About “Stakeholder Capitalism”: The Public Debate

Here is the Transition — From the Long-Dominant Worldview of “Stockholder Capitalism” in a Changed World to…Stakeholder Capitalism!

by Hank Boerner – Chair & Chief Strategist – G&A Institute

October 2020

As readers of of G&A Institute’s weekly Sustainability Highlights newsletter know, the shift from “stockholder” to “stakeholder” capitalism has been underway in earnest for a good while now — and the public dialogue about this “21st Century Sign of Progress” has been quite lively.

What helped to really frame the issue in 2019 were two developments:

  • First, CEO Larry Fink, who heads the world’s largest asset management firm (BlackRock) sent a letter in January 2019 to the CEOs of companies in portfolio to focus on societal purpose (of course, in addition to or alongside of corporate mission, and the reasons for being in business).
  • Then in August, the CEOs of almost 200 of the largest companies in the U.S.A. responded; these were members of influential Business Roundtable (BRT), issuing an update to the organization’s mission statement to embrace the concepts of “purpose” and further cement the foundations of stakeholder capitalism.

These moves helped to accelerate a robust conversation already well underway, then further advanced by the subset discussion of Corporate America’s “walking-the-talk” of purpose et al during the Coronavirus pandemic.

Now we are seeing powerful interests weighing in to further accelerate the move away from stockholder primacy (Professor Milton Friedman’s dominant view for decades) to now a more inclusive stakeholder capitalism.  We bring you a selection of perspectives on the transition.

The annual gathering of elites in Davos, Switzerland this year — labeled the “Sustainable Development Impact Summit” — featured a gaggle of 120 of the world’s largest companies collaborating to develop a core set of common metrics / disclosures on “non-financials” for both investors and stakeholders. (Of course, investors and other providers of capital ARE stakeholders — sometimes still the inhabiting the primacy space on the stakeholder wheel!)

What are the challenges business organizations face in “making business more sustainable”?

That is being further explored months later by the World Economic Forum (WEF-the Davos organizers) — including the demonstration (or not) of excellence in corporate citizenship during the Covid-19 era. The folks at Davos released a “Davos Manifesto” at the January 2020 meetings (well before the worst impacts of the virus pandemic became highly visible around the world).

Now in early autumn 2020 as the effects of the virus, the resulting economic downturn, the rise of civil protests, and other challenges become very clear to C-suite, there is a “Great Reset” underway (says the WEC).

The pandemic represents a rare but narrow window opportunity to “reflect, reimagine, and reset our world to create a healthier, more equitable, and more prosperous future.”

New ESG reporting metrics released in September by the World Economic Forum are designed to help companies report non-financial disclosures as part of the important shift to Stakeholder Capitalism.

There are four pillars to this approach:  People (Human Assets); Planet (the impact on natural environment); Prosperity (employment, wealth generation, community); and Principles of Governance (strategy, measuring risk, accounting and of course, purpose).

The WEF will work with the five global ESG framework and standard-setting organizations as we reported to you recently — CDSB, IIRC, CDP, GRI, SASB plus the IFAC looking at a new standards board (under IFRS).

Keep in mind The Climate Disclosure Standards Board was birthed at Davos back in 2007 to create a new generally-accepted framework for climate risk reporting by companies. The latest CDSB report has 21 core and 34 expanded metrics for sustainability reporting. With the other four collaborating organizations, these “are natural building blocks of a single, coherent, global ESG reporting system.”

The International Integrated Reporting Council (IIRC, another of the collaborators) weighed in to welcome the WEF initiative (that is in collaboration with Deloitte, EY, KPMG and PWC) to move toward common ESG metrics. And all of this is moving toward “COP 26” (the global climate talks) which has the stated goal of putting in place reporting frameworks so that every finance decision considers climate change.

“This starts”, says Mark Carney, Governor, Bank of England, and Chair of the Financial Stability Board, “with reporting…this should be integrated reporting”.

Remember, the FSB is the sponsor of the TCFD for climate-related financial disclosure.  FSB is a collaboration of the central banks and treasury ministries of the G-20 nations.

“COP 26 was scheduled for November in Glasgow, Scotland, and was postponed due to the pandemic. We are now looking at plans for a combined 26 and 27 meeting in November 2021.”  Click here for more information.

There is a lot of public dialogue centered on these important moves by influential players shaping and advancing ESG reporting — and we bring you a selection of those shared perspectives in our Top Stories in the Sustainability Highlights newsletter this week.

Top Stories On Davos & More

And then there is this, in the public dialogue on Stakeholder Capitalism, adding a dash of “reality” from The New York Times:

The State of Sustainable / ESG Investment in 2018: The State of Corporate Sustainability Reporting & How We Got Here

by Hank Boerner – Chair & Chief Strategist, G&A Institute

In this issue of our weekly newsletter we brought you two important Top Stories that capture the state of sustainable investing from varying points-of-view. 

We selected these research efforts for their value to both corporate managers and investment professionals.

  • Corporate staff can use the findings to “make the case” upward to C-suite and boardroom using both documents.
  • Investors not yet on board with Sustainable / ESG investing can gain valuable insights from both reports.

First is the report by Guido Giese and Zoltan Nagy at MSCI – “How Markets Price ESG” – addressing the question “have changes in ESG scores affected market prices?”

MSCI examines the changes in companies ESG scores, “ESG momentum” — either strong or negative for the companies being rated. Using the firm’s model, the research showed that markets reacted “most sensitively” to improvements in a public company’s characteristics rather than to declines in ESG performance, among many other takeaways in the full report.

The takeaway is that changes in ESG profiles of companies certainly affect company valuations.  The change in ESG characteristics showed the strongest move in equity pricing over a one-year horizon compared to shorter or longer time frames.  The report contains a well designed, thorough methodology which clearly demonstrates the importance of a public company’s ESG profile.

The MSCI score, the authors point out, is a proxy for the ESG-related information that the market is processing. (All MSCI ESG scores are updated at least once a year.)  There’s good information for both corporate managers and investment professionals in the 25-page report.

The second report is a snapshot of the “State of Integrated and Sustainability Reporting 2018” — issued by the Investor Responsibility Research Institute (IRRCI)Sol Kwon of the Sustainable Investments Institute (Si2) is the author and colleague Heidi Welsh is editor.  (IRRCI and Si2 regularly publish research reports together.)

The report charts the evolution of corporate sustainability reporting, which got off to a modest start in the 1980s – then on to the 1990s when corporate sustainability reports as we know them today as investors and companies adopted ESG or Triple Bottom Line approaches.

Key:  Another transition is underway, writes author Kwon, the “value creation” (a/k/a shared value) which should lead to more holistic reporting of inputs and outputs…and the emergence of the integrated report.

In 2013, IRRCI had Si2 look at the state of integrated reporting among the S&P 500® companies and examined practices again for this year’s report.  (The earlier work focused on what companies were reporting without regard to status as “mandated” or “voluntary” disclosure.)  Much progress has been made – for one thing, investor attention on ESG matters is much higher today…making corporate sustainability reporting ripe for the next phase.

The details are set out for you in the IRRCI report including trends and examples in use of reporting frameworks (GRI, SASB, IIRC), Quality, Alignment with SDGs, Inclusion of Sustainability in Financial Reports, Investor Engagement / Awareness, Board Oversight, Incentives, and many other important trends.

This an important comprehensive read for both corporate managers and investment professionals, with a sweep of developments presented in an easy-to-read format.

Example:  What drives ESG integration into investment strategy?  The drivers are identified and presented in a graphic for you.

Important note for you regarding IRRCI:  in 2019 the organization’s intellectual properties will be assumed by the Weinberg Center at the University of Delaware.  The center conducts research and holds conferences on corporate governance and related issues and is headed by Charles Elson, one of the most highly-regarded thought leaders on corporate governance in the U.S.

Important Study on ESG Momentum by MSCI: 
https://www.msci.com/www/research-paper/how-markets-price-esg-have/01159646451

State of Integrated and Sustainability Reporting 2018:
https://irrcinstitute.org/wp-content/uploads/2018/11/2018-SP-500-Integrated-Reporting-FINAL-November-2018.pdf

Tune In to the Corporate Reporting Dialogue — An Initiative That Will Impact Investors, Corporate Reporters and Stakeholders

by Hank Boerner, Chairman – G&A Institute

Tune in to the [just launched] Corporate Reporting Dialogue – whether you are an investor, or company manager, or stakeholder with interest in corporate disclosure and structured sustainability / responsibility reporting.

This important dialogue was formally begun in June at the annual International Corporate Governance Network (ICGN) conference – the effort is spreadheaded by the International Integrated Reporting Council (ICCR).

The “dialogue” is organized to include the group of prominent independent organizations that exert varying degrees of influence on (among other things) the valuation and reputation of the world’s public and private companies … by inviting, mandating, suggesting and in various ways requesting that corporate managers look to their framework or standard or approach for their ESG disclosure and reporting.

Compliance with some of the standards of the organizations that gathered are in some cases mandatory (FASB, IASB for periodic or immediate public company financial disclosure & reporting); others are voluntary for the most part (the GRI, now the most widely used for global corporate and institutional sustainability reporting); some are voluntary logically leaning toward becoming the industry norm and perhaps at some point, mandatory (SASB for corporate sustainability reporting in the USA); some have created a global norm that public companies ignore at their risk (CDP for water, carbon and supply chain disclosure).

Gathering in Amsterdam, the Netherlands, the alphabet soup of leading ESG framework purveyors and standards setters came together to talk about important topics: (1) the coming of integrated reporting (for disclosure related to financial and ESG performance and more), (2) improving the quality and consistency or comparability of the various standards and reporting frameworks that corporations are using or adopting for their reporting, and (3) these (as described) and other approaches that asset owners and manager are using to make portfolio decisions.

“More certainty” for corporates and investors is one of the worthy objectives being debated.  More certainty in sustainability reporting…greater coherence among frameworks and standards…and the subsequent investor analysis and use of same?  All users of the standards, frameworks, related requirements, and analytical approaches will cheer that worthy goal on.

The organizations now collaborating under the umbrella of the Corporate Reporting Dialogue include:

  • The Global Reporting Initiative (GRI, the most widely used framework for sustainability reporting);
  • CDP (formerly known as the Carbon Disclosure Project);
  • the USA’s financial accounting standards FASB, authorized by the Congress to set accounting and financial reporting standards;
  • the counterpart international body, IASB for global (non-USA) accounting standards;
  • the very influential International Organization for Standardization (ISO – you know them for ISO 9001 etc.);
  • Climate Disclosure Standards Board (CDSB);
  • International Integrated Reporting Council (IIRC, the initiator of the dialogue);
  • International Public Sector Accounting Standards Board (IPSASB);
  • the relative newcomer and increasingly influential player, based in the USA, the Sustainable Accounting Standards Board (SASB, which is now in the process of generating sustainability reporting standards for various sectors and industries).

Connectivity is Key:  The collaborating organizations are aiming to develop practical ways to align the direction, content and development of the various reporting frameworks, standards, etc. The initial deliverable is going to be a document highlighting the “connectivity” of the various frameworks and standards….and the relevance to the coming of integrated reporting.

In the announcement, the IIRC organizers said that “…in an interconnected world, isolated change is insufficient to reflect the complexities of modern business and investment decisions…the CRD is a collaboration to promote greater cohesion and efficiency, rebalancing reporting in favor of the reader, helping to reestablish the connection between a business and its principal stakeholders…”

Note:  Chair of the CRD is Mrs. Hugette Labelle, Chair of Transparency International and board member of IIRC.

In announcing the initiative, Paul Druckman, IIRC CEO stated: “The purpose of the CRD is to strengthen cooperation, coordination and alignment between key organizations with Integrated Reporting as the umbrella. The need for this is continuously articulated in my discussions with companies, investors, regulators and other stakeholders across the world.

“At the creation of the IIRC we set out to be a catalyst for an evolution in corporate reporting – the formation of the CRD is at the heart of this, and is a significant step towards achieving our goal.”

Tune in and follow the new CRD — whether you are an investor, or corporate manager, or other stakeholder — this conversation will affect the future of corporate sustainability disclosure and reporting.

Information at:  http://www.theiirc.org/2014/06/17/corporate-reporting-dialogue-launched-responding-to-calls-for-alignment-in-corporate-reporting/