The role of governance in developing stakeholder capitalism
Better business has been a key theme throughout Davos 2020. This, of course, refers to the role of companies in shaping their industries and being at the forefront of technological and social change. However, it also looks at the role of corporate governance in creating stakeholder capitalism.
Now before I go on, let me answer your first question.
What is stakeholder capitalism?
One of the convening objectives of the 50th anniversary of the World Economic Forum this week is to give concrete meaning to “stakeholder capitalism”.
Corporations exist to solve problems and provide services, not just make profits. If they are successful at doing this, long-term shareholder returns can increase, as society in general is better served. This is why supporting the needs of all stakeholders (i.e. stakeholder capitalism) is essential to the long-term success and health of any business.
Before the start of Davos 2020 this week, its founder, Professor Klaus Schwab, reshared the first Davos Manifesto, signed in 1973. Eerily, the manifesto seems to firmly nod to the critical role of corporate governance in promoting and maintaining stakeholder capitalism: “the purpose of professional management is to serve clients, shareholders, workers and employees, as well as societies, and to harmonise the different interests of the stakeholders”. So it’s scary to think that the FRC’s recent annual review of UK corporate governance reporting states that there is still significant room for improvement.
The FRC noted that corporate culture, workforce engagement and remuneration all remain areas of development. At Design Portfolio, we frequently help our clients to apply the principles of their chosen governance code in a way that shareholders can evaluate, and to communicate how the board fulfils its role in cascading the tone from the top throughout the organisation and how it employs social and environmental governance through engagement with wider stakeholders. Here is some of our key advice:
- Purpose – Company purpose is about precise descriptions of what problems companies are solving, for whom, how, when and why they are best suited to do that. A credible purpose demonstrates a real commitment to profiting from solving problems – it builds trust and authenticity, as well as stakeholder loyalty. It also provides the foundations for culture and values. Don’t think marketing slogans, think “how are we producing profitable solutions to the problems of people and planet?”.
- Culture – Companies are getting better at explaining their corporate culture, but few companies discussed their assessment and monitoring of culture. Explain how the board receives reports on culture or has a specific agenda item to consider the alignment of culture with values and strategy or, if possible, explain the role for the internal audit function in assessing or monitoring culture. Read more on culture reporting here.
- Stakeholder engagement – I have seen a huge increase in the number of companies reporting stakeholder engagement from the board; however, there are only a small number of companies who explain how effective their chosen methods of engagement have been. This is critical when discussing workforce engagement activities. Explain which issues are important to stakeholders and how stakeholder engagement outcomes are shared with the board and considered in decision making.
- Remuneration – With companies encouraged to align remuneration to company purpose and culture, there should be clear links between non-financial metrics and annual bonus and LTIP awards. Metrics such as diversity, culture and health and safety targets should become common practice. If possible, non-financial KPIs should even align with long-term horizons and companies should specify the use of vesting periods for incentives.
How can we help?
Since the introduction of the new UK Corporate Governance Code in 2018, we have been offering our clients a comprehensive governance benchmark review and workshop. This review identifies areas of non-compliance, as well as areas of general improvement to ensure that governance reports demonstrate how a company is building and nurturing a healthy culture, ensuring engagement with investors, customers and the workforce and maintaining key governance virtues. The review includes specific recommendations of improvements, as well as supporting best practice examples and an intricate content plan detailing key content which should be included on each page of the corporate governance report.
Our governance workshops, in which these benchmarks are presented, have provided great forums to look at the role of stakeholder capitalism and how this is being implemented in the business and reported on in the governance report. If this is a service which sounds of interest to you, please don’t hesitate to contact me at firstname.lastname@example.org.