committee (33%). Thus, the supervision model was for many firms the starting point for the integration of sustainability within corporate governance. Subsequently, a small but significant number of firms chose to follow steps to create a sustainability board committee directly, in accordance with the benchmark proposed by the most cutting-edge firms. An alternative pattern consists in overcoming the supervision model by creating a two-tier committee, which implies the presence of managers as well. Furthermore, the allocation of sustainability-related responsibilities to a delegate board ­committee was another option relatively common among FTSE 100 firms as a progressive move after the generic monitoring role of the board of directors. Similar to what has been verified by analyzing the Italian sample, the delegate board committee and the two-tier committee were conceived as intermediate steps before the establishment of a sustainability board committee. So far, the patterns of evolution identified in the UK look very similar to the Italian ones. However, an interesting finding of these analyses derives from the observation that many FTSE 100 firms eventually

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decided to reshape their corporate governance of sustainability from a supervision model by establishing a management committee. The decision to entrust the responsibility for social and environmental issues to a committee composed only of managers, without any directors, may look counterintuitive according to the framework presented so far. However, it could be argued that some firms prefer to develop their governance of sustainability according to a decentralized approach. According to extant research (Pirson and Turnbull 2018), decentralized governance structures are able to handle the complexity related to sustainability better than centralized forms. In particular, this decentralized governance structure may be more appropriate for those firms that integrate sustainability issues mostly at an operational level, without any specific strategy. Therefore, some FTSE 100 firms opted to have a short and specific decisional process accomplished by the most engaged managers. The comparison between the two samples confirms that the Italian context rapidly evolved from a supervision-based governance structure to a model that involves the board of directors directly by means of specific board committees, as recommended by the regulations. Hence, firms were able to develop more complex forms of governance, but did not always choose the creation of a board committee devoted to sustainability, since in many cases it was preferred to rely on an existing board committee. Furthermore, the pattern of evolution was often gradual, and involved almost the entire sequence of models presented so far. As for the UK context, by virtue of a more developed initial situation, it emerges that in most cases sustainability was already present on the agenda of the board of directors, but in different forms, from simple supervision to the presence of proper board committees. From this ­situation three main patterns emerged, two of which led to the establishment of a sustainability board committee, directly after the supervision model, or passing through an intermediate step, be it a two-tier or delegate board committee. Beyond these first two patterns, the third one indicates a different direction, as supervision leads to the creation of a management committee without board members. The three patterns demonstrate that, although following divergent directions, the governance of sustainability in FTSE 100 firms has become strongly specialized, as firms perceived the need to have a competent and focused

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approach on social and environmental issues. However, unlike the Italian context, in the absence of any specific regulation, the specialized body was not always identified in a committee of the board of directors, but in a committee at the executive level.

5.3 The Influence of Sustainability Board Committees: A Focus on Italian Firms The analysis of sustainability governance models adopted by listed firms in Italy and the UK has highlighted significant and constant growth in both contexts. However, this growth was more significant in Italy, due to the combined effect of the revision of the Code of Corporate Governance and the enforcement of the non-financial disclosure regulations. Hence, it was demonstrated that external pressures had a strong influence in determining the diffusion of board committees devoted to social and environmental issues. However, the difference between the two contexts raised a question regarding the actual influence of sustainability board committees in integrating social and environmental issues within firms’ strategy. Therefore, with regard to the Italian context, an additional desk analysis was run, in order to identify how the presence of sustainability board committees was associated with the presence of monetary incentives for executive directors, an issue that may actually reflect the width of engagement of the board of directors in social and environmental issues (Burke et al. 2019).

5.3.1 S  ustainability Board Committee and Executive Remuneration Previous research drew attention to the role of monetary incentives in executive compensation, an indication that executive compensation is strongly tied to the governance of sustainability-related issues, as it can exert a significant influence on social and environmental performance (Mahoney and Thorne 2005). The presence of monetary incentives for

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executive directors related to social and environmental performance actually reflects the board’s willingness to actively engage in sustainability issues, as it may induce directors to work harder to enhance sustainable performance and prevent potential problems (Burke et al. 2019). Thus, from the perspective of this study, it was interesting to analyze whether the presence of a sustainability board committee was associated with the presence of monetary incentives for executive directors related to social and environmental performance.

5.3.1.1  Methodology This section of the research project was aimed at highlighting if and how sustainability-related issues were taken into consideration in executive compensation, and if such compensation was potentially associated with the governance model of sustainability. The investigation was carried out by undertaking an additional desk analysis on the executive compensation section of the annual statement (i.e., the compensation report) published in 2018 by the 40 Italian firms listed on the FTSE-MIB index. These documents were analyzed by searching for keywords related to “sustainability,” including “social responsibility,” “environment,” “social,” “ecology,” “qualitative,” and “non-financial,” to ensure full coverage of the executive compensation scheme (Burke et al. 2019).

5.3.1.2  Sustainability-Related Compensation Analysis of the compensation schemes adopted by listed firms in Italy with regard to fiscal year 2017 made it evident that the presence of incentives for executive directors related to social and environmental performance is still limited, but significant. In fact, almost half of the FTSE-MIB firms (40%) linked part of the variable compensation of executive directors to socio-environmental performance (see Table 5.5), and more than two-thirds of these firms explicitly report in a quantitative form the incidence of social and environmental performance on variable compensation (68.2%).

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Table 5.5  Sustainability-related compensation for executive directors FTSE-MIB (40) Sustainability-related compensation  Firms with any type of sustainability-related compensation Disclosure  Explicit disclosure (quantitative measure)  Implicit disclosure (qualitative measure) Form of compensation  Management by objectives (MBO)  Long-term incentives (LTI)  Balanced scorecard % of variable compensation tied to social–environmental performance  Average (%)  Minimum (%)  Maximum (%)  Standard deviation (%)

16/40 (40.0%) FTSE-MIB sub-sample(16) 11/16(68.8%) 5/16(31.2%) FTSE-MIB sub-sample(16) 9/16(56.3%) 5/16(31.2%) 2/16(12.5%) FTSE-MIB sub-sample(16)

15.6 1 25 10.5

With regard to the form of compensation, more than half of these firms provide specific information regarding how socio-environmental performance is considered in executive compensation. More specifically, the most common form of compensation is management by objectives (MBO), adopted by nine firms (56.3%), followed by long-term incentive (LTI) plans, adopted by five firms (31.2%), and by the balanced scorecard, adopted by two firms (12.5%). Finally, with regard to the amount of variable compensation tied to social and environmental performance, the data indicate an average value of 15.6%, but the dispersion of values is very high, with extremes ranging from 1% to 25% (standard deviation: 10.5%).

5.3.1.3  Sustainability-Related Compensation and Governance Model The previous analysis of the compensation schemes adopted by listed firms in Italy indicated that firms in the FTSE-MIB index have intro-

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duced in their executive compensation schemes specific incentives related to social and environmental performance. From the perspective of this study, indeed, it was interesting to analyze how the presence of such incentives can be associated with the model of governance of sustainability adopted by the same firms (see Table 5.6). The results indicate that most of the firms that have adopted incentives for their executive directors actually belong to the group of firms with a sustainability board committee (14 out of 16; 87.6%), whereas the remaining firms have a management committee (1 out of 16; 6.2%) or a two-tier committee (1 out of 16; 6.2%). Thus, these data indicate that compensation schemes that consider social and environmental issues are present within firms that allocate the responsibility for sustainability issues to a specialized committee within the board of directors, but also would be in firms where managerial figures are accountable or at least involved in these types of issues. From another perspective, the investigation took into consideration how sustainability-related compensation is widespread within the different models of governance of sustainability. Hence, the results indicate that monetary incentives tied to social and environmental performance are not present within firms whose governance model is undisclosed or based on supervision. Moreover, it was acknowledged that governance Table 5.6  Sustainability-related compensation and governance of sustainability model FTSE-MIB sub-sample(16) Model of governance of sustainability  (Undisclosed)  Management committee  Supervision  Two-tier committee  Delegate board committee  Sustainability board committee Firms with sustainability-related compensation  (Undisclosed)  Management committee  Supervision  Two-tier committee  Delegate board committee  Sustainability board committee

0/16(0.0%) 1/16(6.2%) 0/16(0.0%) 1/16(6.2%) 0/16(0.0%) 14/16(87.6%) FTSE-MIB(40) 0/1(0.0%) 1/2(50.0%) 0/4(0.0%) 1/1(100.0%) 0/9(0.0%) 14/23(60.9%)

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models that imply a significant role for managerial figures are mostly associated with sustainability-related compensation. In fact, this type of compensation has been individuated in one out of two firms with a management committee, as well as in the single firm that had a two-tier committee. The analysis provided also evidenced that the firms with a delegate board committee did not link the compensation of their executive directors to any social or environmental performance measure (0 out of 9). Finally, it was recorded that sustainability-related compensation was present in three in five firms that have set up a sustainability board committee (14 out of 23; 60.9%). Analysis of the presence of sustainability-related compensation according to the governance model revealed two apparently conflicting trends: on the one hand, sustainability performance has an influence on executive compensation mostly in firms that have allocated the responsibility for social and environmental issues to a specific board committee; on the other hand, when considering the total number of firms that have set up a sustainability board committee, it emerges that a minority but significant group of firms have not yet adopted a compensation scheme related to sustainability. Additionally, the latter trend is valid for all the firms with a delegate board committee, where there is no evidence of any sustainability-­related compensation. As the board of directors’ engagement in social and environmental issues is reflected by the presence of compensation incentives (Burke et al. 2019), the fact that a significant number of firms did not present any compensation scheme related to sustainability may raise a question about the actual relevance of sustainability issues for the board of directors.

5.4 Conclusions The longitudinal analysis of the corporate governance structures adopted since 2013 by the top firms in Italy and the UK to integrate sustainability was aimed at providing an overview of how the allocation of responsibility for social and environmental issues was gradually evolving in the last five years.

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The desk analysis of the main corporate documents that these firms published from 2013 onwards offered the opportunity to investigate how listed firms belonging to the FTSE-MIB and FTSE 100 indices formally and publicly communicated their corporate governance approach. Hence, it was possible to elaborate a classification of the main models for governing sustainability, and to develop the principal patterns of evolution. The completion of desk analysis in both Italy and the UK was useful in determining how the evolution of the governance of sustainability was affected by different legal and regulatory contexts, and how firms responded to these external conditions. In 2013, when this research project started, sustainability issues were already a common corporate governance topic in the UK, as almost every FTSE 100 firm was already considering social and environmental issues within its model of corporate governance, often involving a board committee directly. At the time, in contrast, only a relatively small group of Italian listed firms had formalized the commitment of the board of directors to sustainability-related issues, whereas most firms only declared a generic supervisory approach. The difference between the two countries became less and less significant in the following years, as soon as the regulatory framework became more stringent for Italian firms. In fact, starting in 2016, Italian firms had to deal with a robust regulatory recommendation for a further formalization of the role of the board of directors in sustainability-related issues. Between 2013 and 2016 more than half of FTSE-MIB firms changed their governance of sustainability, especially as the deadline to comply with the regulation was approaching. In parallel, within the FTSE 100 index the number of firms integrating sustainability into corporate governance at the highest level kept growing, but gradually and in different forms. Thus, the third wave of desk analysis provided some interesting insights into how the integration of sustainability within corporate governance was affected by significant changes in the legal context. The results of the analysis conducted considering 2017 too reflected the effects of the law which established for Italian firms the duty to publish a non-financial disclosure report, and that made the board of directors responsible for the content of this statement.

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Following up on the previous analysis, the results highlighted some interesting trends. First, the presence of sustainability board committees registered further growth, more emphasized in Italy than in the UK; as an alternative to this type of board committee, FTSE-MIB firms preferred an already existing board committee, whereas FTSE 100 firms adopted a two-tier committee. Second, the supervisory role of the board of directors became even less relevant in both countries, as much as the number of firms not disclosing any information. Third, Italian firms generally shifted towards a more and more important role for the board of directors in governing sustainability-related issues, whereas in the UK some firms opted also for attributing this role to a managerial committee. Thus, the third round of corporate document analysis confirmed the crucial role of legal and regulatory pressures in determining the integration of social and environmental issues within corporate governance mechanisms. In fact, at the end of 2017 the scenario initially recorded in 2013 was eventually overturned: on the one hand, Italian firms significantly engaged in making the board of directors specifically devoted to the governance of sustainability by means of a board committee; on the other hand, within UK firms the presence of alternative forms of ­governance was registered, although there was nonetheless a large spread of board committees. Building on the results of this longitudinal study, the research intended to draw some patterns of evolution of governance forms of sustainability, in order to individuate which paths have led listed firms to integrate sustainability-­related issues progressively into their corporate governance. In fact, it was observed that in Italy most firms start dealing with the governance of sustainability by assigning to the board of directors the task of supervising social and environmental issues; subsequently, some firms opt for directly creating a sustainability board committee, whereas others opt for a gradual approach, which consists first in delegating sustainability issues to an existing committee, and then creating a specialized committee. Equally, in the UK there are two main choices for progressing from the supervising model: first, to opt for a sustainability board committee, directly or passing through the creation of a two-tier committee; second, to reallocate responsibility for social and environmental issues to

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a management committee, in order to keep the decisional level closer to the operational one. In summary, the research revealed that the role of board committees has become more predominant year after year, in both Italy and the UK. However, the significant changes in the regulatory and legal context had a strong influence in determining the behavior of Italian firms, which in most cases decided to shift from collegiate supervision to a form of governance not only compliant with the regulations, but also suitable for governing social and environmental issues more effectively. Thus, these two contexts, which in 2013 still were significantly different concerning the presence of corporate governance mechanisms related to sustainability, at the end of 2017 appeared to have many commonalities. In fact, almost every firm in the benchmark stock indices had defined its own model of governance of sustainability, while the simple supervisory approach was being progressively overcome by more structured forms of governance. Conversely, Italian firms relied mostly on board committees, whereas UK firms also took into consideration forms of governance involving managers. Given the recognition of the significant role of regulation in determining the diffusion of corporate governance mechanisms related to ­sustainability, an additional segment of the analysis was carried out in order to investigate the behavior of Italian firms more deeply. Consequently, the study focused on the presence of monetary incentives for executive directors related to social and environmental performance, to analyze whether they are associated with the presence of a sustainability board committee. The results made it evident that sustainabilityrelated compensation has been introduced by firms that have set up a sustainability board committee; however, it was recorded that this trend is not valid for all the firms with this latter type of committee, and it was not even verified for the delegate board committee model. This evidence may raise a question about the actual relevance of sustainability issues to the board of directors, but it is also necessary to underline that Italian firms have had a short time to adapt their corporate governance to the new regulations. Consequently, it is possible that these firms have not yet the chance to complete their process of integrating sustainability into their corporate governance.

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References Burke, J. J., Hoitash, R., & Hoitash, U. (2019). The heterogeneity of board-­ level sustainability committees and corporate social performance. Journal of Business Ethics, 154(4), 1161–1186. Crosio S., & Vastola O. (2017). New disclosure requirements on nonfinancial information for Italian public interest entities. Jones Day. Retrieved July 18, 2018, from https://www.jonesday.com/new-disclosure-requirements-onnonfinancial-information-for-italian-public-interest-entities-07-05-2017/. EC. (2017). Commission guidelines on non-financial reporting. Retrieved March 2, 2018, from https://ec.europa.eu/info/publications/170626-nonfinancial-reporting-guidelines_en. Galbreath, J. (2017). The impact of board structure on corporate social responsibility: A temporal view. Business Strategy and the Environment, 26(3), 358–370. Grayson, D., & Kakabadse, A. (2013). Towards a sustainability mindset: How boards organize oversight and governance of corporate responsibility. London: Business in the Community. Retrieved May 5, 2014, from https://www.bitc. org.uk/resources-training/research/towards-sustainability-mindset-howboards-organise-oversight-and. Helfaya, A., & Moussa, T. (2017). Do board’s corporate social responsibility strategy and orientation influence environmental sustainability disclosure? UK evidence. Business Strategy and the Environment, 26(8), 1061–1077. Kothari, C. R. (2004). Research methodology: Methods and techniques. New Age International. Mahoney, L. S., & Thorne, L. (2005). Corporate social responsibility and long-­ term compensation: Evidence from Canada. Journal of Business Ethics, 57(3), 241–253. Pirson, M., & Turnbull, S. (2018). Decentralized governance structures are able to handle CSR-induced complexity better. Business & Society, 57(5), 929–961. Quinn, J., & Connolly, B. (2017). The non-financial information directive: An assessment of its impact on corporate social responsibility. European Company Law, 14(1), 15–21. Rake, M., & Grayson, D. (2009). Embedding corporate responsibility and sustainability—Everybody’s business. Corporate Governance: The International Journal of Business in Society, 9(4), 395–399. Vartanian, T. P. (2010). Secondary data analysis. Oxford University Press.

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Venturelli, A., Caputo, F., Cosma, S., Leopizzi, R., & Pizzi, S. (2017). Directive 2014/95/EU: Are Italian firms already compliant? Sustainability, 9(8), 1385. Yin, R. K. (2003). Case study research: Design and methods. Thousand Oaks, CA: Sage Publications.

6 Conclusions

6.1 T  he Demand for Governance of Sustainability The last decade has been characterized by a growing pressure on firms to address sustainability issues, in order to contribute to solving or mitigating the social and environmental problems that have been emerging. However, the noteworthy efforts that many firms have made to respond to such pressures, as well as the repeated scandals and cases of misconducts, have raised many questions about how genuine is the engagement of firms towards sustainability and, consequently, about the real effort made by the governing bodies of these firms (Gantenbein and Volonté 2012). Therefore, significant attention has been recently paid to the role of corporate governance in sustainability (Morck and Steier 2005), particularly regarding the influence of the board of directors (Elkington 2006). Not surprisingly, in the last few years a growing demand has been recorded for an active role for boards of directors in dealing with social and environmental issues. This resulted in the demand for the creation of board committees specifically responsible for sustainability issues

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(Hussain et al. 2018), in charge of promoting, planning, and monitoring the integration of social and environmental issues in firms’ activities (Burke et al. 2019). Notwithstanding the growing pressure, the diffusion of this type of board committee has not occurred homogeneously, as in some countries it was voluntary, whereas in some other countries it was recommended or established by the local legal and regulatory framework (Gennari and Salvioni 2018). In this context, the significant changes that had recently occurred in Europe to the legislation regarding both corporate governance and sustainability motivated a research project on the governance of sustainability. The research project aimed at understanding if the legal tradition of a country can actually affect the evolution of models of governance of sustainability. Consequently, the research project was designed as a longitudinal study, by realizing multiple waves of data collection and analysis, through interviews with firms’ representatives and desk analysis of corporate documents. Furthermore, given the purpose of analyzing the role of the legal tradition in determining firms’ model of governance of sustainability, the study focused on Italy and the UK, two countries representative, respectively, of the civil law and of the common law tradition (La Porta et al. 1997). Through the combination of primary and secondary data, the project contributed to the academic and practitioner debate on the role of corporate governance in sustainability, with particular regard to the board of directors. Thus, the study’s conclusions and suggestions for future research are now discussed in this chapter.

6.2 Filling the Research Gap Chapter 2 presented the theoretical background of the research project, starting from an overview of the most significant contributions, both academic and practitioner, related to the relationship between corporate governance and sustainability. Although previous contributions discussed the role of the board of directors in dealing with social and environmen-

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tal issues, the academic debate only narrowly took into consideration the significant changes occurring in the legal and regulatory framework, especially in the European Union. By considering that national laws and regulations can apply European directives with a certain degree of flexibility, this research project identified in the legal tradition (civil law vs. common law) a potential determinant of the actual integration of sustainability within corporate governance. In fact, previous research has demonstrated that in civil law countries the regulation regarding specifically social and environmental issues is tighter than in common law countries (Hörisch et al. 2017) and, as a consequence, firms operating in these countries have better social and environmental performance (Kock and Min 2016; Kim et al. 2017). Thus, in order to highlight the influence of the different institutional contexts, the study was centered on the analysis of benchmark Italian and British top listed firms, starting from a situation where both countries did not have any specific regulation on the governance of sustainability, and then analyzing how the two contexts evolved differently. The seminal investigation presented in Chap. 3 demonstrated that sustainability in 2013 was already an important topic for the boards of directors of the main Italian and British listed firms. In particular, the 2013 scenario of the governance of sustainability in Italy, in the absence of any specific regulation, appeared encouraging for the involvement of the boards of directors of a significant number of firms. Even if for many firms such involvement implied mostly a monitoring approach, the promising presence of directors experienced in sustainability and of training programs on social and environmental issues has been interpreted as a sign of the perceived importance of the integration of sustainability at board level. Conversely, the comparison with the UK made evident that some Italian firms had not yet considered the opportunity to integrate socio-environmental issues into their strategy, while almost every UK FTSE 100 firm had already specified its model of governance of sustainability. Subsequently, from Chap. 4 it was possible to derive an overview of the evolution of the governance of sustainability between 2013 and 2016, when most of the changes to the legal and regulatory framework occurred. The significant increase in the diffusion of board committees responsible

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for sustainability in Italy testifies to the relevance of the legal context for what concerns social and environmental issues. In fact, the 2014 European Union Directive 2014/95/EU had a different resonance in Italy and the UK.  In Italy, indeed, it was followed by the revision of the Code of Corporate Governance, which explicitly recommended that top listed firms assign responsibility for social and environmental issues to a board committee, possibly a specific one. The relevance of the new regulations was confirmed also by the fact that many Italian firms changed their governance structure by the indicated deadline, but also by the fact that these firms concurrently decided to integrate sustainability into their strategic plans, and to provide the board of directors with the necessary competences. In relation to the UK, the absence of specific regulations did not prevent FTSE 100 firms from modifying their governance of sustainability. However, UK firms kept in consideration a governance model implying the presence of managers, both with and without directors, to keep the decisional level closer to the managerial perspective. Finally, Chap. 5 confirmed the crucial role of legal and regulatory pressures in determining the integration of social and environmental issues within corporate governance mechanisms. In fact, as soon as the non-­ financial disclosure regulations entered into force, in both Italy and the UK, the scenario initially recorded in 2013 was eventually overturned: on the one hand, Italian firms significantly engaged in making the board of directors specifically devoted to the governance of sustainability by means of a board committee; on the other hand, within UK firms the presence of alternative forms of governance was registered, although nonetheless there was a large range of board committees. From this chapter it was possible to derive as a contribution for both academics and practitioners the individuation of the main patterns of evolution of the governance of sustainability in Italy and the UK. These patterns offer the possibility of delineating which paths have led listed firms to integrate sustainability-­ related issues progressively into their corporate governance, and which are the possible alternatives. In summary, this research project contributed to highlighting the role of the legal tradition in determining the integration of sustainability within corporate governance, by demonstrating that the role of board committees year after year has become more predominant in Italy than in

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the UK, as the different legal and regulatory frameworks determined ­different pathways. These two contexts, which in 2013 still had a significantly different approach to corporate governance mechanisms related to sustainability, at the end of 2017 were still different, but from an opposing perspective. In fact, Italian firms opted to rely mostly on board committees, whereas UK firms also took into consideration forms of governance involving managers. Nonetheless, the evolution of the governance of sustainability in the two countries occurred with some similarities; in fact, almost every firm on the benchmark stock indexes has defined its own model of governance of sustainability, while the simple supervisory approach is being progressively overcome by more structured forms of governance.

6.3 T  owards Sustainability-Oriented Governance This research project, since its beginning in 2013, aimed to provide an overview of the integration of sustainability within the corporate governance of Italian and British firms, looking in particular at how laws and regulations have an influence on the engagement of the board of directors. The study contributed to the debate about this topic by putting in evidence not only the significant role of the legal and regulatory framework in determining firms’ choice of integrating sustainability within corporate governance, but also that such a choice is influenced by the legal tradition of the country, as the civil law tradition is associated with a higher concern for all categories of stakeholders. Moreover, this research contributed to the literature regarding the governance of sustainability by defining a new classification for models of governance of sustainability, suitable for solving potential ambiguities among customized governance structures, and therefore suitable for being applied in different contexts. In addition, the study made evident the patterns of evolution followed by listed firms, including the intermediate forms, providing a longitudinal perspective which so far had been lacking (Spitzeck 2009).

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Another contribution of this research is represented by the attempt to verify how the governance of sustainability may reflect the real commitment of a firm to sustainability. The robust influence of the legal and regulatory context, in fact, could lead firms to comply with the requirements without fostering a considerable integration of sustainability issues within their activities. From this perspective, the research project demonstrated that, as soon as the integration of sustainability within corporate governance was growing, the strategic relevance of sustainability also improved, as confirmed by the fact that social and environmental issues became frequently part of the strategic plan. Furthermore, the models of governance of sustainability were analyzed in relationship to the presence of sustainability-related compensation. In fact, since previous research identified executive compensation as a determinant of social and environmental performance (Mahoney and Thorne 2005), it was interesting to verify how it was associated with the governance of sustainability. The results made evident that sustainability-­ related compensation has been introduced mostly by firms that have set up a sustainability board committee, but also that this association is not valid for all firms with a board committee. This evidence may raise a question about the actual relevance of sustainability issues for the board of directors, but the short time that Italian firms have had to comply with the new regulation may not have been sufficient to complete the process of integration of sustainability into their corporate governance. Hence, this research project aspires not only to contribute to the academic debate, but also to provide policymakers and practitioner with useful recommendations. On the one hand, for policymakers it could be important to underline that stronger regulation can actually lead to a higher integration of sustainability within corporate governance. However, formal integration could result in an empty shell if it is not sustained by incentives, and if it is not feasible to meet the actual needs of the firm. Consequently, tightening regulation could lead firms to strive for meeting the new requirements, and therefore shift the focus from a real engagement in sustainability. As far as the practitioner perspective is concerned, the study intended to promote a transition in firms’ behavior, by providing the board of

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directors with a useful set of information to check the positioning of the firm compared to a significant benchmark. In fact, the research project put in evidence that the integration of sustainability within corporate governance will soon represent for firms a standard to comply with. Thus, the board of directors will have to look to integrate specific competences on social and environmental issues, both by co-opting sustainability experts onto the board and by providing the board with more frequent and specific training programs. In addition, as the legal accountability of directors is increasing, the creation of sustainability board committees implies potentially reducing the risks of social and environmental problems related to the firm’s activities. The possibility of reducing potential risks for the firm through the integration of sustainability within corporate governance will also be appreciated by investors; furthermore, this could be even more valid if sustainability issues were integrated into the firm’s strategy, in order to provide it with an additional source of competitive advantage as well as to create value for all stakeholders.

6.4 L imitations and Opportunities for Further Research Despite its contribution, this research project was affected by some limitations. One limitation is that the findings are not necessarily applicable across all the countries belonging to the civil law or common law traditions. However, Italy and the UK are two significant representatives of their traditions (La Porta et al. 1997), as well as two countries which have been affected by significant changes in the legal and regulatory frameworks regarding corporate governance. Thus, further research could extend the geographical scope of this study, taking into consideration more countries, in order to confirm the relevance of the legal tradition beyond the country-level legislation, and to overcome one of the main limitations of this research project. Second, the exploratory research was realized by interviewing only Italian firms, and also relying on a relatively small sample. However, the exploratory nature of the study was granted by the context-specific data

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and by the direct feedback received from the boards of directors and their members. Besides, although there was a small sample size of countries as well as interviewees, the study attempted to avoid potential bias deriving from the complex articulation of board activities across countries. Therefore, further research could attempt to sustain generalizations by developing a large-scale quantitative survey suitable to be valid in more countries. Given the contributions and the limitations of this research project, this study may also stimulate further research regarding the future of the governance of sustainability. First, the evidence that a significant number of UK firms have chosen to allocate the responsibility for social and environmental issues to a managerial level, with or without the support of directors, may raise a question regarding the actual reasons behind this choice. In general, the presence of a sustainability committee expresses the board’s orientation and commitment to sustainabilityrelated issues (Burke et al. 2019). However, it is not possible to state that a governance model alternative to a board committee is necessarily associated with a minor engagement in sustainability. In fact, as a recent contribution highlighted (Pirson and Turnbull 2018), a decentralized governance architecture is a valid alternative for managing sustainability issues, specifically in the case of significant complexity, as it may facilitate information flow with stakeholders. Thus, future research could investigate if there is a substantial difference in sustainability-related performance according to the model of governance of sustainability adopted and the complexity of the business environment in which the firm operates. Second, future research could investigate the relationship between the governance of sustainability and non-financial reporting, especially with regard to a potential causal relationship between the two issues, but also with regard to the quality of the disclosure of non-financial performance. Third, future research could investigate with a deeper focus the role of shareholder activism, as well as the perception of firms’ insiders, such as sustainability managers and independent directors, to verify the perception of the activities of the board and its outcomes according to the governance model.

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Index

A

Activities, 56 Ad hoc committee, 14 Agency theory, 13, 29, 31 Audit committee, 23 B

Balanced scorecard, 164 Board committees, 1, 2, 11, 14, 23, 31, 35, 57, 104, 105, 173 Board composition, 20, 30, 59, 112 Board diversity, 30 Board independence, 21 Board of directors, 1, 13, 29, 53, 105 Board structure, 19, 20, 30 C

Cadbury Code, 23 Chief Executive Officer, 121

Civil law, 16, 34 Code of Corporate Governance, 3, 25, 98, 103, 130, 133, 150 Code of ethics, 76, 118 Commitment of the board of directors, 55 Common law, 16, 34 Communication, 122 Community, 80 Companies Act 2006, 23, 149 Companies, Partnerships and Groups (Accounts and NonFinancial Reporting) Regulations, 24, 97–98, 149 Compensation, 162, 178 Comply or explain, 22, 26 Consumers, 80 Control/risk management, 58 Corporate documents, 82 Corporate governance, 4, 11, 13, 15

© The Author(s) 2019 M. Minciullo, Corporate Governance and Sustainability, https://doi.org/10.1007/978-3-030-18885-6

183

184 Index D

L

Definition of sustainability, 53 Desk analysis, 83, 128, 147 Diversity, 98

Legal tradition, 5, 15, 35, 174–176 Legislative Decree 231/01, 98 Legislative Decree No. 231/2001, 150 Legislative Decree No. 254/2016, 124, 149 Legitimacy theory, 31 Long-term incentives, 164

E

Emerging approaches, 64–71 Enforcement of laws, 3 Environment, 80 ESG funds, 64 Ethical code, 54 Ethical funds, 127 EU Non-Financial Reporting Directive, 24, 97, 148

M

Management by objectives, 164 Management committee, 84 Methodology, 48–53 Models of governance, 84 Monetary incentives, 59

F

Felonies, 98 Financial disclosure, 17 Form of compensation, 164 FTSE MIB, 28 G

Governance structures, 4 H

Hierarchical distance, 121 Human resources, 80

N

New Code of Corporate Governance, 152 Nomination committee, 24, 27 Non-executive independent directors, 75–82 Non-financial disclosure, 148 Non-financial performance, 124 Non-Financial Reporting, 2 O

One-tier model, 20 I

Independent directors, 2, 19, 27 Institutional context, 15 Institutional factors, 34 International standard, 124 Investor protection, 17, 21

P

Private enforcement, 18 Prosecution mechanisms, 18 Public enforcement, 18

 Index  Q

Questionnaire, 49 R

Remuneration committee, 24, 27 Reporting, 122 S

Shareholders’ General Meeting, 63, 126 Skills/experiences, 59 Social and environmental issues, 30, 53 Socio-environmental performance, 32 Stakeholder engagement, 58 Stakeholders, 80 Stakeholder theory, 29, 32 Strategic documents, 53 Strategic plan, 52, 54, 119, 178 Strategic value of sustainability, 76 Supply chain, 80 Sustainability, 1, 30 competences, 78 experts, 114 manager, 60, 71, 120

185

plan, 119 report, 61, 123 unit, 60, 121 Sustainability board committee, 4, 31, 34, 84, 151 Sustainability-related activities, 55 Sustainability-related competences, 110 Sustainability-related training, 56, 113 T

Training on social and environment topics, 56 Two-tier model, 20 U

UK Companies Act, 24 UK Corporate Governance Code, 23 V

Vision, 53