Ultimately, a company’s compensation framework needs to be in line with its long-term business strategy. So, it should be based on setting the right KPIs and rewarding executives for achieving those KPIs.
It is important to emphasize that an increased focus on long-term value does not lessen the importance of profits in any way. “I’m not suggesting that companies should not make a profit,” said Robin Stalker, “because if we don’t make a profit, we can’t grow and we can’t be innovative.” Neither should long-term value lead to conflict arising between shareholders and stakeholders. A profitable company creates long-term value while a company that is genuinely focused on sustainability will achieve good results.
Top five questions for boards
- How does the company define long-term value? Would a broader definition of value, supported by nonfinancial metrics, allow the company to better articulate its value to investors, other stakeholders and the markets?
- Does the company explain its purpose, culture, investments, innovations and other initiatives and how they are linked and incorporated into strategy in ways that are enhancing the company’s competitive position?
- What information or communications do key investors and other stakeholders say they need to invest their capital and resources in the company for the long term? Does the company clearly provide these communications in decision-useful ways?
- Do current company performance metrics and executive compensation packages reflect the objectives of the company’s long-term strategy?
- How does the company communicate the value of its board, in view of its composition, effectiveness and leadership, and overall governance framework?
This article summarizes key points that were discussed during the EY EMEIA Center for Board Matters’ webcast on board perspectives on long-term value. The webcast considered topics including frameworks for long-term value creation, ways to activate long-term value, and management incentives to drive appropriate behaviors.