CS Stakeholder capitalism and the board
In 2019, 181 CEOs of major US companies signed the Business Roundtable’s Statement on the purpose of a corporation, issuing a call for companies to...
and the board: Taking on a new mindset
Governance professionals report on their board's involvement in exploring stakeholder capitalism issues, investor interest and how companies are reaching out to other stakeholder groups
Governance professionals report on their board's involvement
in exploring stakeholder capitalism issues, investor interest and
how companies are reaching out to other stakeholder groups
In 2019, 181 CEOs of major US companies signed the Business Roundtable’s Statement on the purpose of a corporation, issuing a call for companies to look to the interests of not only shareholders but also other stakeholder groups such as customers, employees, suppliers and communities. This overturned a previous policy statement that for more than two decades had defined a company’s principal purpose as maximizing shareholder return.
Since then, developments ranging from the need to protect employees during a global pandemic to a heightened focus on racial equity, greater awareness of the climate crisis and supply-chain crises have all ratcheted up discussion about stakeholder capitalism and its current or potential role. Questions remain about the extent to which companies in practice take into consideration the needs and wants of stakeholders other than their shareholders – and indeed whether investors will pressure them to do so.
In this special report we present results from a survey conducted among governance professionals such as general counsel, corporate secretaries and their teams. Their responses provide insight into how boards assign oversight of and discuss stakeholder capitalism issues, investor questions about those issues, the extent of formal stakeholder capitalism strategies and whether companies link executive compensation to corporate purpose.
Our research indicates that stakeholder capitalism has gained a firm toehold in terms of board discussions, research into stakeholder groups and even directors’ engagement with non-shareholders, but less so in terms of specific strategies and regular investor questioning.
- Sixty-one percent of respondents say the main board has some oversight of stakeholder capitalism issues.
- Overall, just under half (49 percent) have discussions around these issues on an ad hoc basis, while 16 percent do so at every board meeting.
- Three quarters of respondents say their company seeks information on the needs of stakeholders other than shareholders.
- More than half (53 percent) of respondents at mega-caps say stakeholder capitalism issues are at least very important to their investors, with 18 percent saying they are extremely important.
- Only 21 percent of respondents say their company has a defined strategy for stakeholder capitalism. Fifty-eight percent say their company does not, although it should be noted that more than a fifth (21 percent) do not know.
- Overall, more than half (51 percent) of respondents say executive compensation is linked to corporate purpose at their company.
This report is based on the findings from an online survey conducted between December 2021 and February 2022. A total of 153 respondents took part.
Respondents by market cap
Board oversight and agenda
Board oversight and agenda
On your company’s board, which of the following has some oversight of stakeholder capitalism issues?
Overall, a majority of companies in our research assign stakeholder capitalism to the board as a whole: 61 percent of respondents say the main board has some oversight of stakeholder capitalism issues. The most frequently cited board panel with some oversight is the nominating and governance committee, mentioned by one in five respondents.
Otherwise, respondents say some oversight is assigned to the audit (7 percent of respondents), compensation (6 percent) or risk (6 percent) committee. In a sign that these issues have not yet gained universal acceptance, almost a quarter (23 percent) of respondents say their company does not consider stakeholder capitalism.
These patterns are broadly similar across different sizes of companies. But higher percentages of respondents at mega-cap (29 percent) and large-cap (34 percent) companies say their nominating and governance committees have some oversight of stakeholder capitalism matters, compared with 17 percent of those at mid-cap companies and just 11 percent of those at small caps saying the same.
Fourteen percent of respondents at mid-caps say their board’s compensation committee has some oversight, more than their peers at large caps (6 percent), mega-caps and small caps (4 percent each). Among small-cap firms, 11 percent say their audit committee has some oversight, more than their peers at mega-caps (8 percent), mid-caps (7 percent) and large caps (3 percent).
More than a quarter (28 percent) of respondents in North America report that their nominating and governance committee has some oversight of stakeholder capitalism matters, compared with just 10 percent of those in Europe. A third of respondents in Europe say their company does not consider stakeholder capitalism at all, while only one in five respondents in North America say likewise.
How often does the committee(s) with stakeholder capitalism oversight report to the main board on those issues?
Almost a fifth (19 percent) of all respondents say the board committee(s) that oversees stakeholder capitalism matters reports to the main board on those issues at every board meeting. Only a few (4 percent) do so at every other board meeting or once a year (9 percent). And more than four in 10 respondents (44 percent) say such reporting happens on an ad hoc basis.
Again, there are variations according to company size, although the broad pattern applies. Just 7 percent of respondents at large-cap companies say reports are made to the main board at every meeting, while 61 percent say it happens on an ad hoc basis. By contrast, almost a third (32 percent) of those at mega-caps say reporting takes place at every board meeting and 36 percent say it happens on an ad hoc basis. Respondents at small caps (24 percent) are more than three times as likely as those at large-cap companies to say committees report to the main board at every meeting.
Boards that take an interest in stakeholder capitalism are more likely to receive regular updates in Europe, where 29 percent of respondents report updates to the board at every meeting, compared with 15 percent of respondents in North America. More than half (51 percent) of those in North America say these reports are given to the board on an ad hoc basis, compared with 36 percent of those in Europe who say the same.
How often does the main board discuss stakeholder capitalism issues?
Unsurprisingly, the frequency with which the main board discusses stakeholder capitalism issues follows a similar pattern to how often it receives reports from the relevant committee/s. Overall, just under half (49 percent) have these discussions on an ad hoc basis, while 16 percent do so at every board meeting.
Almost a quarter (23 percent) of respondents at mega-caps report that their board discusses stakeholder capitalism issues at every meeting, compared with 18 percent of those at small caps, 13 percent of those at mid-caps and 11 percent of those at large-cap firms. A quarter of respondents in Europe say their board has such discussions every time it meets, while just 12 percent of those in North America say the same.
On their agenda?
In the past year, how often have investors asked questions about stakeholder capitalism issues affecting your company?
The level of attention stakeholder capitalism attracts in public discourse does not appear to have translated into it being a frequent topic of discussion in engagements with shareholders.
Respondents were asked to rate the frequency with which investors have in the past year asked about stakeholder capitalism issues affecting their company, using a scale of one to five, where one is ‘never’ and five is ‘very frequently’. Overall, the average score is 2, or ‘occasionally’. Respondents at mega-cap companies tend to report receiving the most frequent questions, with an average score of 2.4, or between ‘occasionally’ and ‘sometimes’.
Respondents at mid-cap and large-cap companies each give an average score of 1.7, compared with the 2.1 average score given by those at small caps. Those in Europe on average report more frequent investor questions (2.4) than their peers in North America (1.8).
On the whole, how important are stakeholder capitalism issues to your investors?
Respondents were also asked to rate the importance of stakeholder capitalism issues to their investors using a scale of one to five, where one is ‘not at all important’ and five is ‘extremely important’.
Globally, the average score is 2.5. Respondents in Europe report a higher average score (2.8) than do their peers in North America (2.3).
Those at mega-caps report the highest average score (3.4) for the importance of stakeholder capitalism to investors. More than half (53 percent) say those issues are very or extremely important to their investors. Just under three in 10 respondents at mid-caps (29 percent) say the issues are very important. By contrast, almost half (48 percent) of respondents at large caps say stakeholder capitalism is not at all important to their investors.
When asked what investors ask about stakeholder capitalism issues affecting their company, respondents’ comments include:
- ‘Progress on ESG plans and commitments, cost’
- ‘Generally, how we view the issue overall’
- ‘Investors want to know the extent of influence stakeholders have on the company’
- ‘What is the capital allocation policy of the company and how is stakeholder engagement considered as a part of it?’
- ‘General concerns’
- ‘Community relations issues’
- ‘Ownership of founder and broadening of share float’
- ‘Indigenous reconciliation, climate change, diversity’
- ‘Mainly about public hearings’
- ‘This essentially comes up when people ask about the S in ESG’
- ‘Shareholders tend to ask about climate and environmental issues – including adaptation to climate change’
- ‘Capital allocation’
- ‘[Greenhouse gas] emissions, innovation, climate change, nature loss, diversity and dignity, health and well-being, corporate governance’
- ‘Questions often linked to social value metrics contained in contract tender processes (both in public and private sector)’
Knowing your stakeholders
Communication and engagement beyond shareholders
Knowing your stakeholders
Communication and engagement beyond shareholders
Does your company seek information on the needs of stakeholders other than shareholders?
It appears it’s not just investors that are of interest to a large majority of companies. Overall, three quarters of respondents say their company seeks information on the needs of stakeholders other than shareholders. This is reportedly the case among 86 percent of respondents at mid-caps, followed by 77 percent of those at mega-cap companies, 75 percent of those at large-cap firms and 66 percent of those at small caps. There is minimal regional variation.
How does your company seek information on the needs of stakeholders other than shareholders?
Globally, company outreach to stakeholder associations/organizations is the most common method used when seeking information on the needs of stakeholders other than shareholders, cited by 75 percent of respondents. This is followed in frequency by market research (cited by 51 percent of respondents), impact assessments (50 percent), social media and the internet (43 percent) and holding open meetings (24 percent).
Almost nine in 10 respondents at mega-caps (88 percent) say their company conducts outreach to stakeholder groups, compared with 76 percent of those at large caps, 71 percent of those at small caps and 63 percent of those at mid-caps. Similarly, larger companies with more resources at their disposal are more likely to conduct impact assessments: 62 percent and 65 percent of respondents at large-cap and mega-cap companies, respectively, report doing so. Just a third of those at small caps and 42 percent of those mid-caps report doing the same.
More than three quarters (76 percent) of respondents at mega-caps say their firm uses social media or the internet to research the needs of non-shareholder stakeholders. This compares with around a third or less of respondents at smaller companies.
Impact assessments appear to be far more popular in Europe, where 81 percent of respondents report their company using them, while just 38 percent of those in North America say likewise.
Respondents in Europe are also more likely (52 percent) to report using social media/the internet than their peers in North America (33 percent). Those in North America are slightly more likely (75 percent) to say their firm reaches out to stakeholder groups than are those in Europe (71 percent).
Which of the following stakeholder groups, if any, are members of your board involved in engagement with?
Although information gleaned from engagement with various stakeholder groups can be passed along to the board, there is arguably no full alternative to having directors take part in that process and thereby gain first-hand understanding of those groups’ needs, wants and concerns.
Respondents most frequently cite shareholders (65 percent) when asked which stakeholder groups members of their board engage with. But a majority (58 percent) of respondents also say members of their board engage with employees and 41 percent say directors are involved in engagement with customers. Beyond that, almost three in 10 respondents (29 percent) report directors engaging with communities and 21 percent say directors engage with suppliers.
There is broad consistency in these results across respondents at companies of different sizes. That said, 45 percent of those at mega-cap companies say members of their board are involved in engagement with communities. This compares with 32 percent of respondents at mid-cap companies, 25 percent of those at large caps and 19 percent of those at small-cap firms who say the same.
Similarly, almost a third (32 percent) of respondents at mega-caps say their directors engage with suppliers, more than those who say so at mid-caps (23 percent), large caps (18 percent) or small-cap firms (16 percent).
There are relatively narrow differences between respondents in Europe and North America in terms of board engagement with non-shareholder groups. That said, however, 75 percent of those in Europe report that members of their board engage with shareholders, compared with just 58 percent of those in North America.
Respondents were asked how information on the needs of stakeholders other than shareholders is shared with the board. Their comments include:
- ‘Reported through CSR committee report and governance report’
- ‘Verbal report’
- ‘Through reports in [the] form of a [memorandum] from all relevant heads of department, particularly the operations department, office of the chief economist and corporate services departments’
- ‘Executive reporting’
- ‘During meetings’
- ‘In each board paper there is a section highlighting stakeholder impact issues’
- ‘Timely updating of the board on stakeholder issues and grievances’
- ‘Quarterly reporting’
- ‘Report to board/relevant committee’
- ‘Presentation by general counsel and head of human resources’
- ‘Management reports to the board’
- ‘Reporting and direct engagement’
- ‘Ad hoc reporting’
- ‘Reported regularly’
- ‘We report to the CEO and the audit committee on this’
- ‘Regular CEO report to the board, quarterly updates on key metrics that include stakeholder surveys, ESG disclosures in annual reporting shared in board strategy sessions’
- ‘Major contract bids, where our offer will include material social value elements, presented to the board.’
Putting issues into practice
Does your company have a defined stakeholder capitalism strategy?
Despite the frequency of board discussions around stakeholder capitalism and the levels of research and engagement indicated in the research, only 21 percent of respondents say their company has a defined strategy for addressing stakeholder capitalism. Fifty-eight percent say their company does not, although it should be noted that the same number – 21 percent – say they do not know whether their company has such a strategy as say they do.
More than a quarter (27 percent) of respondents at mega-cap companies say they have a defined stakeholder capitalism strategy, compared with 23 percent of those at mid-caps, 19 percent of those at small-cap companies and 18 percent of those at large caps.
Does your company have any plans to develop a stakeholder capitalism strategy in the next year?
There appears to be little immediate prospect of widespread change. Overall, just 10 percent of respondents say their company has plans to develop a stakeholder capitalism strategy in the next year, although it's worth noting that almost a third (31 percent) don’t know whether that’s the case.
Does your company implement its stakeholder capitalism strategy?
Among respondents whose companies have a defined stakeholder capitalism strategy, opinion is quite evenly split between those who say their company fully implements it (52 percent) and those who say it partially implements it (48 percent).
Although based on a relatively small sample size, it appears that those at larger companies – and hence with more resources – are more likely to believe their strategy is fully implemented. Eighty-three percent of respondents at mega-caps say the strategy is fully implemented, more than twice the 40 percent of those at mid-caps and almost five times the 17 percent of those at small-cap companies who say the same.
Is executive compensation at your company linked to corporate purpose?
Rather than via formal strategies on stakeholder capitalism, one area where more companies are taking definitive action is executive compensation. Overall, more than half (51 percent) of respondents say this is linked to corporate purpose at their company.
Sixty-one percent of those at small-cap firms report that executive compensation is linked to corporate purpose. This compares with 59 percent, 45 percent and 36 percent among those at mega-cap, mid-cap and large-cap companies, respectively. More than six in 10 (61 percent) of respondents in Europe say there is such a link, compared with 44 percent of those in North America.
<H>Balancing the traditional with the innovative
An approach to stakeholder capitalism
Balancing the traditional with the innovative
An approach to stakeholder capitalism
During its 50-year history, Morrow Sodali has achieved pre-eminence in corporate governance counseling and shareholder services by anticipating market developments and bringing together a comprehensive set of resources and expertise that are closely aligned with the expanding obligations companies face in dealing with owners and market forces.
The advent of ESG, the reassessment of corporate purpose and the expansion of corporate responsibility to include a newly prominent audience of stakeholders has fundamentally changed the way corporations are perceived. Gone are the days of shareholder primacy in which traditional financial reporting, accounting standards and stock price were the unquestioned measures of corporate well-being.
Today, in this new era of stakeholder capitalism, companies are being evaluated in a broader societal context. Stakeholders – including shareholders – are now taking a deeper dive into companies’ ESG policies and conduct. Firms now face a virtual deluge of demands for information about climate change, human capital management, sustainability, governance and more.
Companies are also facing a thicket of revised disclosure rules and competing standards and metrics promoted by regulators, NGOs and special interest groups. At the same time, there is market pressure to standardize ESG principles and metrics in order to make stakeholder capitalism provide the same level of market comparability as traditional financial accounting standards.
Meeting new demands
Morrow Sodali’s organizing principle with respect to ESG and stakeholder capitalism is that these new demands are in no way inconsistent with the long-standing business practices of well-managed companies. In the words of Harvard Business School Professor George Serafeim: ‘ESG analysis should be a part of good corporate and investment management.’
In line with this perception, Morrow Sodali anticipated the emerging ESG demand and prepared clients to deal with it well before it became a matter of widespread public attention – just as the firm had done in years past with hostile takeovers, governance reforms and shareholder activism.
Anticipating the direction ESG issues and stakeholder capitalism would take, Morrow Sodali’s first step was to expand the scope of our analytics and market intelligence activities to include ESG topics. In particular, our early efforts were focused on helping companies prepare for institutional investor pressure, proxy votes and shareholder activism on a variety of ESG issues, especially climate change and related executive compensation policies.
As the nascent stakeholder movement was emerging, Morrow Sodali was assembling new teams of ESG experts globally and expanding our engagement activities to reach out to all stakeholders whose interests are deemed material. Our advisory and analytical services now bring us into much closer strategic relationships with both our corporate clients and their investors and stakeholders.
As the external world of regulators, special interest groups, academics and politicians continues to struggle with the contradictions of understanding and measuring ESG issues, Morrow Sodali’s single-minded objective is to help our corporate clients, both public and private, meet the demands of stakeholder capitalism and maintain their strategic balance in a rapidly changing marketplace.
Our early efforts were focused on helping companies prepare for institutional investor pressure, proxy votes and shareholder activism
Morrow Sodali’s approach to ESG and stakeholder capitalism
Morrow Sodali’s ESG and stakeholder programs are rooted in the company's traditional corporate governance counseling and shareholder services, but with expanded expertise and resources that address today’s issues.
Our goal has always been early diagnosis rather than cure – helping companies anticipate challenges and deal with them before problems arise, thereby enabling managers to concentrate on running the business.
With this goal in mind, Morrow Sodali’s programs are designed to help companies successfully negotiate their sustainability journey and meet the challenges of managing their stakeholder and ESG issues.
Morrow Sodali monitors these rapidly changing and often conflicting standards with a view to helping clients prioritize and determine which issues have the greatest potential impact on the business and which standards are most appropriate for individual firms. Most importantly, Morrow Sodali helps clients determine how to prioritize and measure the importance of these ESG/stakeholder issues in the context of their particular business circumstances.
Following this assessment, we analyze each firm's unique stakeholder profile and help develop programs for corporate reporting, shareholder engagement, communication, management of shareholder resolutions and the voting process. The Morrow Sodali ESG program includes the following basic elements:
- Assess the external ESG landscape: Based on a review of trends in ESG and the financial markets, provide insights about the company and its peers and prepare a preliminary strategic analysis
- Identify issues of strategic importance to the company: We help firms determine which ESG factors are potentially material and which ESG standards and metrics are suitably aligned with the business
- Prepare an internal plan of action: We help companies identify focus areas to achieve a holistic approach and ensure consistency in communications and policies, both internally and externally
- Manage external relations: Help craft content and delivery of disclosure, corporate reporting, investor engagement and stakeholder outreach programs
- Manage ongoing risks and opportunities: Work with corporate directors, risk committees and executive management teams on providing feedback, evaluating market developments, updating strategic analysis and determining strategic response.
Morrow Sodali recognizes that stakeholder capitalism is not a zero-sum game. What is good for stakeholders is also good for shareholders. Our decades of work dealing with shareholder issues are the groundwork for our expanded ESG program. Both stakeholders and long-term shareholders want companies to perform well, produce profits and grow. Managing ESG and stakeholder issues has become a critical requirement for running a successful business enterprise.
The words of attorney Martin Lipton, from a Wachtell Lipton client memorandum entitled ESG, stakeholder governance and the duty of the corporation in September 2022, are useful to understand from a legal perspective how companies should approach the responsibilities of stakeholder capitalism:
‘A holistic, stakeholder view of corporate purpose does not exalt ESG as the sole or weightiest consideration – to the contrary, it recognizes that the various elements of ESG are among numerous considerations that are essential to a company’s sustainability and that must be carefully balanced by the board and management, in consultation with shareholders, to ensure the long-term health and prosperity of the business.’
Learn about Morrow Sodali
Morrow Sodali is a leading provider of strategic advice and ownership services to corporate clients around the world. The firm provides corporate boards and executives with expertise, resources and services relating to ESG, corporate governance, shareholder and bondholder communication and engagement, capital markets intelligence, proxy solicitation, shareholder activism and mergers and acquisitions.
From headquarters in New York and London, and offices and partners in major capital markets, Morrow Sodali serves approximately 1,000 corporate clients in 80+ countries, including many of the world’s largest multinational corporations. In addition to listed and private companies, its clients include financial institutions, mutual funds, ETFs, stock exchanges and membership associations.