Avoiding a Punch in the Mouth
By David Shaw

Shifting some (or more) board focus to stakeholder interests sounds good in principle, but…

Throughout this year, Directors & Boards is devoting space in every issue to discuss and analyze “The Character of the Corporation.” We’re looking at the corporation’s (and board’s) roles and responsibilities to employees, the local and global community, and other stakeholders through a variety of lenses: ESG (environmental, social, and governance), human capital, the impact of technology on stakeholders, and the desire for longer-term thinking and planning in the face of quarterly reports and guidance, and outside pressures from short-term activists and governments.

This corporate character discussion is being driven by a variety of factors, including large institutional investors, social activists, and the changing demographics among the employee and customer bases of public companies. Politics, especially in the runup to 2020, will certainly rear its head even more than it already has.

Many of us — though certainly not all — would agree that public companies can do more to reflect the interests of stakeholders, and that ESG and human capital initiatives can create benefits to the long-term sustainability of the social and business ecosystems in which corporations operate and from which they profit.

But can these initiatives really take hold in corporate America? Will the few companies that are making commitments in these areas end up like the pioneer, lying face down with arrows in the back? Can boards really commit here, or will this end up being just a short-term exercise in public relations? As boxer Mike Tyson famously said, “Everybody has a plan until they get punched in the mouth.”

I think boards are at an inflection point, perhaps the most important inflection point they’ve faced in the history of corporate governance, since this one isn’t (currently) being driven by legislation or a financial crisis. And that inflection point revolves around many of these questions:

• What exactly is the corporation’s broader responsibility, if any?

• What exactly is ESG (or Corporate Social Responsibility)?  Does it emphasize the E, the S, the G, or all three?

• How should corporations report their ESG initiatives?

• How should management be compensated and incented on ESG performance?

• What are the human capital risks and opportunities of ESG? How do you make a stakeholder focus flow throughout the organization?

• What are the risks of shareholder disagreement (and then lawsuits) with a shift in focus away from short term financial performance?

• Will ESG need government intervention in order to be a successful initiative?

But who will take the first steps?  Will all companies follow along, or will some break away for short-term benefit? 

To help answer these and other questions, Directors & Boards will convene an event this fall in New York City. The event will be an intimate “congress” of about 140 public company board members, institutional shareholders, sustainability experts, academics and proxy advisers, as well as select thought leaders from the board consulting side, to deeply discuss ESG and human capital, with the goal of identifying and agreeing on the five to 10 most important things that must occur if stakeholder responsibility is to be a measurable component of board and company performance.

It’s our view that boards, and the corporate governance professionals who work with and around them, can determine what works best for them, without the need for political intervention. Boards can agree on what’s important, what’s measurable, and how compensation plans can reflect new priorities. Boards can determine the best way to communicate corporate character missions to shareholders. And boards can lead themselves and their companies through this inflection point, without the pain and expense of regulatory changes.

Or, at the very least, boards can shape the conversation, rather than merely react to it. It’s certainly better than waiting for a punch in the mouth.

If you’re interested in participating in the event, please contact me at dshaw@directorsandboards.com, and let’s talk.

 


Issue: 
2019 Second Quarter

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