Corporate governance in the 21st century
What’s the purpose of a corporation? For the last 50 years, the answer was “to maximize shareholder value.” But, on August 19, CEOs of 181 leading U.S. businesses, including Amazon, Apple, General Motors and Walmart, pledged to broaden the scope.
Beyond shareholder value
Putting shareholders first was the doctrine of University of Chicago economist Milton Friedman. In 1970, he famously wrote that “the social responsibility of business is to increase its profits.” While this mindset has enriched large shareholders, it’s also had negative consequences, including pay disparities between executives and frontline workers, layoffs and pollution.
Last year, Chairman of the Business Roundtable Jamie Dimon launched a project to update its principles. The new version of its Principles of Corporate Governance looks beyond delivering value to shareholders. It also recognizes the importance of:
- Investing in employees through training and education, as well as providing fair compensation and benefits,
- Fostering diversity, inclusion, dignity and respect in the workplace,
- Dealing fairly and ethically with suppliers,
- Supporting local communities,
- Protecting the environment through sustainable business practices, and
- Providing transparent and effective communications with shareholders and lenders.
For many business leaders who signed the new statement of purpose, these objectives represent a fundamental change in longstanding business principles. “Major employers are investing in their workers and communities because they know it is the only way to be successful over the long term. These modernized principles reflect the business community’s unwavering commitment to continue to push for an economy that serves all Americans,” said Chairman Dimon.
What you can do
Translating the statement’s lofty principles into concrete business practices will be challenging, especially if the changes cause earnings to fall over the short run. The key will be getting investor and lender buy-in by effectively communicating the link between adopting so-called “sustainable” business practices and building long-term shareholder value.
For example, identifying and successfully navigating sustainability issues can add value by building trust with stakeholders, providing improved access to capital and reduced borrowing costs, and enhancing customer and employee loyalty. Tracking sustainability also helps companies identify ways to reduce their energy consumption, streamline their supply chains, eliminate waste and operate more efficiently.
Conversely, aggressive tax strategies and regulatory violations can lead to fines, remedial costs and reputational damage. And the sale of toxic or unsafe products can result in product liability lawsuits, recalls and boycotts.
Disclosing the changes
Do your company’s financial statements include sustainability disclosures? Though they’re currently voluntary under U.S. Generally Accepted Accounting Principles (GAAP) and the financial reporting rules of the Securities and Exchange Commission (SEC), they can be worthwhile. These disclosures provide insight into various nonfinancial issues, such as:
- Pollution and carbon emissions,
- Union relations,
- Political spending,
- Tax strategies,
- Training and diversity practices,
- Health and safety matters, and
- Human rights policies.
Our auditors can help you draft disclosures that explain your sustainability efforts to stakeholders in a clear, objective manner and establish links to financial performance. Contact us for more information.