Sustainable, inclusive long term value creation for “future-readiness”:
the paradigm for, notably, listed and other systemic business (including institutional investors) is changing with business stewardship focusing on balanced long term value creation for all stakeholders and aligned with a widely-accepted societal agenda. This is to a certain extent going back in time: business started as a way to address needs in society, not primarily (or even solely) its owners. It is the business response to become "future-proof" in terms of opportunities and challenges in an increasingly dynamic, even disruptive context caused by the digital revolution, globalization, climate change, societal mega trends (justice, inclusion, public goods’ orientation) and their consequences.
Business challenged: Information technology and stepped-up stakeholder engagement have resulted for business in “no place or time to hide”:
the constantly and rapidly changing societal context in which it operates, matters even more. Understanding and addressing this emerging context with its global, natural, social, resources’, security and innovation challenges in a much more transparent and intrusive environment is matter of business self-interest.
Opportunities if responsive: yet, “nothing is impossible, particularly if it is inevitable”, also offering business opportunities for early adaptation and leadership. No business (or investor) wants to be faced with (the perception of) infected or (having or being) stranded assets, failing systems, real costs/losses and/or future liabilities by not being sufficiently, early stage responsive to its emerging medium to long term environment on which “markets” anticipate today. It is the emerging business case to consider these dynamics in its strategy and to address in its operations; resilience, long term thinking, balanced informed decision-taking, stakeholder- inclusive actions and effective communication/ reporting to stakeholders are of the essence.
Do no harm and do good, or rather: doing better business (better): for its investment and operational actions , business must take an “outside-in” (=risk and opportunity) as well as an “inside-out”(=impact and benefit) approach. As its relevant orbit it must take an entire value chain approach (upstream and downstream) and engage with all relevant (direct and indirect) stakeholders, balancing their rights and interests on an informed basis, and, of course, be accountable for its choices. It must do its initial and ongoing risk- and impact- based (“do no harm”) due diligence in all its interventions; its mission is long term value creation for its shareholders as well as its other stakeholders, including the priority agenda of society-at-large (such as e.g. reflected in the “do-good” universal and global Sustainable Development Goals). It must also adhere to international standards if local law on major issues is non-existent or its enforcementfailing. The Statutes of listed or systemic business should reflect its intended alignment with societal interests and agenda. The multi-stakeholder materiality assessment process as part of the corporate reporting process is a very powerful instrument for this. In addition, we need to develop a new “due diligence” and disclosure discipline: internalising the social, and environmental externalities in product prices as well in an (integrated) P&L; both need to reflect the societal costs and benefits of business interventions (ref. www.trueprice.org). This information also needs to be considered in the merger & acquisition processes.
Self-interest and learnings
Its self-interest is to “sustainabilise” and stabilise its value chain as much as possible and practical in its dynamic, competitive business and societal context. it should compete on client –engagement, solutions, pricing, but not on important values and international standards. Interestingly enough, the learnings that “accidental pain in the value chain is often leading to systemic (sector) gain”. The 2014 Rana Plaza accident is an unfortunate, but not less important evidence of this in the global textile industry.
Basic guiding principles:
all these imperatives to build resilience and grasp the opportunities, applying principles such as “duty of care” (vis a vis stakeholders and society), “proportionality of responsibility” (association with adverse impacts: causing, contributing or only being linked) and “materiality” (of adverse impacts) are complicated and require strong values and professionalism. Business needs to translate its “purpose”, its “core values” and “mission” into active stewardship in its sphere of influence.
Stakeholder inclusion of the essence:
however, not surprisingly, in such transformative context, away from short-termism and with more stakeholder and societal inclusion, the emerging direction and pace of corporate strategies (including by investors) is often not sufficiently supported by traditional governance concepts and accountability standards. It is imperative that the company’s purpose, strategy and targets will be aligned so that management will not only have the ability and incentive, but also the statutory duty and legal protection to balance financial interests with non-financial ones. Shareholders may be in today legal world the owners of a company, but stakeholders clearly “own” the business: shareholders put their money, but so do other financing actors, employees with their talent, suppliers, customers and partners with their (long term) relationship, and society with its permits, licenses.
There is no “free law zone”:
good practice by some will become a benchmark for others, also in courts. Voluntary codes (such as the OECD MNE Guidelines, UN Guiding Principles for Business and Human rights), with governments’ encouragement to business to adopt the standards, are becoming “soft law”, and even mandatory such the UK Modern Slavery Act, France’s Law on Due Diligence.
Fiduciary duty revisited:
the pressure on institutional investors to sharpen their own “fiduciary duty” is increasing: pension funds and their beneficiaries will be directly affected in failed societies. Short term (micro-)rewarding investment may very well be contrary to the long term (macro-) interests of their current and/or future beneficiaries! Shareholders only looking at financial capital and for (short term) returns thereon, ignore the business and societal value of the other types of capitals, in particular natural-, social-, human- capitals. This mismatch between prevailing short–term investor focus by some and long term value creation focus by management needs to be addressed by both investees and investors by active engagement. Also, wouldn’t it be logical, even desirable if ordinary shareholders would only have voting rights if there is at least one-year holding of such shares? Short term investors would keep, of course, their full economic interest within such period of 1 year.
Actively connect with all stakeholders!
It is clear that corporations need to (re)connect with their key stakeholders, including shareholders, and proactively engage them in their strategy to ensure that they have the stakeholders they (feel they) deserve (and vice versa). Good Investor Relations and Public Affairs are business cases. Reporting is in these respect a key driver for stakeholder inclusion and public accountability: integrated reporting is our next frontier. As mentioned before, the “Materiality Assessment Matrix” is an excellent platform to at least annually, map interests of the business against stakeholders’ and society interests, and publish this.
Making Markets fit for Purpose:
there many laws, regulations and policies which are incompatible with the new “better business agenda” as described before. Also new drivers may be developed to support this agenda. This does not always have to come from governments. Increasingly, advanced ideas by few end up become law. The Global Reporting Initiative was such an advanced, yet complex idea in a niche of the market only 15 years ago and has now become law in the EU. Good practitioners can support governments and supervisory authorities in shaping markets’ regulatory environment fit for purpose for sustainable, long term value creation, removing obstacles, providing incentives, create a level playing field. In “the Theory and Practice of Positive Change”, early voluntary initiatives by a few often become at a later stage more widely embraced by business and encouraged by governments, and eventually become mandatory as national and, even more importantly, international standards.
1. The stakeholder-model, balancing interests of all relevant interest-holders, is the only way for long term value creation for all stakeholders, including shareholders, to be resilient and to be “future-proof”; theannual multi-stakeholder, company-specific Materiality Assessments should become an essential part of the governance ecosystem and processes, and become target-setting.
2. A listed or systemic relevant company should include in its Statutes as its purpose also its societal mission and responsibility;
3. A listed or systemic relevant company should adopt the OECD Guidelines for Multinational Enterprises and the UN Guiding Principles for Business and Human Rights and embrace the Sustainable Development Goals (SDGs) as integral part of its strategy.
4. A listed or systemic relevant company should adopt the integrated reporting framework as reporting basis;
5. It makes sense that only shareholders holding their interest for more than one year, to have voting rights and more (loyalty) dividend;
6. Institutional Investors should sharpen their fiduciary duty and stewardship role; and in their investment policies consider the long term interests of their beneficiaries, which includes a broadly accepted societal agenda as reflected by the e.g. the SDGs. (which includes, but is not limited, to climate change).
7. Sharpening the business “duty of care” means a strengthening of the risk-based, impact sensitive, stakeholder-inclusive, initial and on-going due diligence process, also explicitly considering societal costs and benefits: internalising the externalities.
Source: newsletter Nyenrode Corporate Governance Institute, September 2017.