Turning Stakeholder Value into Lasting Shareholder Returns
We, as a global society, find ourselves in a precarious predicament. Wealth inequality is increasing, ideological divisions are deepening, and many health outcomes are worsening. Further, our atmosphere is warming, wilderness areas are shrinking, and entire species of plants and animals are disappearing at rates not seen since our planet's last mass extinction event, 66 million years ago.
The causes of our current malaise are undoubtedly multiple and complex, but it’s clear that the excesses of consumer capitalism share in the culpability.
Recognising their role in this dynamic, many business leaders now profess their aspirations to create value for ‘all stakeholders’, not just their shareholders. In 2019, the Business Roundtable, an association of nearly 200 CEOs from America’s largest corporations, overturned a 22-year-old policy statement that defined a corporation’s principal purpose as maximizing shareholder returns. In its place, a new statement declares that ‘companies should serve not only their shareholders, but also deliver value to their customers, invest in employees, deal fairly with suppliers and support the communities in which they operate.’
This shift to stakeholder, not just shareholder, responsibility is more than a moral issue for the business sector. In a kind of karmic paradox, creating value for all stakeholders is now considered an essential driver of shareholder returns. As BlackRock, the world’s largest asset manager, pronounced in their 2020 CEO letter, ‘a company cannot achieve long-term profits without embracing purpose and considering the needs of a broad range of stakeholders’. BlackRock also assert that ‘each company’s prospects for growth are inextricable from its ability to operate sustainably and serve its full set of stakeholders.’
These historically uncharacteristic statements come with the support of a growing body of evidence. A 2015 meta-study of more than 2,000 independent research efforts by DWS and the University of Hamburg reported that 63% of the studies found a positive correlation between ESG investing (investing in businesses with a focus on Environmental, Social and Corporate Governance) and returns, while only 8% showed a negative effect. Further, a STOXX index of global ESG leaders outperformed the STOXX Global 1800 Index by 37% over a 16 year period from 2003 to 2018. Even amidst our current pandemic-induced downturn, ESG funds on the MSCI and FTSE indexes are proving to be more resilient to shocks, outperforming their all-country counterparts by 2% and 5% respectively over the first 10 months of 2020.
It goes without saying that different factors will be behind the success of each of the individual businesses in these studies. What is becoming clear, however, is that businesses who are able to demonstrate their value to a broad range of stakeholders are increasingly outperforming their competitors on essential underlying drivers of performance.
Specifically, they’re better able to:
Attract investment - from the growing pool of investors who consider Environmental, Social and Corporate Governance factors in their investment decisions.
Attract talent - particularly among younger, socially aware cohorts (who tend to be more educated).
Attract customers - by appealing to socially aware consumer groups (who tend to be more affluent).
Mitigate brand risks - by reducing the likelihood of major governance failures.
Mitigate regulatory risks - by demonstrating their positive contributions to society.
Mitigate employee disengagement - by inspiring a sense of purpose and contribution at work.
Despite these myriad benefits, most businesses fail to implement an effective stakeholder value strategy. If the business leaders are not onboard, the results tend to be either hollow investor relations statements or superficial marketing campaigns. Even with leadership buy-in, stakeholder value risks being treated as a laborious, somewhat impractical, exercise in measurement and disclosure for an annual report (a 2020 World Economic Forum white paper on ‘Measuring Stakeholder Capitalism’ recommends a total of 55 common metrics, for example).
Rather than superficial rhetoric or an arduous disclosure obligation, stakeholder value needs to be treated as a core business strategy for driving growth that lasts. And, just like any other core strategy, it should be:
Driven by business leadership.
Underpinned by the company purpose.
Focused on strategically important, and objectively measurable, metrics for key stakeholder groups.
Simple for all stakeholders to understand and communicate.
At Roundsmith®, we’ve developed a strategic planning framework to help business leaders effectively turn stakeholder value into lasting shareholder returns. We call it the Round Value Map™. Not only does it help to drive growth that lasts, it enables businesses to demonstrate their contributions to a more resilient, prosperous, and sustainable society. Contributions that can play a vital role in restoring balance to our precarious predicament, and creating a brighter future for all stakeholders.