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How boards can make the most of stakeholder governance



No matter what business they’re in, many companies are weighing how to confront generative artificial intelligence. What should they do with ChatGPT and its fellow A.I. bots? 

For Paul Washington, this choice highlights the challenges faced by organizations and their boards in an age of stakeholder capitalism, also known as stakeholder governance and stakeholder engagement. 

“You could replace a lot of employees with [A.I.] and perhaps increase profits for your shareholders,” says the executive director of the ESG Center at the Conference Board, a nonprofit business think tank. “But that’s not what you actually want to do because that’s not the socially responsible thing to do. So I think this is a different era.”

Whatever you call it, taking into account employees, customers, regulators, environmental groups, and other stakeholders who aren’t shareholders has assumed greater urgency. For companies and directors, there’s a strategic and financial imperative to do so as they grapple with environmental, social, and governance (ESG) risks. Many investors support this emphasis on stakeholders, which should become part of the business, experts say.

How much has changed, and where does it leave boards?

“Most large enterprises have regarded stakeholder issues as important for many years now,” says Greg Rice, a partner and director with Boston Consulting Group, where he co-leads its shareholder advisory and activism effort. “It’s come to the fore in terms of the media as it applies specifically to things like either employee safety or climate change. But I think companies have been trying to balance the interests of stakeholders for a long time.”

Christine DiBartolo is senior managing director and head of Americas corporate reputation with FTI Consulting. “The interesting thing now is that it’s no longer just investors that boards [and management] need to worry about,” says DiBartolo, who helps clients of the global firm engage stakeholders. “There is a real understanding that there is power in each of these groups.”

The Conference Board recently published several reports on the board’s roles in the era of ESG and stakeholder capitalism. “Well-run companies have always considered their employees and their customers and their communities,” Washington says. “But I think there’s now an increasing focus on serving their long-term welfare.”

Another difference, according to Washington: “There is a recognition that this is not all ‘Kumbaya,’ but that there are tradeoffs to be made among certain of those stakeholders. Sure, in the long run, when we are all dead, serving your stakeholders will serve your stockholders. But in the near and medium term, at any time we are alive, there are tradeoffs.”

Washington offers some historical context by pointing out that from the 1930s until deep into the 1970s, stakeholder capitalism was the dominant model in the U.S.  “Stockholder primacy stepped in in the late ’70s, ’80s, and now we’re back again, a little bit, to where we were.”

Noting that stakeholder capitalism sometimes gets conflated with ESG, he also explains how they differ. “Environmental and social responsibility are the ‘what’ that you can focus on, and then stakeholders are the ‘whom’ that you’re serving,” Washington says. “As you’re considering a broader set of issues, you’ll have a broader set of stakeholders.”

If the Conference Board’s research is any sign, boards’ consideration of stakeholder capitalism lags their attention to ESG issues. For example, in a 2022 survey of 80 general counsel and corporate secretaries, 80% percent said the increased focus on ESG had made a strong or moderate impact on their board over the past two years, versus 58% for weighing the interests of multiple stakeholders.

“That actually undercuts the notion that boards have always been doing this,” Washington says.

Likewise, 68% of respondents said ESG would have a significant and durable impact on the board over the next five years, compared to 53% for stakeholder capitalism.

Rice sees potential for a win-win. “I think there’s a natural tension, but many of the things that are good for a broader set of stakeholders ultimately accrue to the benefit of shareholders in the long run,” he says. “The question is, over what time frame, and how do you measure that? But companies that act as good corporate citizens ultimately enhance their right to operate in their industry, and that’s ultimately good for the shareholder.”

Mindy Lubber, CEO and president of nonprofit Ceres, has noticed a similar alignment. “We have found limited examples of where what investors want isn’t what consumers and employees want as well,” says Lubber, whose organization works with capital markets leaders to solve sustainability challenges. “Because it is about risk and mitigating risk.”

Lubber points to Climate Action 100+, a group of 700 global investors managing a combined $68 trillion in assets. “Those investors have come together to work with the companies in their portfolios to urge them to address climate risk.”

The financial risk is very real for, say, an agricultural firm that stands to suffer huge losses because of changes in weather patterns, Lubber notes. “For whatever number of reasons, companies are factoring in climate because their consumers care, because their employees and because their shareholders care, because there’s a very clear bottom line.”

Although profit and loss remain important, a business must consider a broader range of metrics and issues that relate to its strength as well as risks and opportunities, Lubber stresses. “Almost all publicly traded companies are recognizing that their success in building their enterprise requires looking beyond quarterly earnings, taking a slightly longer-term view, understanding what it means if there’s a news story that says they’re using child labor in Singapore,” she says. “And this is not only about climate. It’s about reputational harm; it’s about real costs.”

Investors must be on board, Rice asserts. “Doing the math on a capital investment today that’s going to have a traditional return profile is very different than doing the math on something with a 30-year time horizon,” he says. “So you’ve got to find a way to get shareholders to underwrite those long-term investments as well that are less obvious.”

In late 2021, FTI Consulting did a survey of employees and institutional investors, DiBartolo recalls. “COVID really accelerated change among the relationships between corporations and their employees, their communities,” she says. “We wanted to understand in particular how investors might differ from employees on what they expect.”

The results showed plenty of common ground. “What we found is that there are certainly competing interests, but there are also a lot of similarities,” DiBartolo says, citing views on leadership and mental health and wellness. “Investors were just as much interested in CEOs talking about these issues as employees.”

FTI asked both groups what kind of information they expect from a company, DiBartolo relates. “Purpose, mission, values was the highest-ranking, in particular among professionals, but it was the highest-ranking among investors as well.”

DiBartolo encourages boards and management to follow through. “As our clients are managing multiple stakeholders’ interests, our guiding counsel to them all the time is to make sure that you’ve got a North Star on how you react to all of them,” she says. “What is your corporate purpose, what [are] your core values, and how do you build your strategy and operate your company around those?”

Boards should assess their relationship with each stakeholder group, Washington suggests. “Are you trying to understand their expectations? Are you trying to have good relationships with them? Are you trying to serve their welfare?” he asks. “That refined level of thinking is not necessarily what people have been doing.”

In its survey, the Conference Board found that most boards get too little or just the right amount of information on ESG and stakeholder expectations. “No one says that they’ve got too much,” Washington observes.

For the most part, respondents also said the information is of acceptable quality. “One area where there’s still work to be done is more deeply integrating reporting on environmental, social, and sustainability issues, stakeholder perspectives into core business reports,” Washington says. “Ideally…those are incorporated into the company’s business strategy, into its capital allocation decisions, into its compensation decisions and so forth.”

Rice wonders if, generally speaking, directors of public companies suffer from information overload—and if they have the resources they need. “You receive your board book a week in advance of a board meeting,” he says. “It’s three inches thick; a lot of it is technical financial issues. It’s prepared by the management team.”

The solution? “The modern board should have the ability, as a matter of routine, to draw on external advisors to help them cut through and do the kind of analysis where they’re more on parity with the management team,” Rice says. That outside analysis will help them “get as broad of a view possible on stakeholder issues, and financial and strategic issues,” he adds.

The Conference Board also recommends creating a framework for making business decisions that incorporates multiple stakeholders and considers the organization’s key ESG issues. To do that, it suggests starting with mergers and acquisitions (M&A).

“It’s relatively easy to do,” Washington says. “The challenge is that the people who are often running M&A have not been traditionally trained to consider this broader set of stakeholders. And M&A is often quite a closely held process at a company, and so people can be hesitant to reach out to the other parts of the company to assess things like impact on employees, impact on communities.”

When enhancing board composition to address ESG and multiple stakeholders, directors should put general strategic business experience and industry knowledge ahead of specialized expertise, the Conference Board counsels.

Not that there’s anything wrong with the latter, Washington says. “But there’s a real risk, if you have a director who’s regarded as the go-to expert, that the other directors perhaps defer too much to that one director.” Management might do the same. “So it can have a distorting effect on the gravitational field of the board and senior management decision-making.”

Lubber urges a united front. “People say, ‘Well, shouldn’t every board have a sustainability expert as a board member?’ I mean, yes, that would be good, but you don’t want to pigeonhole,” she maintains. “This has to be owned by the whole board.”

Boards and their organizations should also be careful about making promises to stakeholders, says DiBartolo, sharing a cautionary tale. A few years ago, bowing to pressure, many companies pledged to achieve net-zero emissions by a certain date. “They now may have to back down from that because they’re not able to do it, for a variety of reasons,” she says.

“For boards and executives, it’s really important to stay focused on the strategy and to make sure that you are realistic in what you can and can’t do, so that you are engaging with stakeholders but not overpromising,” DiBartolo adds. “Because overpromising creates a very different business risk and reputational risk that’s hard to recover from.”

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