How can boards make the intangible tangible?

For boards to help guide long-term growth, they must first make sure stakeholders understand the strategy.

The need for boards to focus on the long-term value of their organizations is by now well known, but communicating this clearly to stakeholders is crucial to build public trust and investor confidence. Politicians, consumers, suppliers and investors now place increased importance on long-term thinking as a means of tackling many of the big societal issues they see around them. Boards are increasingly under pressure to demonstrate their commitment to long-term value creation and show how they are delivering within a framework that measures their success.

Communicating this to a wide range of stakeholders in today’s fast-moving business world is a challenge, which is why the messaging needs to be clearer than ever. This will require different metrics and a new, dynamic reporting framework, one that is able to measure the value of a board’s long-term strategy, and one that helps investors and other stakeholders understand how this works for the benefit of all those involved.

“The first thing to understand is that long-term value is not a new agenda item,” explains Hywel Ball, Assurance Leader and Head of Audit, EY UK & Ireland. “All businesses are trying to create long-term value. But the need for businesses to better articulate their long-term strategies is becoming more acute.”

This need is being driven by several factors, including the rise of the knowledge sharing economy and big data as well as the disconnect between the short-term outlook of capital markets and the long-term vision of companies¹, together with the widening gap in trust between business and society². There is evidence now that just focusing on the short term causes economic damage and erodes trust in business³, so the question of balancing the short with the long term is at the forefront of the corporate agenda.

“Business is being confronted with some of the same principles that governments have faced for many years around finite resources, different stakeholders and the balance between the short and long term,” says Barend van Bergen, EY partner and one of the team members working with the Coalition for Inclusive Capitalism on a proof of concept to encourage, measure and demonstrate long-term value creation.

The role of the board

Often, management has little incentive to focus on investments that move the needle beyond the short term, so the board’s role is to hold management accountable for long-term strategy – and this role is a critical one.

Stephen W. Klemash, leader of EY Americas Center for Board Matters, is clear that “it is incumbent on boards to hold management accountable for making investments in innovation and transformation that will generate value over the long term – and they’re well positioned to do so.”

Klemash draws a parallel with venture capital firms, which make several investments of which only a handful need to succeed to provide a meaningful return. “The venture capital model is a valuable one, and boards should be looking to management to implement similar models of investment. This is about the board taking greater ownership and holding management accountable on whether it’s placing the right bets and giving those investments the appropriate focus. It’s also about communicating that strategy to investors and other key stakeholders to put short-term performance in a more accurate context.”

Balancing stakeholder demands

So, how do boards work with management to achieve a balance between the demands of their various stakeholders – many of which are looking to the longer-term, while others bring shorter-term pressures to bear?

Boards need to ask themselves if their purpose matches the reality of their business model.

An organization that is on the journey to creating long-term value will understand its purpose, and its duty to customers, employees, and communities in addition to shareholders. Importantly, those organizations have been proven, in various studies, to be the better long-term investment.

There is a need for wider “outcomes” to be measured: staff should be able to articulate what is important to them as employees of the company, and executives should be able to measure how their activities impact this human capital. Outcome metrics can act as a proxy about how employees feel about their company, so the board should ask whether these outcome metrics are indicative of the value that the board is trying to drive for this group.

Building and sustaining long-term value

Board directors are already the custodians of the long-term value creation strategy of the company, but they should be constantly challenging their own organization.

Is the board satisfied they are disclosing to their stakeholders, in the best way?

How is the company performing against this strategy? This works at two levels: how the board is monitoring and measuring the executive team, and what as well as how this is disclosed to external stakeholders.

Karin Lutz, leader of EY Women. Fast Forward, points to one example: gender parity.

“Purpose and gender parity are two sides of the same innovative coin. If you’re a business leader looking to spark and sustain long-term value, you can’t find a better investment than that. Think about what drives value over the long term: an ability to grow and transform. A workforce of diverse views and experiences. A creative culture that empowers employees. An eye to the future and a vision for navigating it. That’s what purpose and parity bring to an organization.”

EY research shows that more women than men believe purpose creates value for their organization. The connection is clear: women are a driver of purpose. It is also true that purpose drives more women into an organization. Inclusiveness is an essential driver of long-term value creation.

The impact of big data and analytics

Finally, boards need to understand the impact of data and analytics: even if they are not using the data that is now available to them, shareholders and other stakeholders almost certainly will be.

Some investor groups who only use data and do not interact with businesses at all are finding a correlation⁴, and sometimes a causation for long-term value. As these correlations become stronger, and quant investors become more successful, boards will start pushing for more data. In this context, data enables rather than disrupts.

Take these questions on board, and businesses will take a step closer to recognizing their long-term value. As Hywel Ball says: “Everyone we speak to confirms this is important, but its importance is accelerating.”

Questions for the board to consider

1. Does the board feel adequately informed around actions taken that demonstrate the organization’s engagement with long-term value? If not, what measures will it take to address this?
2. Does the board understand how the business communicates its business model and strategy to all stakeholders?
3. Is the board satisfied the business is pursuing ethics that reflect its societal values?
4. Does the board embody and champion the culture needed to support long-term value? How does the board make sure this culture and mindset is entrenched in the DNA of the organization?
5. Has the board checked that the business mission and purpose are aligned with reality?
6. Does the board make certain the business is capturing and analyzing data in support of its long-term values?
   

A full version of the original article appears on BoardAgenda.com