CSVC: I know you’ve got some thoughts on ways that Boards should implement social value considerations in their governance and decision making, but maybe we should start at a baseline.

Prochno: So the role of the Board of Directors (BoD) from a company’s perspective is to advise on the strategic direction of the organization. But that’s not always clear, as there is a constant friction between two facets of “strategic direction.” On one hand, the BoD’s prerogative is to ensure that companies retain managers that make the best decisions for shareholders. On the other hand, BoD’s also have a responsibility to leverage their networks, understand the environment of the company, and account for stakeholders beyond shareholders.

That’s an implicitly different conceptualization of Boards than the shareholder profit-maximizing bottom line approach. For example, let’s say I’m a shareholder at an oil company and I see that the company is considering a member of GreenPeace to bring onto their BoD. To me, what value does someone without managerial or business expertise bring to the leadership of my company?

CSVC: But if someone like Exxon-Mobil brought on an executive from GreenPeace that provides them a more strategic perspective on how to navigate the business environment, environmental considerations inclusive, that’s a consideration for future expectations of profit. It’s not just about the short-term discounted cash flows, there are assumptions to be made beyond those captured internally by the more discretely operational costs and revenues, yes?

Prochno: I would agree. A lot of the discussion around BoDs is internally focused, ensuring that moral hazard and agency issues don’t affect the stewardship that managers have over the best interests of shareholders. But rather than focusing on BoDs as policemen, I’d argue that the discussion should focus on strategic roles of Board members in social and environmental considerations as company advisors.

However, this has to go beyond just categorizing those considerations as purely marketing or philanthropic facets of the business fabric. 65% of S&P 100 firms have CSR-focused board members but are only focusing on those parts of the equation. I would argue that business leaders should think about social value creation as an implicit facet of their strategy and competitive advantage.

CSVC: Is it just that social value is hard to measure?

Prochno: But businesses make strategic decisions everyday on non-social value related issues that are difficult to measure. Competitive strategy is difficult to quantify by nature.

CSVC: Right, strategic commitments, “Top Dog” strategy, etc., so much of it is assumptions.

Prochno: So if you accept that having an ear to the social value landscape has a positive return for your company, it’s the same as any strategic decision that keeps a company ahead on the innovator’s spiral. And in that vein, a BoD with the advisory acumen to keep those considerations in mind is valuable to the company and to its shareholders. They should provide a perspective that can’t be captured internally, for the benefit of the shareholder, and one that ultimately increases the profitability of the company.

Unfortunately, what you see with many BoDs is a sort of “inside out” perspective on strategy. They are often individuals born out of the management and internal culture of the company. In that way, these individuals can be experts of the company’s history, of its business practices, yet simultaneously bring an unintentional myopia to the table. For BoDs to create value they need to expand out of this trend and get an outside perspective, including experts with more experience with the social value facets of their company’s business practices.

CSVC: Do shareholders care about the compositions of their BoDs?

Prochno: Well, what happens with many companies is that Board members are representatives for major shareholders. Let’s say this mutual fund or that pension fund has a certain percentage ownership. That gives them X number of Board seats. So those specific Board members are often in turn making decisions in the best interest of those individuals holding those funds.

CSVC: Wait a minute. So now it seems to me that you run into an incentives/agency problem. If individual board members are acting only vertically-minded and accountable to the holders of the funds they represent, then it’s an extra hurdle to expect any single director to be the one that represents that external social or environmental perspective. If the Board as a whole is to be strategically strongest, it is going to take lateral leadership across the group rather than vertical leadership driven from the individual clients represented by a given Director.

Prochno: Now we’re talking, I feel like we’re driving at an art form of sorts.

CSVC: Ha, I wouldn’t say that.

Prochno: To expound on your point, oftentimes across Directors you see a certain level of groupthink. Boards become too familiar, too harmonic. And without conflict, this sort of harmony can result in a level of stasis, a lack of innovative thinking. But on the other hand, that same conflict brings more difficulty in the decision making process. I think even accounting for both these parts of the equation, to drive success the BoD’s need more than ever to have that external perspective on social value issues.

CSVC: Do the most successful companies have those perspectives, that sort of implicit conflict you are referencing that would drive success?

Prochno: To my knowledge, there isn’t much empirical evidence that I’m familiar with. It’d be difficult to capture, you’d have to have Board surveys. And those surveys would need to be captured by external observers over time. Getting data on these sorts of things is fairly difficult. But it’d be curious to look at.

CSVC: Alright, now to the fun part— I make everyone tell me about their hobbies and interests. What does Professor Prochno do in his spare time?

Prochno: Well, I do have a passion for movies, and music.

CSVC: Do you play?

Prochno: (laughing) Ha, badly. But yes, I play acoustic guitar, Brazilian style. Badly though, really— maybe if I played better I would be a musician instead of an academic.

CSVC: I assure you, we are very happy that your musical career didn’t take off like your academic career has.

Prochno: Ha, thank you.