August 4, 2020
August 4, 2020
A year ago, 181 chief executives of prominent American companies signed a statement committing to deliver value to all company stakeholders—customers, employees, suppliers, communities, and shareholders. Redefining the purpose of the corporation, this statement from the Business Roundtable has drawn varying reactions in the marketplace. It is an acknowledgment from these business leaders that delivering superior financial results isn’t good enough, government activism is on the rise, formidable political gridlock does not offer solutions, and international tensions add uncertainty. These matters are not just American issues, but global concerns that require systemic thinking and expansive cooperation across both the private and public sectors.
The bottom line: More and more people perceive that corporations’ traditional focus on shareholder interests and maximizing profits is not fit for purpose if it functions in a vacuum that places environmental and social concerns in a category of issues belonging to other institutions.
One of the challenges in evaluating whether the statement really matters is that more than a few companies believe it merely codifies what they are already doing. This belief is understandable given the lack of uniform, global standards for identifying appropriate stakeholder interests and measuring progress toward addressing them. Therefore, there is ample opportunity for discretion in interpreting whether these interests are addressed adequately. The reality is that the statement is one of intention—and progressing from intention to buy-in, ownership, action, and accountability takes time.
Note that the statement indicates that each company “serves its own corporate purpose,” so there is an explicit recognition that not all companies are alike. That said, each company “share[s] a fundamental commitment to all… stakeholders,” specifically to deliver value to customers, invest in employees, deal fairly and ethically with suppliers, support communities in which the company works, and generate long-term value for shareholders.
In the United States under the law in Delaware (where many companies are incorporated), directors have a fiduciary duty to act in the best interests of shareholders. This question of balancing accountability with diverse interests can thus be tricky. The Business Roundtable’s statement does not alter the reality that shareholders own the company, and that the board and CEO act on their behalf. From a practical standpoint, the statement must be applied in that context. The good news is that this isn’t hard to do. Treating customers, employees, and suppliers right and sustaining the communities in which the company operates are solid, long-term plays which benefit shareholders, provided that acceptable financial performance is delivered concurrently.
These commitments should not be viewed as mutually exclusive, but rather as integrated—meaning they are integral to generating sustainable, long-term shareholder value. Thus, boards and their CEOs must rationalize the balancing of stakeholder interests in this manner because, by law, the board cannot ignore the primacy of shareholders’ interests.
What hampers progress, however, is the lack of global reporting standards offering sufficient comparability and transparency to investors and the market for assessing the adequacy of what companies are doing. Without such standards, skepticism regarding the corporate community’s commitment to action is likely to remain high in an environment where reasonable people differ as to what the appropriate level of commitment entails.
But comparable environmental, social, and governance (ESG) reporting offers a glimpse beyond current profitability to longer-term factors that may be more critical to sustainable success. It also depicts how management is considering—as well as balancing—the diverse interests of relevant stakeholders. Armed with such reporting, investors can decide whether to remain invested in the corporation or redirect their capital elsewhere.
Many are rethinking the corporation’s purpose amid the recognition that to succeed, organizations must attract three things: customers, talent, and investors. In recent years, all three have expressed a preference for companies that contribute a positive environmental and social impact over those that do not. Companies balancing the needs of shareholder interests with the interests of other stakeholders are more likely to possess the resilience to adapt to changing market realities than organizations focused solely on maximizing profits. ESG metrics, as well as traditional performance targets around financial results, the customer experience, innovation, and human capital management, offer a balanced family of measures that set the organization’s path in the right direction.
Future-ready boards are best equipped to set this tone of balance. Such boards are likely to do the following:
By doing the above, directors position themselves to think more broadly about stakeholder interests as they work with and through the CEO to oversee the company’s affairs and also serve the long-term interests of shareholders.
NACD: Tools and resources to help guide you in unpredictable times.