For the last fifty years, the mandate and role for corporate governance have been set within well-defined boundaries, in which the business of business was business and the well-being of society was the responsibility of governments. This paradigm was summed up succinctly in 1970 by economist Milton Friedman who noted, “There is one and only one social responsibility of business — to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game.”
Today, thanks to globalization and the international economy, we live in a world in which the neat dividing line between business and governments in terms of their role and responsibilities for society is blurring rapidly. As governments struggle and fall into debt, business has prospered; over half the world’s top economies are global firms with an influence and impact on society exceeding that of many countries. Not surprisingly in this environment, society is looking to business to take greater responsibility for its impact. As the Larry Fink, CEO of BlackRock, which is the world’s largest and most powerful institutional investor, put it in his annual letter to CEOs, “Society is demanding that companies, both public and private, serve a social purpose. To prosper over time, every company must not only deliver financial performance, but also show how it makes a positive contribution to society. Companies must benefit all of their stakeholders, including shareholders, employees, customers, and the communities in which they operate.”
The questions remaining are, are current models of corporate governance sufficient to deal with these new expectations from investors and society? Are corporate boards equipped to provide oversight on a firm’s social purpose, and which “ESG” issues, from human rights and workforce training to global warming, are material to the business and require action? As Fink’s letter makes clear, these challenges can no longer simply be public relations challenges; they are increasingly critical to businesses success and of growing interest and concern to shareholders. To that point, fully half of shareholder proxy actions in 2017 were focused on “ESG” related issues.
In the spring of 2017, the High Meadows Institute, working with Tapestry Networks, explored how boards are responding to this challenge. The results of our research suggest that the current framework for corporate governance is facing serious challenges.
–Compliance crowds out strategy: Many directors said that they thought it was increasingly important for boards to have engagement and oversight of strategy. At the same time, they said their mounting compliance and accountability roles simply don’t allow them the time to meaningfully engage in the strategy process.
–No frame of reference for consideration of “social” issues: Many directors reported that they are feeling increasingly overwhelmed by the growing range of “social” issues coming at them and that boards are not equipped with the background, tools, or support to adequately assess which are material in the context of corporate strategy.
Against this backdrop, we are now working with large institutional investors and senior corporate directors to explore how the challenges we have identified can be most effectively addressed. Like the Shareholder-Director Exchange Protocol (SDX), our goal is to provide a practical path forward for the evolution of corporate governance. Our focus will be on measures that can improve boards’ capacity to provide the necessary oversight and input to ensure corporate strategy can anticipate and manage the changing expectations of business in society and assure their long-term institutional investors and other stakeholders that the firms they govern have a strategy that can ensure long term sustainable performance.
In future posts we will update you on our progress and, in the meantime, welcome your thoughts on the challenges we have identified and any specific suggestions you have for us.