‘There’s a mismatch between the story we tell about business and what we know it takes to run a kick-ass business. There’s even a mismatch between the story we sometimes teach in business schools and what we know it takes to run a kick-ass business. And sometimes there’s a mismatch between the stories executives and managers tell about their businesses and what they really know in their hearts it takes to a run a successful business,’ said R Edward Freeman at a TEDx talk in 2013.
Freeman is the architect of the stakeholder theory, the notion that in order for a business to be successful it has to create value for its customers, suppliers, employees, communities and financiers (banks and shareholders). He first published this theory in 1984 and has been teaching it at such universities as the Wharton School and the University of Virginia, as well as consulting companies on business ethics; he quips that some people consider ‘business ethics’ to be an oxymoron, like ‘jumbo shrimp’.
In the summer of 2019, 25 years after the publication of Freeman’s theory, the Business Roundtable released its headline-grabbing statement (see Statement on the purpose of a corporation, below), which put stakeholder theory at the forefront of economic discourse. The statement finishes with the phrase: ‘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.’ That 181 CEOs from some of the largest companies and asset managers in the world co-signed the statement would have been inconceivable in 1984. The World Economic Forum (WEF) also captured the zeitgeist when it released a new manifesto – its first since 1973 – and put stakeholder value at the heart of it (see The Davos Manifesto 2020, below).
If Freeman is right and the story we’ve been telling about how to run a successful business for the last 25 years is incorrect, it poses an interesting challenge for IR professionals. As custodians of a company’s equity story, how can they balance the interests of their investors and analysts while also introducing non-material topics, such as the effect of a company on the community at large, into investor-facing communications? And do investors really care about stakeholder value, beyond the material ESG issues that many companies are now striving to report on?
Not a zero-sum game
Ian Roe, who has held corporate responsibility roles at Barclays Bank, KPMG, Lloyds and Linklaters, says investors are increasingly seeing overlap between the value a company provides to its broader stakeholders and its financial materiality.
‘What has changed is a broader consideration of which issues are material from a stakeholder perspective that are also financially material,’ says Roe, who now serves as director of strategy at MerchantCantos in London. ‘There is a growing realization that shareholder and stakeholder value isn’t a zero-sum game. One doesn’t need to trade off a reduction in shareholder value to achieve stakeholder value, or vice versa. Quite the contrary: strong ESG tends to correlate with stronger, less volatile shareholder value creation, provided the company is focusing on genuinely material issues.’
This begs the question of what’s changed in society for the stakeholder theory to gather such momentum. ‘Activism among citizens has made a big difference,’ says Rosina Watson, senior lecturer in sustainable business at the UK’s Cranfield School of Management and former head of corporate sustainability at Home Retail Group. ‘That has changed significantly in the last 18 months, with citizens realizing that little actions can lead to big changes.’ She cites Veganuary – a UK non-profit that encouraged 400,000 people to go vegan in January 2020 – as a recent example of citizens taking action on a societal issue. ‘Other pressures come from legislation, government, public sector stakeholders and investors,’ she adds.
Alex Edmans is professor of finance at London Business School and academic director of the Center for Corporate Governance. In a recent article he writes about the global financial crisis as an instigator of a shift toward stakeholder value: ‘The 2007 financial crisis cost 9 mn Americans their jobs and 10 mn their homes. The economy has recovered since then, but the gains have largely gone to bosses and shareholders, while ordinary incomes have stagnated.’
Reporting on stakeholder value
Tim Mohin, chief executive of the Global Reporting Initiative (GRI), attended the WEF in Davos this year and participated in several panels about how issuers can report on investor-centric data. There’s clearly a degree of overlap between this topic and ESG reporting, and Mohin says that IR teams in particular need to advocate for creating disclosures that are useful and easy to read for investors.
‘Sustainability reports that are 100 pages long are poor communication vehicles and often get criticized as more greenwashing than actual disclosure. You see information that’s 18 months old in some large reports,’ Mohin says. ‘For me, there are four Cs of effective reporting: concise, consistent, comparable and contemporary. All four are really important.’
Watson agrees that large sustainability reports don’t serve any of the stakeholder groups they intend to. ‘I still think there is too much of a disconnect between what the sustainability people are trying to achieve and how they can add value to the IR team,’ she says.
One example of a subject that is important to several stakeholder groups but should not be included in investor communications is corporate philanthropy. ‘It’s a noble aim and supports things like employee engagement that can tangibly impact productivity, but for most businesses corporate philanthropy will not be a highly material metric,’ Roe says.
He suggests issuers think about reporting almost like a Venn diagram, looking for the issues that are important to a broader set of stakeholders and that will also be meaningful to investors. Taking corporate philanthropy as an example, while reporting on it in investor-facing communications may not be necessary, the benefits of making the information available to employees can be reflected in employee engagement statistics, which are material to investors.
Getting the balance right on this reporting can have a significant positive impact from an IR perspective. The number of ESG-oriented indexes continues to increase, with indexes like Bloomberg’s Gender-Equality Index establishing itself alongside long-standing products like the FTSE4Good Index and MSCI’s ESG Index.
In addition, FCLTGlobal, a non-profit that encourages issuers and investors to take a long-term-focused approach to business, draws links between stakeholder value, long-termism and shareholder wealth creation. In a recent article about the WEF’s manifesto, Sarah Williamson, FCLTGlobal’s CEO, pointed to the Beyond Meat IPO as an example of this: ‘It raised nearly $250 mn to grow its line of plant-based meat products and was the best-performing IPO of companies that have each raised at least $200 mn since 2000.... Beyond Meat soared 163 percent from its original offering price on its first day of trading.’
Growing the pie
While the notion of stakeholder value was first introduced by Freeman, Edmans proposes a new interpretation of it in his forthcoming book Grow the pie. He contends that non-investor stakeholders can grow angry when they see how much shareholders and company management make from a business, compared with the value delivered to other stakeholders. Visualizing that on a pie chart, Edmans says there can be anger about how businesses get away with the largest slice of the pie.
But instead of thinking about how to redistribute the size of the slice, Edmans proposes that companies can increase the size of the pie, by setting out to please all stakeholders. ‘By investing in stakeholders, a company doesn’t reduce investors’ slice of the pie, as assumed by some CEOs – it grows the pie, ultimately benefitting investors,’ he explains.
‘In the pie-growing mentality, a company’s primary goal is to serve society rather than generate profits. Surprisingly, this approach typically ends up more profitable than if profits were the end-goal.’
The Business Roundtable’s Statement on the Purpose of a Corporation
Americans deserve an economy that allows each person to succeed through hard work and creativity and to lead a life of meaning and dignity. We believe the free-market system is the best means of generating good jobs, a strong and sustainable economy, innovation, a healthy environment and economic opportunity for all.
Businesses play a vital role in the economy by creating jobs, fostering innovation and providing essential goods and services. Businesses make and sell consumer products, manufacture equipment and vehicles, support the national defense, grow and produce food, provide healthcare, generate and deliver energy and offer financial, communications and other services that underpin economic growth.
While each of our individual companies serves its own corporate purpose, we share a fundamental commitment to all of our stakeholders.
We commit to:
– Delivering value to our customers. We will further the tradition of American companies leading the way in meeting or exceeding customer expectations
– Investing in our employees. This starts with compensating them fairly and providing important benefits. It also includes supporting them through training and education that help develop new skills for a rapidly changing world. We foster diversity and inclusion, dignity and respect
– Dealing fairly and ethically with our suppliers. We are dedicated to serving as good partners to the other companies, large and small, that help us meet our missions
– Supporting the communities in which we work. We respect the people in our communities and protect the environment by embracing sustainable practices across our businesses.
– Generating long-term value for shareholders, which provide the capital that allows companies to invest, grow and innovate.
We are committed to transparency and effective engagement with shareholders. 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.
Released in August 2019 by the Business Roundtable and signed by 181 CEOs
The Davos Manifesto 2020
The universal purpose of a company in the fourth industrial revolution
The purpose of a company is to engage all its stakeholders in shared and sustained value creation. In creating such value, a company serves not only its shareholders, but all its stakeholders – employees, customers, suppliers, local communities and society at large. The best way to understand and harmonize the divergent interests of all stakeholders is through a shared commitment to policies and decisions that strengthen the long-term prosperity of a company.
- A company serves its customers by providing a value proposition that best meets their needs. It accepts and supports fair competition and a level playing field. It has zero tolerance for corruption. It keeps the digital ecosystem in which it operates reliable and trustworthy. It makes customers fully aware of the functionality of its products and services, including adverse implications or negative externalities.
- A company treats its people with dignity and respect. It honors diversity and strives for continuous improvements in working conditions and employee well-being. In a world of rapid change, a company fosters continued employability through ongoing upskilling and reskilling.
- A company considers its suppliers as true partners in value creation. It provides a fair chance to new market entrants. It integrates respect for human rights into the entire supply chain.
- A company serves society at large through its activities, supports the communities in which it works and pays its fair share of taxes. It ensures the safe, ethical and efficient use of data. It acts as a steward of the environmental and material universe for future generations. It consciously protects our biosphere and champions a circular, shared and regenerative economy. It continuously expands the frontiers of knowledge, innovation and technology to improve people’s well-being.
- A company provides its shareholders with a return on investment that takes into account the incurred entrepreneurial risks and the need for continuous innovation and sustained investments. It responsibly manages near-term, medium-term and long-term value creation in pursuit of sustainable shareholder returns that do not sacrifice the future for the present.
A company is more than an economic unit generating wealth. It fulfils human and societal aspirations as part of the broader social system. Performance must be measured not only on the return to shareholders, but also on how it achieves its environmental, social and good governance objectives. Executive remuneration should reflect stakeholder responsibility.
A company that has a multinational scope of activities not only serves all those stakeholders who are directly engaged, but acts itself as a stakeholder – together with governments and civil society – of our global future. Corporate global citizenship requires a company to harness its core competencies, its entrepreneurship, skills and relevant resources in collaborative efforts with other companies and stakeholders to improve the state of the world.
Released in December 2019 by Klaus Schwab, founder and executive chairman of the World Economic Forum
This article was originally published in the Spring issue of IR Magazine. This article was updated on April 7 to reflect that there are 181 signatories to the Business Roundtable's Statement on Corporate Purpose, not 131 signatories.