Earlier this year we released a report that explored why and how boards should guide management to focus on the long-term, better understand stakeholder needs and objectives, and improve communications about how their companies create value. Since then, the topic has gained significantly more attention, especially following the Business Roundtable’s August 2019 updated statement on corporate purpose.
A broad group of business leaders, market participants, governance and legal professionals and academics agree that for-profit corporations should positively serve non-investor stakeholder interests in ways that also serve investors. In doing this, companies can improve competitive positioning and address some of the issues giving rise to increased social and income inequity, geopolitical risks and environmental concerns. In turn, they enhance stakeholder trust and support and create long-term value.
This is a heady proposition. And one that is increasingly supported in the marketplace and by multiple studies and data. But what steps can boards encourage their companies to take to realize this potential?
To start, boards will need to strengthen their forward-looking orientation and long-term strategic planning in the coming year. Companies can successfully develop and execute strategy only when they identify and look to address key stakeholder needs, take a longer-term view and invest in the value drivers that will support company sustainability and performance through short-term disruption.
More concretely, boards should assess more objectively how corporate value is reflected in intangible assets, such as human capital, culture, innovation and corporate governance. These assets, in particular human capital, can comprise over 50% of a company’s market capitalization and should be well understood and appropriately communicated. Next, boards need to encourage management to develop better ways to identify, measure and communicate value, including using valuation frameworks and with data, KPIs and substantive nonfinancial metrics, and narrative disclosures such as those developed by the Embankment Project for Inclusive Capitalism. Another fundamental step is for boards to shift focus away from short-term financial results toward longer-term success generated by investment in research, innovation, technology, sustainability and human capital.
Companies can benefit from disclosing what they are doing and why, particularly if they can explain how these actions drive long-term value. For example, if companies are using capital to adapt and upskill their workforces to new technology, they should communicate the story around that strategic effort to investors and other stakeholders. They should also strive to develop and disclose metrics that show the competitive gains, tangible and intangible benefits, and other drivers of long-term value resulting from those strategic efforts.
Companies make disclosures in many ways, some required by regulators, and others demanded by investors and the marketplace. Different communication vehicles are intended for different purposes. Even so, boards should encourage their companies to intentionally communicate their value proposition and strategy consistently across all relevant communications. Additionally, as communications to a broader set of stakeholders expand, boards should make sure that management disclosures of certain nonfinancial KPIs are subject to the appropriate controls and procedures to promote the same accuracy, reliability and consistency as financial data subject to regulatory review.
By guiding their companies to look at value with an expanded lens and to clarify and better communicate value over a longer term, boards can demonstrate sustained value to investors and other stakeholders, even in periods of volatility and downturn.
Questions for the board to consider
- How does the company define long-term value? How would a broader definition of value, supported by data, KPIs and other nonfinancial metrics, allow the company to better articulate its value to investors, other stakeholders and the markets?
- What information or communications do key investors and other stakeholders need to invest their capital, talent and resources in the company for the long term? Does the company address those needs in decision-useful ways?
- Does management work collaboratively so that all the company’s communications taken together consistently explain the company’s value proposition and strategy?
- Are management’s disclosure controls and procedures designed to enable the accuracy, reliability and understanding of non-financial measures used and disclosure?