It’s time for businesses to refocus from shareholder value to stakeholder value. Here’s how.
The Business Roundtable, an influential US business association, made headlines in August when it released a powerful statement. In this “Statement on the Purpose of a Corporation,” the signatories publicly abandoned the principle of shareholder primacy and argued instead that companies exist to serve a broad range of stakeholders. In addition to shareholders, these stakeholders include customers, employees, suppliers and communities.
While the Business Roundtable’s announcement generated extensive media coverage, it did not actually mark a sea change on the part of companies. Instead, it formalized the significance of a global corporate governance movement that was already heavily influencing how companies operate in practice - shifting a company’s focus from shareholder to stakeholder.
The focus on stakeholders is about recognizing that a company’s purpose is to create long-term value for a broader group of interested parties – including its customers, employees, suppliers, communities, the environment - as well as its shareholders. So, companies must move from a short-term focus on quarterly earnings and delivering value to shareholders without consideration of other stakeholders. Being woke to stakeholders is not new, but given today’s seemingly yawning gap between the haves and the have nots, it’s gaining prominence in business and society because it is seen as foundational to the creation of a more equal, cohesive and sustainable world.
While a change in focus to stakeholders may seem straightforward, it can be challenging for companies to put into practice. Hence, we see a divide today between what companies want to achieve, and what they are able to achieve, when it comes to meeting societal expectations for more inclusive and sustainable growth.
Walking the talk in long-term value creation does indeed begin with talking, but it also needs to be followed in short order by action. So, what can companies do to turn their ambitions into reality, while enabling their stakeholders to hold them accountable?
1. Create a culture that rewards long-term behavior
First and foremost, this is about a cultural shift within organizations. Employees need to see and believe that creating long-term value is central to the strategy and fundamental to their business success. Leaders can play an important role here by setting the right tone at the top. To influence staff at every level, they can tap into the natural support for long-term value creation that will come from the millennial and Generation Z members of their workforce.
In addition, companies will need to retrain employees and managers in how they can relate to a broader group of stakeholders. Most employees and managers know how to relate to customers or suppliers, but developing long-term value mandates that today’s employees must be able to engage with a broader group. This means equipping people with the skills that they need to engage with stakeholders such as policymakers, the media and community groups.
2. Build value for the future, while also delivering today
Another important consideration in the shift to a focus on stakeholders– and this is where it can get hard – is that companies need to keep their sales up. Ultimately, they can’t focus on creating long-term value to the exclusion of short-term profits – or they might cease to operate. The transition to long-term value is happening while companies are still being measured by the short-term metrics of yesterday. So, companies must innovate in ways that enable them to keep achieving short-term growth while staying aligned to their purpose and long-term business objectives.
3. Deliver value to the communities in which you live and work
Perhaps not as obvious is the need to engage with communities. Over time, many companies have got out of the habit of engaging with the communities where they do business. And even when they do engage, they often see community engagement as an overhead – a corporate social responsibility “initiative” – rather than fundamental to the way they do business. This is a major strategic error. If a company loses sight of its stake in the community, it might miss out on market opportunity. Even worse, it can jeopardize its social license to operate.
4. Measurement and transparency are close to your non-financial performance
Finally, measurement and reporting are key. These two activities enable companies to be held accountable by their stakeholders, which in turn helps to build trust. Measurement and reporting are the public proof of what companies are doing to turn their ambitions into reality. Unfortunately, while numerous frameworks exist for measuring the long-term value that companies create, not enough companies are using them. Even if they did, the confusing array of frameworks, combined with the lack of uniform measurements, makes it hard for companies and stakeholders alike to understand the best options.
While challenges remain, there is a groundswell of support for long-term value creation from companies, investors, employees and communities. Given the EY role in establishing trust in the capital markets and our deep knowhow on reporting, we are proud to be advocates of this movement. Along with the Coalition for Inclusive Capitalism and more than 30 global companies with US$30t of assets under management, EY teams helped develop the Embankment Project for Inclusive Capitalism. Together with this group, representing asset managers, asset owners and multinational companies, we helped to create a breakthrough in how businesses can measure and report the true value they create for all stakeholders.
Additionally, we are applying our long-term value measurement knowledge to a project being run by the World Economic Forum and the International Business Council. This project is focused on introducing an environmental, social and governance scorecard for businesses.
Measurement is essential for companies to illustrate how they are creating long-term value for all their stakeholders. But there is also a need to engage consumers, employees, investors and regulators with the measurement process. Stakeholders will ultimately be seeking comparable reporting that is accessible, timely, and transparent.
We are only in the early days of the shift from shareholder to stakeholder value. It will take time for companies to reengage their communities, change their cultures and become proficient at balancing their short-term and long-term goals. Importantly, investors will need to move away from their demands for short-term returns over long-term value for this to succeed. Yet, the fact we are only witnessing the start of a revolution is no excuse for companies to delay thinking about long-term value. I believe the companies that pay the greatest attention to it in the short term will deliver the best results – to all their stakeholders – in the years to come.
When will you move long-term value from ambition to action? Join EY to discuss pressing economic and social issues as we look to the World Economic Forum Annual Meeting 2020 – from 21-24 January. Join the conversation via ey.com/wef and using #WEF20 and #BetterWorkingWorld