December can be a hectic, demanding month. If it seems that each remaining day of 2019 pulls to a close even more rapidly than its predecessor, that may be all the more reason to carve out some quiet time for reading about and staying abreast of governance matters. There’s no shortage of reading material for those interested in good governance, and one report released in November may prove particularly interesting.
As a governance professional, whether you’re referred to as a corporate secretary, chief governance officer or by one of a number of titles that ideally does justice to the expertise you have honed, you take care in curating the plethora of information sent your way for board consumption. We know that directors invest time and energy in reviewing and assessing substantial quantities of data to support boardroom debates and decision making. Thus, it may be the norm for you to guide colleagues on the scope of reporting and data that directors need to digest in order to inform their decision making.
Understanding the View of Shareholders
The November 2019 report, “Stakeholders Take Center Stage: Director Views on Priority and Society,” turns the tables. In this report, it’s directors’ insights that are being considered and communicated to those with an interest in governance. The Diligent Institute and Stanford University’s Rock Center for Corporate Governance collaborated this past summer on a survey of almost 200 directors of public and private corporations globally.
The survey was undertaken to gain a better understanding of how companies balance stakeholder and shareholder needs. The timing was opportune, in that the report itself provides additional insights on principles articulated in August 2019’s Business Roundtable Statement on the Purpose of a Corporation, which was signed by 181 influential CEOs of major US corporations.
The Business Roundtable’s 2019 Statement included a commitment that, “While each of our individual companies serves its own corporate purpose, we share a fundamental commitment to all of our stakeholders.” The Statement concluded, “Each of our stakeholders is essential. We commit to deliver value to all of them, for the future success of our companies, our communities and our country.”
This year’s Statement drew attention for its precedent-setting commitment to all stakeholders, and yet the report published by Diligent Institute reflects a fairly consistent perspective. This past summer’s research found that, contrary to popular perceptions, companies do not place shareholders’ needs significantly above those of their employees or society at large. Nor, it found, are corporate directors as shareholder centric as is commonly believed.
Rather, the study found, directors “pay considerable attention to important stakeholders – particularly their workforce – and take the interests of these groups into account as part of their long-term business planning.” These findings beg the question: Were shareholders ever priority number one?
Were Shareholder Ever a #1 Priority?
Study participants were asked about the importance of stakeholder interests relative to shareholder interests when it comes to boards and the long-term management of corporations. It may be unsurprising that only slightly more than half the surveyed directors (55%) rated shareholder interests as more important than stakeholder interests in this context. In fact, only 23% of the surveyed directors considered shareholder interests significantly more important than stakeholder interests.
Almost a full third of respondents reported that shareholder and stakeholder interests were equally important to them. Consider one participant’s response as captured in the report: “Broadly, my role as an independent board member [involves] strategic oversight and management accountability. In each of those cases, we have to take into account many impacted parties [not just shareholders].” For more than a few of you reading these words, these respondents could be representative of some or all your own board’s directors.
Who are these stakeholders to whom directors are paying attention? Diligent and the Rock Center for Corporate Governance asked directors which stakeholders play a key role in, or are impacted by, their company’s daily operations and long-term strategy. A full 87% of the directors identified employees. More than one director spoke to the relevance of employees’ interests in the context of shareholder returns. One respondent observed, “If you’re not responding to the needs, wants, and interests of employees, I guarantee customers will suffer. They’ll respond in way[s} that are negative to the business, and your investors will suffer. This is an ecosystem that is interrelated.” Another put it this way: “If you treat your employees terribly, have a lousy culture, and are not competitive in compensation, how are you ever going to achieve shareholder returns?”
What about other stakeholders? In descending order of the percentage of directors who identified them, these include community groups (cited by 51% of respondents), local government (38% of respondents), the public at large (38% of respondents) and “other” (24%). Trade unions were identified by 14% of the surveyed directors, as were non-government organizations (NGOs) and advocacy groups.
It’s worth noting that 60% of the surveyed directors said they believed their largest institutional shareholders really do care about the interests of such stakeholders. Only 23% had a contrary view, while 17% said that they didn’t know.
Shareholder & Stakeholder Interests
What about competing shareholder and stakeholder interests? When asked if their largest institutional shareholders believe that a conflict exists between their own interests and those of stakeholders, 52% of the directors said no. More than a quarter, 28% of respondents, said that they didn’t know. Twenty-one percent of the surveyed directors answered affirmatively. In other words, one in five said they believe that meeting the needs of these stakeholders comes at the cost of lower shareholder value.
One director cited in the report said that, while institutional shareholders’ pressure is valid, “…they are not as close to the business as the management team and the board. So, while their perspective is important, they shouldn’t drive a decision that otherwise wouldn’t be reached by management and the board.”
Another put it this way: “The board is not under obligation to do what [shareholders] ask, but they are under obligation to listen, and they have the obligation to communicate. This is more of a two-way street than ever before.” If you think that your shareholders or your colleagues who are not part of the executive team would be surprised by the results of this study, then perhaps it’s time for a conversation with your board chair as to whether the importance and scope of board communications might find its way onto a 2020 board agenda.