If Time Magazine were to assign a corporate governance category to their annual “Person of the Year” announcement, 2019’s winner might have been “Stakeholders.” This past year, stakeholders were often at the forefront of corporate sector pronouncements and business media coverage—from Larry Fink’s 2019 letter to CEOs calling on companies to articulate their “purpose,” to the responding Business Roundtable statement articulating a commitment to stakeholders (and subsequently signed by 181 CEOs), to the updated Davos Manifesto 2020 calling for “a better kind of capitalism.” In reading this coverage, it’s easy to come to the conclusion that all of this is entirely new—that never before have corporate leaders based decisions on what’s best for all stakeholders, rather than seeking to primarily (or only) benefit shareholders.
But in the midst of all the conversations and coverage, we perceived a gap: nobody was asking corporate directors what they were actually doing differently as a result of this new or renewed commitment to stakeholders. Additionally, we wanted to know whether directors agreed with how a focus on stakeholder interests is being represented in the press as a “new and novel” issue.
To attempt to fill this gap, Diligent Institute, in partnership with the Rock Center for Corporate Governance at Stanford University, set out to ask corporate directors precisely how they are addressing stakeholders’ interests and concerns. In November 2019, we published our first joint report, “Stakeholders Take Center Stage: Director Views on Priorities and Society.” We surveyed roughly 200 directors from around the world and conducted follow-up interviews to learn how they are addressing stakeholders’ interests.
What we heard from directors is that they largely disagree with the premise that considering stakeholders’ interests is a “new” venture; rather they believe that taking a long-term view of investment decisions and considering the impact on stakeholders is part and parcel of the board’s job. Directors told us they see including stakeholders’ interests in decision-making as a best practice, one that they have strived to follow for some time. We learned:
• Directors strongly believe stakeholder interests are important, and directors are satisfied with how they address stakeholder interests: 87% of directors consider stakeholders to be “important” or “very important” in board decision-making; and 92% of directors are satisfied with how their companies meet stakeholder needs.
• Directors reject the notion that shareholders have primacy in board decisions: 77% don’t believe shareholder interests are significantly more important than stakeholders.
• Directors don’t believe their companies are short-term focused. Fully 72% said their company predominantly considers an investment horizon of 3 or more years in managing the business.
Meanwhile, the coverage that this issue has received over the past year would give one the impression that considering stakeholders’ interests is a new trend – one that runs counter to traditional decision-making on the part of corporate leaders. Indeed, the Larry Fink Letter, the Business Roundtable statement, and Davos Manifesto all are founded to some extent on an assumption that corporations don’t consider stakeholders as equal with shareholders, and that they tend to take a short-term view of investments – an assumption with which the directors we interviewed seem to disagree.
This begs the question: what is causing the disconnection between directors’ assertions that they already consider stakeholders to be vitally important, and the perception of those clamoring for change?
Based on the research we conducted, we have a few potential clues as to why this disconnect exists:
• When directors say “stakeholders” they primarily are thinking of the company’s employees. We asked directors to select which stakeholders they consider to be important to their decision-making process, and overwhelmingly (87%) they said “employees” are their primary stakeholders. This result helps to contextualize directors’ response that 92% are satisfied with how their companies address stakeholders’ interests—presumably, if directors felt that the company was mistreating employees that might impact board decisions around who they place in key C-suite positions to help turn the situation around. As one of our respondents put it, “If you treat your employees terribly, have a lousy culture and are not competitive in compensation, how are you ever going to achieve shareholder returns?”
• Directors told us that while stakeholders have a fairly accurate picture of how important they are to corporate decisions, the media does not. In our survey, we asked directors whether specific groups understood the job their company was doing to address stakeholders’ interests. While more than half of directors believe that stakeholders (57%) and institutional investors (56%) have a clear picture of how their company addresses stakeholder needs, only 18% of directors believe the media accurately understands. As one respondent told us, “I think the media has overplayed this obsession with shareholders.” Other directors told us they believed that perhaps their companies lack of adequate communication might be partially to blame for any skewed perspective in the press; for example, one respondent said, “If we do our job communicating with our stakeholders… a more well-rounded perspective will emerge.”
• Despite a widely reported global rise in shareholder and investor activism to force boards to address stakeholders’ interests, directors aren’t feeling the heat (especially not in the US). We asked questions around advocacy groups and whether directors were feeling pressure from these groups to be more responsive to stakeholders. In our global findings, more than half (55%) of directors said they feel “low pressure” or “none” from advocacy groups. Only 14% of directors told us they feel high pressure from advocacy groups. The pressure on directors outside the US is felt a little more keenly: 19% of directors reported “high pressure, and 38% told us they feel “moderate pressure” from advocacy groups.
Bottom line, the picture inside the boardroom is always more complex and nuanced than it is in a press headline. From the director’s perspective, listening to shareholders is part of the job, but not the entire job. As one director put it, “The board is not under obligation to do what [shareholders] ask, but they are under obligation to listen, and they have the obligation to communicate. This is more of a two-way street than ever before.” At the same time, directors realize that listening to stakeholders is also a critical component of their work, and one that helps provide a bulwark against risk and increase the sustainability of the business. As one director summarized, “If you’re not responding to the needs, wants and interests of employees, I guarantee customers will suffer. They’ll respond in ways that are negative to the business, and your investors will suffer. This is an ecosystem that is interrelated.”