America is experiencing record growth which has provided abundant jobs, wage growth and wealth generation for a majority of Americans. Yet income inequality and wealth disparity are alarmingly high, bringing into focus the challenge of attaining fair, equitable and sustainable growth as well as placing focus on the fundamental purpose of a corporation and the primary role of the board. The liberal left, notably Elizabeth Warren, a U.S. senator running for the Democratic presidential nomination, are contending that our corporate governance system has lost sight of its purpose, namely sharing gains from corporate profits with the workers who create them and the communities which enable them. They are advocating for a sweeping overhaul of American capitalism.
Last fall, Directors & Boards convened a forum of corporate governance thought leaders to debate whether corporations can and should attempt to balance corporate profit and social purpose by embracing environmental, social and governance principles (ESG). Echoing through corporate boardrooms is a new model of capitalism based on the overarching themes of purpose, inclusion and sustainability which encompass the interests and needs of a broad array of stakeholders.
By renouncing the decades-old doctrine of shareholder primacy, the Business Roundtable (BRT) seems to have embraced a new standard for corporate leadership. Portrayed as one part affirmation, one part aspiration, this standard takes into account the interests of all corporate stakeholders. BRT’s “purpose” proclamation may represent a significant shift in corporate chieftains’ attitude toward their responsibility to society on many hot-button topics like economic inequality, social justice and climate change.
However, many of our forum participants were not buying into this shift in priorities. By allowing the corporation’s primary purpose to slip away from its shareholder-value moorings, they fear that the loudest and most passionate activists would set the agenda for the allocation of corporate assets. Not surprisingly, for many of the business leaders who attended our forum, a Warren presidency is a terrifying prospect.
As our forum speakers and panelists underscored, balancing profit and purpose is tricky. They noted that ESG criteria have increasingly come to play a greater role in decisions regarding the allocation of corporate resources, with CEOs asserting that their ESG initiatives would enhance bottom-line performance, perhaps not in the short term, but sometime down the road. Although undertaking ESG initiatives may ultimately enhance long-term profits and improve long-term competitive positions, our forum participants pointed out that the present value to current shareholders is uncertain and difficult to measure. Moreover, they questioned the board’s ability to align the goals of varying stakeholders.
Some of the takeaways from the “Character of the Corporation” forum include:
1. Continue making money responsibly, but understand that profits, though always a necessary purpose, may not constitute the highest purpose at a given period of time.
2. Take on the accountability for defining and aligning the purpose of the company with its long term financial goals.
3. Determine what stakeholders, in particular the largest investors, want and require from the company.
4. Recognize that ESG is increasingly going mainstream as large institutional investors develop and expand their sustainable/socially responsible portfolios, which increasingly represent permanent capital investments.
5. Embrace ESG attitudes, principles and policies that can enhance long-term competitive positioning and profitability.
6. Rein in top management compensation, in particular CEO pay, which is exacerbating both the perception and reality of income inequality.
7. Share more corporate gains with employees in terms of compensation, benefits and training.
8. Identify company-specific ESG objectives, measures and standards, and tie ESG outcomes to annual and long-term compensation throughout the corporation, most particularly for the CEO.
9. Place ESG initiatives on each and every board agenda using a dashboard that monitors progress towards attainment of specific outcomes.
10. Empower the audit committee to handle the risk issues surrounding ESG issues, and the compensation/management development committee the handle the HR issues.
In 2020, Directors & Boards will continue to address the intensifying drumbeat for boards of directors to go beyond profits and develop a sense of purpose that focuses on social good both within and outside the company. We will examine how far directors should and can go in serving a broad array of stakeholders, and we will look at ways to measure and reward ESG initiatives.