The report says "[a] board’s primary responsibilities are to provide oversight, insight and foresight. Being well-informed is foundational to a board's ability to effectively execute those primary responsibilities. For this reason, boards have an obligation to seek a clearer understanding of stakeholder capitalism and its underlying rationales. Through this understanding, boards may see opportunities for their companies to deliver improved value over the long term by considering and addressing key stakeholder needs and demands."
A board that makes informed decisions helps mitigate the risk of making decisions that may adversely impact the company's operations or long-term strategy.
The report adds: "To facilitate more informed and 'patient' investment, many investors are asking companies to report on how they identify and measure both their intangible assets and the environmental, social and governance (ESG or sustainability) initiatives that are influencing long-term corporate value. They and other stakeholders are also seeking disclosure about whether and how those measurements are used to inform and improve strategic planning, risk management, executive compensation, sustainable operations, growth and, ultimately, long-term corporate value."
I concur that "[t]o more fully respond to these points of view, boards should consider how their company's value is reflected in intangible assets such as culture, human capital, innovation, corporate governance and ESG initiatives."
Moreover, "Boards can encourage their companies to develop better ways to identify, measure and communicate corporate value, including through narrative disclosures and nonfinancial metrics, and consider how a longer-term focus can lead to investment and innovation that promotes growth and value creation.
"This article highlights five market-driven and regulatory initiatives on long-term value that illustrate the shift to the longer-term, broader perspective of value suggested in stakeholder capitalism. Boards may consider how any of these initiatives might be useful for their companies to apply in ways that could clarify and support value creation."
1. Companies, investors and other market participants — moving toward a longer-term perspective
"FCLTGlobal, a private organization whose membership includes companies, asset managers, investors, financial advisors and service providers, was formed in 2013 with a goal of addressing how market participants weigh immediate financial pressures against long-term objectives. Believing that the balance was skewed toward investors and companies hitting near-term targets at the expense of long-term value creation, FCLTGlobal encourages a longer-term focus in business and investment decision-making and has developed practical tools to facilitate this focus, including:
- "Objectives, questions and checklists for boards to use in assessing whether they have effective composition and are giving the appropriate focus, time and support to help their companies maximize long-term value
- "Guidelines for investors, asset managers and companies on managing multi-horizon risks, including through communications on strategy, risk and performance and on strategic engagement that can enhance mutual understanding and support long-term value
- "Guidelines for CEOs in developing a long-term road map designed to attract long-term investors, deter activist attacks, more accurately reflect company valuation, provide strategic clarity and address stakeholder concerns"
2. Embankment Project for Inclusive Capital (EPIC)
"EPIC was formed by the Coalition for Inclusive Capitalism and EY, with the view that 'the health of corporations and financial markets — and public trust in both — is critical to economic growth' and 'market participants have a role to ensure long-term value creation that benefits all.' Guided by these views, EPIC brought together more than 30 global capital market leaders representing institutional investors, asset managers and companies to work on developing a standardized, material and comparable set of nonfinancial metrics for the measurement of company activities related to long-term value."
The report explains: "In a report issued in November 2018, EPIC identified four key value drivers of long-term sustainable growth and value":
Talent: Employees have a significant impact on a company's ability to create long-term value by implementing company strategy and developing new ideas for success and growth. EPIC identified three areas where a company’s actions on the talent front could influence its long-term prospects and proposed metrics and narrative disclosures for each:
- Human capital deployment, management, engagement and turnover
- Organizational culture and related employee views and data
- Employee health programs, participation and impact on productivity
Innovation and consumer trends: Companies must measure their interaction with and impact on consumers and other stakeholders to assess whether innovation is meeting evolving demands. EPIC identified three related factors for enhanced narrative disclosures and metric development:
- Innovation, with a narrative addressing overall innovation strategy and metrics demonstrating performance against strategy
- Consumer trust scores
- Consumer health impacts
Society and the environment: To be successful in the long term, companies need to understand how they create the social value that provides competitive advantages in attracting talent and customers and that strengthens their "license to operate." EPIC explored how companies can use the United Nations' Sustainable Development Goals (SDGs) by linking them to strategy and explaining how their contribution to SDGs creates long-term value for the company.
Corporate governance: While companies already provide a great deal of disclosure about their boards and governance practices, current disclosures may not clearly demonstrate the quality of the board's composition and governance frameworks and how those assets impact long-term value. EPIC suggests narrative disclosures for companies to consider in better making this demonstration, including:
- Whether the board has conducted a robust evaluation of its composition, dynamics and effectiveness
- Whether the board maintains a decision-useful skills matrix to guide its composition determinations
- Whether the company discloses (without risking competitive harm) strategic milestones achieved or to be achieved in execution of long-term strategy
3. Sustainability Accounting Standards Board (SASB)
"SASB, a private nonprofit organization, works with other prominent private organizations seeking to advance voluntary corporate reporting and disclosure on sustainability issues, including, among others, the Global Reporting Initiative, the International Integrated Reporting Committee and the Task Force on Climate-Related Financial Disclosures.
"In November 2018, SASB published a set of detailed, industry-specific standards intended to enable companies to manage, measure and report on sustainability factors that drive value and affect financial performance. In developing its standards, SASB identified 26 broadly relevant sustainability issues and organized them into five groups":
- Environment — addresses environmental impacts, either through the use of nonrenewable, natural resources as inputs to the factors of production or through harmful releases into the environment that may result in impacts to the company's financial condition or operating performance
- Social capital — addresses the company's management of relationships with key outside parties, such as customers, local communities, the public and the government on issues related to human rights, local economic development, responsible business practices, customer privacy and other matters
- Human capital — addresses the company's management of human resources as key assets to delivering long-term value on issues that affect employee productivity, labor relations, and the health and safety of employees
- Business model and innovation — addresses the integration of environmental, human and social issues into the company's value-creation process, including resource recovery, product innovation, and efficiency and responsibility in the design, use phase and disposal of products
- Leadership and governance — addresses the company's management of issues that can create conflict between the business and stakeholders, and relating to regulatory compliance, risk management, safety management, supply-chain and materials sourcing, conflicts of interest, anticompetitive behavior, and corruption and bribery
4. Securities and Exchange Commission
"Regulators are considering the development of new approaches to measuring and reporting value," says the report. "Through its 'Disclosure Effectiveness' and other initiatives, the U.S. Securities and Exchange Commission and its staff (SEC) is reviewing its disclosure requirements and considering and implementing ways to improve those requirements for the benefit of both companies and investors. Additionally, and in light of the SEC's initiatives, the U.S. Government Accountability Office has been asked to prepare a report on public company disclosures and SEC disclosure requirements relating to ESG matters."
5. International Organization of Securities Commissions (IOSCO)
"In January 2019, IOSCO, an association of national securities regulators whose membership regulates more than 95% of the world's securities markets, published a statement setting out the importance of corporate consideration of ESG matters when disclosing information material to investors' decisions.The SEC did not vote on the publication of IOSCO's statement and therefore the statement should not be viewed as an expression of the SEC's views or as an endorsement by the SEC. IOSCO noted that ESG disclosures are increasing, particularly in some industries, and include 'environmental factors related to sustainability and climate change, social factors including labor practices and diversity, and general governance-related factors that have a material impact on [a company's] business.'"
I support the report's conclusion that "Boards can guide companies by examining how an expanded view of corporate value over the long term can more accurately define and clarify corporate value in ways that give investors, other stakeholders and the financial markets a clearer view of corporate value, long-term sustainability and the company's related strategy."
What is more, "By redefining value using the broader and longer-term lens of stakeholder capitalism and linking key nonfinancial metrics of value to strategy execution, companies can better communicate how they are working to achieve long-term value creation and sustainability for themselves, their stakeholders, and society and economies generally. This will help ensure the wider stakeholder perspective is considered, deliver transparency that should increase trust in the business and capital markets, and support more long-term decision-making and investment."
The report concludes by presenting the following questions for the board to consider:
- 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?
- Do the company's communications adequately address the value of certain intangible assets, such as culture, human capital, innovation and corporate governance?
- Can the company quantify the benefits of its ESG or sustainability initiatives to determine their effectiveness and whether to adjust or expand them? Does the company communicate the effectiveness and value of these initiatives in ways that gain stakeholder support?
- 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?