Groups like the Embankment Project for Inclusive Capitalism (EPIC) are helping companies drive decision-making and communication around their long-term value proposition. Including how they are creating sustained, inclusive, long-term value for key stakeholders and society more broadly.
EPIC’s November report identifies key value drivers, as agreed by companies, asset managers and investors, and ideas on how these drivers can be leveraged to enhance broad-based inclusive growth. Focus areas include:
- Talent – the way companies manage compensation and benefits, recruitment, training and development, diversity and inclusion, well-being and creating a purpose-driven culture of engagement
- Innovation – fulfilling unmet needs, maintaining focus on the end user during the innovation process and fostering trust in the organization
- Society and the environment – the impact on external stakeholders and communities by contributing to business-relevant social and environmental goals
- Governance – the board’s effectiveness in providing appropriate oversight, governance mechanisms to determine board quality and independence, and the ability of management, in conjunction with the board, to develop and assess long-term strategy
Other organizations are also applying a multistakeholder approach aimed at enabling more multistakeholder partnerships and collaboration. For example:
The World Economic Forum (WEF) promoted the New Paradigm4 in 2017, which aims to recalibrate the relationship between public corporations and their major institutional investors and views corporate governance as a collaboration among corporations, shareholders and other stakeholders working together to achieve long-term value. Since then, WEF has obtained more than 100 commitments from corporations and investors who said they would take positions consistent with the philosophy.
The Coalition to Encourage Corporate Philanthropy (CECP) CEO Force For Good effort encourages cross-sector CEOs to share their long-term business plans for sustainable value creation with institutional investors. CECP discloses corporate contributions of over US $18 billion in societal investment and 4 million hours of employee engagement since its creation in 1999. Their site highlights ways that companies can consider building the capital market infrastructure for long-term value creation and includes examples of company presentations on long-term strategy to institutional investors.5
Other groups encouraging longer-term focus in business and investment decision-making include FCLTGlobal, which conducts research and encourages stakeholders to problem-solve and test capital allocation approaches that create long-term value.6
Similar themes are being advocated, too, by the CEO-backed Commonsense Corporate Governance Principles 2.0, the Business Roundtable’s Principles of Corporate Governance and the Investor Stewardship Group’s Corporate Governance Principles For US Listed Companies.7
Well-governed companies understand that they need to be responsive to these initiatives and key stakeholder interests. They also can demonstrate their responsiveness through both continued positive engagement and enhanced disclosures directly addressing these interests. If companies respond to customer needs, invest in their employees for the long-term, do right by the communities and physical environments in which they operate and have a strong, fundamental purpose, their shareholders should benefit.
The real opportunity for boards and companies in 2019 and beyond is to drive a long-term-oriented strategy. This includes strong stakeholder communication and engagement practices. Companies that effectively execute this model and communicate their multidisciplinary, multistakeholder efforts in a comprehensive and transparent manner are those that are best positioned to develop and maintain the support of a broad base of stakeholders even in this highly disruptive and transformational time.
Questions for the board to consider
- Has the company considered how it might harness purpose to reveal a path through business model disruption and concurrently prioritize stakeholder engagement and communication efforts?
- Is the company familiar with key multistakeholder groups – and other organizations focused on leading environmental and social metrics and disclosures, such as the Climate Action 100+, the Task Force on Climate-related Financial Disclosures (TCFD) and the Sustainability Accounting Standards Board’s (SASB) disclosure frameworks?
- How is the company communicating to all stakeholders – in a consistent, comprehensive manner – its efforts to provide sustainable, inclusive growth integrated with core business strategy?
- To what extent is the company familiar with the governance specialists, as well as the portfolio managers and equity research analysts, who follow the company? Has the company engaged in outreach and established a relationship such that it can quickly engage as appropriate?
Continue to enhance board performance
To more fully address the growing demands and complexity of their work, boards should rigorously and continuously examine and evaluate their performance. While most boards still formally evaluate performance annually, leading boards do so more regularly. Intra-year evaluation enables boards to conduct a deep evaluation in phases that focus on one or more of the multiple aspects of overall board performance. More regular evaluation also encourages more candid, real-time feedback that can be quickly acted upon, improving information flow, decision-making, dynamics and performance.
When conducting evaluations, boards should use a tailored process that demands thoughtful and objective self-inquiry and raises questions that elicit feedback cutting to the core of performance, such as:
How did our prior thinking and decision-making impact company operations, strategy and competitiveness? Were we proactive enough in responding to and initiating disruption? Were we successful in engaging with stakeholders in ways that enhanced mutual understanding and stakeholder support? Did we help management communicate company culture and strategic vision in ways that make the company more attractive and valuable to employees, customers and investors? Did we support the company’s expanded use of technology in ways that make systems, processes and controls more efficient and secure? Did the performance goals we approved for CEO incentive compensation positively and measurably impact CEO performance and corporate value in the past year? Did our succession planning and talent management programs give rise to new leadership and innovation and increased employee engagement?
An equally (and related) key purpose of evaluation is for boards to regularly consider, objectively within the right context, the fundamental question of whether the current directors have, collectively and individually, all the experience, background, perspective, foresight, integrity and communication skills needed to consistently exercise informed judgment and effective oversight of their many complex duties and responsibilities. And, even if so, does the board support a culture that fosters rigorous inquiry and deliberation that promote agile and effective decision-making?
As boards make composition determinations, they should simultaneously consider board structure. Boards should ask whether adding a new committee or establishing an ad hoc committee may enhance oversight capabilities or ease workload issues, whether committee membership should be refreshed, and whether reallocation or expansion of duties and responsibilities can improve performance.
Today, boards and their committees are seeing reasons to expand their oversight into new areas. For example, as talent becomes increasingly critical to strategy and value, compensation committees should consider expanding their oversight to broader employee and talent matters, including how to attract, retain and motivate the workforce needed to further support and activate the company’s strategy and purpose.