The Business Roundtable’s Shift on Shareholder Value and How it Will Impact Communications Strategies
When the Business Roundtable released its new statement of purpose in August, the rest of corporate America did a double take. The updated mission of a company, according to the business leaders, is to benefit all stakeholders, including customers, employees, suppliers, and the community at large— rather than a commitment and duty to shareholders alone. While this marks a tremendous win for ESG and impact investors, it also has the potential to create a paradigm shift, not just for C-Suite executives, but also for communications professionals.
Consider the public relations strategy for any sensitive news. The messaging around layoffs, for instance, is never easy, especially when it impacts colleagues, friends, or an entire community. It’s a topic, too, that is often scrutinized by everyone except investors. But in terms of crafting a statement, it has hitherto been pretty black and white: Thank the affected employees for their hard work and dedication, cite the company’s efforts to ease the transition, point to the business challenge that necessitated the layoffs, and pass the buck to a fiduciary duty to shareholders. Then rinse and repeat every time thereafter the company is called on to answer for difficult corporate decisions.
Assuming that the Business Roundtable’s new purpose statement does indeed foster a new lens and dialectic that informs corporate actions, it would also have a cascading impact on how to message and articulate these decisions. No longer is it enough to merely point to a faceless mass of investors, who themselves rarely have to answer for the sometimes-callous choices companies make to maximize profits.
This shift in thinking from the Business Roundtable did not occur in a vacuum. The revised purpose statement may have caught observers off guard, but it’s certainly not surprising given recent trends. Eighty-five percent of S&P 500 companies now publish a sustainability or CSR report regularly, up from 20% in 2011. Financial reporting has since evolved too. Across the oil and gas sector, for instance, several energy companies have been forced, through shareholder resolutions, to consider climate change among their risk filings. And all public companies are required to include CEO pay ratios as a mandatory data point in their proxy filings.
As an aside, having seen firsthand the extent to which corporate lawyers and compensation consultants would complicate and obfuscate CEO-salary disclosures, the outcry for a simple and uniform formula is a rational reaction. Ironically, when reporters inquired about excessive CEO pay packages, the comms team would be far more straightforward in attributing it to “performance-based incentives” that are merely aligned to company growth.
But again, this narrative may no longer be so cut and dried.
This new emphasis reinforcing a company’s impact on all stakeholders—assuming that it does indeed go beyond just aspirational declarations—will have far-reaching ramifications that cuts across all industries. Just scanning across the different practice areas at BackBay, we foresee several possible changes and considerations.
ASSET AND WEALTH MANAGERS. The investment management community will certainly have to consider how this new lens influences its strategy. Many firms have already begun to incorporate ESG factors into their core financial analysis. For them, the Business Roundtable’s new statement of purpose provides confirmation there’s real value in including social and environmental factors—either for risk management purposes or to produce alpha. For managers investing in stocks, these harder-to-quantify variables could play a bigger role in assessing an asset’s intrinsic value. And for those investing in funds, they’ll want to know how selected managers are equipped to capitalize on the opportunities and managing new risks.
There will be other potential consequences—intended or otherwise. For starters, broadening corporate focus beyond just profits could help put an end to Wall Street’s myopic, short-term orientation. After all, while profits rise or fall every quarter, the interests of employees and the environment take years, if not decades, to manifest. One also wonders how this will affect share buyback activity or dividends. For instance, if large swaths of a company’s employee base doesn’t receive a living wage, can that corporation effectively justify raising dividend payouts to their shareholders? From a communications or IR perspective, asset managers will also face more scrutiny into whether their investments are aligned with—or run counter to—these ideas.
PRIVATE EQUITY. In private equity, many who have raised funds in recent years, have already witnessed a material uptick in interest from limited partners and prospective LPs around their attention to ESG. While many PE managers are signatories of the Principles for Responsible Investment, it would not be surprising if their limited partners simply demand more transparency around a sponsor’s impact in the non-financial areas of their portfolio companies. Just as public companies almost universally produce a CSR report today, the same traction could occur in private market reporting. Apax Partners, for instance, offers a good example of what that might look like.
FINTECH. For the fintech universe, a wider scope of emphasis across all stakeholders presents a tremendous opportunity. As financial institutions begin to navigate and attempt to quantify these new factors, they will lean on technology to do so efficiently and in an unbiased, consistent manner. Firms, such as Arabesque, are already deploying analysis tools that leverage big data to measure ESG and sustainability factors across thousands of public companies, while the prevailing data providers have also rushed in to carve out their respective niches. The key in messaging will be to highlight the materiality of what’s being measured and how it affects long-term value creation.
IMPACT/ESG. Of course, the ESG community should be celebrating this acknowledgement. It’s unlikely that the Business Roundtable ever would have made such a step if it weren’t for the pioneers of impact investing who were able to demonstrate that social factors don’t hurt investment returns—in fact, they can actually lead to market-beating performance. BackBay is proud to have represented several notable funds and thought leaders who have been swimming against the current to bring attention to these issues for years.
As it relates to communications, though, this milestone merely signals that experienced practitioners will now need to advance the dialogue. It’s no longer enough just to be an advocate. Thought leaders today are distinguishing themselves by playing an active role in helping the industry scale—to meet demand from institutional investors, share best practices around reporting, and continue to foster the larger ecosystem. If social factors are now integral to a corporation’s purpose, it will be beholden on impact investors to walk the walk going forward. Several recent crises that have captured headlines already this year reflect the higher bar that now exists.
Assuming the Business Roundtable’s revised purpose statement isn’t just an empty promise—and let’s be honest, there are plenty of doubters (here, here and here)—the magnitude of this shift will be far reaching. Business executives should relish the opportunity. For years, executives like Larry Fink and others have decried the short-term focus of public companies. At the same time, 2018 saw a record 226 companies targeted by an activist campaign, presaging what potentially awaits those who aren’t maximizing shareholder value. One would think executives would cheer this new lens, even if it requires more thought and consideration to explain a chosen path and then articulate how it ultimately helps all stakeholders.