Progressive companies operate in the interest of all their stakeholders – and not just shareholders
Institutional investors should support open cultures at the companies they buy into. In such environments, employees would be encouraged to voice values-driven concerns about problematic practices.
Such openness would help to engage employees more productively and enable them to raise ethical issues more effectively at early stages, before such issues caused substantial damage to reputation or the bottom line.
I made this argument last year in Ethical Corporation and drew some support from the spirit of the UK Stewardship Code. The 2010 version of the UK code at that time did not explicitly refer to corporate cultures. However, it aimed to enhance the quality of engagement between institutional investors and companies, including on issues of corporate governance, and the latter arguably encompasses culture.
Subsequently, the UK code was revised, with effect from 1 October 2012, to include an express reference to culture:
“For investors, stewardship is more than just voting. Activities may include monitoring and engaging with companies on matters such as … corporate governance, including culture.”
Sound cultures may embody more than openness; they could, for example, also uphold inclusiveness, collaboration among employees or even employee health. A common premise of sound cultures is that employees are treated as a key group of stakeholders.
In guiding institutional investors to promote sound cultures, then, the revised UK code appears to affirm – as I also argued – that, rather than being locked in a zero-sum game, the interests of shareholders and employees can be closely aligned.
In that respect, the UK code may resonate with a growing trend to improve corporate governance by optimising interaction between the interests of stakeholders in a company. Generally speaking, the term “stakeholders” in this context includes shareholders, employees, customers, creditors, suppliers and communities in which the business operates.
Such a trend is a constructive response to the view that treating shareholders as the only stakeholders creates a tendency towards catering to shareholders’ pecuniary interests – often tilted towards the short term – at the expense of the longer-term overall interests of the corporation or even society.
In a recent book, John Mackey and Raj Sisodia propose a “conscious capitalism” model:
“The most common type of stakeholder cancer in business results from the widespread idea of maximizing shareholder value and profits. When … the interdependency and intrinsic value of the other stakeholders are denied, the business is at high risk of … growing a cancer … This type of thinking is partly what led to the recent financial crisis. Many financial institutions were focused only on maximizing their short-term profits, with little concern for the possible harmful impacts on their other stakeholders and the larger society.”
Rather than managing divergent stakeholder interests as a series of trade-offs, “conscious businesses engage … human creativity to create win-win-win … solutions that transcend those conflicts and create a harmony of interests among the interdependent stakeholders.”
For the authors, it’s a question of enlightened management under which positive social impact, stakeholder harmonisation and collaboration can be ingrained in the company’s culture.
One example of stakeholder synergies cited in the book is the Whole Planet Foundation, set up and funded by Whole Foods Market, of which Mackey is co-chief executive, to provide microcredit loans in more than 50 countries. The book claims that the foundation has:
- improved the lives of more than 1.2 million poor people;
- raised the morale of employees – they are proud of the foundation, and work more enthusiastically as a result;
- enhanced Whole Foods’ brand recognition and goodwill among customers;
- improved suppliers’ involvement in the business;
- generated an estimated 1,000% return to Whole Foods’ shareholders, factoring in the above benefits.
Of course, as the authors acknowledge, “without conscious leadership, little else matters” in making their model work.
Since the model’s success often appears to be a function of the powerful position (eg co-founder) and values of a corporate leader, it raises the question of how widely replicable the model is. Nevertheless, the authors have introduced a valuable choice among business models to which companies may aspire.
Professor Colin Mayer of Oxford University recently proposed an intriguing and more structurally oriented approach to countering the shareholder-centric, short-term-oriented model: granting voting rights on shares in proportion to the remaining length of a holding period to which the shareholder pre-commits (see Mayer, Colin: 2013, Firm Commitment: Why the corporation is failing us and how to restore trust in it (Oxford University Press, Oxford, UK)).
Shares thus pre-committed would not be transferable during such a holding period. Shares that continue to be or become transferable would have no voting rights.
Also, it would be primarily pre-committed shareholders who elect a board of trustees tasked with overseeing major aspects of the company’s governance in order to properly address multiple stakeholder interests and core values of the corporation.
As Mayer has said, this approach is “preliminary and tentative”. Some issues, clearly, remain to be worked out, including practical and operational aspects of ensuring that exchange-listed shares remain “inalienable” while pre-committed. Also, the structure may lend itself to opportunistic investors “leveraging” voting power through the pre-commitment mechanism with objectives not necessarily aligned with the long-term viability of the corporation.
Why not fundamentally alter the legal nature of some corporations to expressly require addressing all stakeholders’ interests?
During the past several years, some states in the US have supplemented their corporation law to do just that. Their laws now accommodate benefit corporations – B corporations for short – which are for-profit entities that are required to address multi-stakeholder interests and pursue specific goal(s) that yield public benefit(s) as chosen in their constituent documents (eg certificates of incorporation).
As of November 1 2013, 20 jurisdictions in the US had adopted some form of benefit corporation law.
The statute recently enacted in the US state of Delaware is worth a quick review as the state is the leading US jurisdiction on corporation law and the other statutes are not expected to vary dramatically from Delaware’s.
Delaware [http://delcode.delaware.gov/title8/c001/sc15/] defines “public benefit” as “a positive effect (or reduction of negative effects) on one or more categories of persons, entities, communities or interests (other than stockholders in their capacities as stockholders)”. A Delaware B corporation must identify one or more of such benefits in its certificate of incorporation as goal(s) that it will promote.
The directors of a Delaware B corporation are required to manage the business and affairs of the corporation in a responsible and sustainable manner and, toward that end, balance:
1. the pecuniary interests of the stockholders;
2. the best interests of those materially affected by the corporation’s conduct (ie stakeholders); and
3. the specific public benefit(s) identified in its certificate of incorporation.
Directors will be deemed to satisfy their fiduciary duties to the corporation if a decision by them is both informed and disinterested and not such that no person of ordinary, sound judgment would approve.
The new Delaware law is intended to shield directors from investor lawsuits alleging that the directors are not maximising shareholder value in pursuing public benefits. However, the law provides directors with latitude that is even wider than the “business judgment rule” under US common law that amply protects directors from shareholder lawsuits on decisions made on behalf of “regular” corporations.
Consider also that, while a Delaware B corporation is supposed to balance the interests of all stakeholders, only holders of relatively large blocks of its stock may sue to enforce the duties of the directors.
Therefore, the new law has the potential to allow directors and management to become complacent and relatively less responsive to criticism, given their limited accountability to stakeholders and the diminished discipline being exercised by potential lawsuits.
An additional potential issue with B corporations in general relates to their ability to widely attract equity capital: while “socially responsible” investors may be drawn to B corporations, many other investors may be unwilling to take a potential hit to their returns in exchange for doing some public good.
Nevertheless, the attractiveness of becoming a B corporation is catching on, with some start-ups and socially minded companies, including well-known outdoor clothing retailer Patagonia, making the switch. B corporations represent an innovative way to structurally embody a true multistakeholder approach and the idea of running a business sustainably. Hopefully they will surmount any shortcomings and scale up.
Each approach to stakeholder integration discussed here could merit further study as a valuable work-in-progress that can eventually enhance choices among models of corporate governance.
They could also be viewed collectively as offering a range of tools and concepts from which differently situated companies can choose their preferred governance arrangements.
At a minimum, these approaches remind us that any potential business outcome ought not to be considered in a vacuum – the quality of the decision-making may hinge on how well those with a stake in that outcome are defined and their interests harmonised.
Wilfred Chow is a US-based lawyer and corporate governance researcher and writer. He previously served as a managing director and associate general counsel at a leading financial services firm in the US.corporate culture governance shareholders stakeholders
May 2014, London, UK
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