Managing shareholder vs. stakeholder conflict
February 2022 | TALKINGPOINT | BOARDROOM INTELLIGENCE
Financier Worldwide Magazine
February 2022 Issue
FW discusses ways to manage shareholder versus stakeholder conflict with Harlan Loeb and Robert Gemmill at Argyle Communications.
FW: How would you characterise the nature of shareholder vs. stakeholder conflict in today’s business world? What are the key battlegrounds?
Loeb: Certainly, the coronavirus (COVID-19) pandemic has impacted the still-fervent controversy over whether publicly held companies should be governed and run for shareholder or stakeholder interests. Ever since the Business Roundtable’s October 2019 pre-pandemic edict that a corporation’s purpose today requires it to weigh interests of stakeholders more heavily, the debate has favoured that contention, primarily because of the pandemic. The pandemic’s impacts have highlighted that companies must rework their mission statements to focus more on their stakeholders. They must look after their employees’ and their communities’ wellbeing. They must ensure they best serve their customers and suppliers, protect the environment and weigh in on critical social issues. Supporting this view are employee and consumer surveys that consistently favour business leaders taking a stand through action, not just words, on critical societal issues and being more responsive to climate change concerns. This helps explain why environmental, social and corporate governance (ESG) is the new corporate buzzword. Yet, unless this new normal persists, key battleground issues will rekindle – especially when world stock and commodity markets slide sharply. Shareholders generally have been silent as the stock markets posted gains and stayed near those highs during the past decade. But should stocks dive and dividends decline, shareholders will begin to make their criticisms heard. Managements and boards of directors will listen more intently then, fearing increasing hostility. Issues over executive pay will likely resurface too, once profits and stock values decline. Directors are less likely to link executive pay to such issues as diversity, inclusion and ESG – which have consumed more of their time recently – and once again hinge pay boosts on profit and stock performance. There is merit to considering history. It is doubtful that over time, the belief that 2020 triggered a new inflection point in a corporation’s role will remain as strong. Rather, history suggests that who is ahead – shareholders or stakeholders – will switch back and forth.
FW: In an ESG world, what are the key drivers that govern corporate governance and decision making? Are corporations truly accountable when they position themselves as ‘stakeholder’ firms when, in fact, they are indelibly wedded to the concerns of shareholders above all?
Gemmill: Look for ESG issues to be embedded increasingly in companies’ business plans and culture, as well as in laws and regulations. That trend started in earnest after the pandemic began. There are two key drivers. First, the growing call by employees, consumers and customers and clients for managements and boards to become more involved in ESG issues, especially as they relate to diversity, equality and inclusion (DE&I) and climate change. More senior management and boards are setting diversity goals for their workforce and management. Boards also are giving their various committees increased oversight over specific DE&I matters. Broadcast company Tegna, for instance, has set five-year DE&I goals and incorporated into each board committee charter specific areas of DE&I oversight. Second, the growth of laws and regulatory requirements that relate to DE&I and climate change. With respect to DE&I, new Nasdaq board diversity and disclosure rules that have been approved by the US Securities and Exchange Commission (SEC) and could go into effect in 2022, require listed companies to disclose board level diversity data and have at least two diverse directors or explain why they do not. Plus, California has strengthened its board diversity requirements, a signal that other states may follow. Regarding climate, driving the regulatory focus is a global effort to meet targets of the Paris Climate Agreement and other landmark agreements. In the US, the SEC is expected to propose a mandatory climate risk disclosure rule this year and the agency is already taking a more proactive approach to reviewing companies’ climate disclosures. In Europe, EU regulators have incorporated ESG requirements into existing regulations and the UK has chosen to align its environmental disclosure rules for large firms with the Financial Stability Board’s Task Force on Climate-related Financial Disclosure by 2025. Asian regulators also are creating the framework to include climate risk factors into investment regulations. So, in certain ways, companies must be accountable to stakeholders as much as shareholders because of the growing role of regulators and lawmakers.
“The shift to stakeholder from shareholder capitalism that began during the pandemic and due largely to ESG factors will likely continue for the foreseeable future. ”
FW: What are the potential consequences for companies found to have made inaccurate or misleading claims, such as greenwashing? How are stakeholders reacting to such revelations when they are uncovered?
Loeb: The consequences for companies found to be greenwashing their environmental claims are likely to be substantial as new statutory and regulatory ESG mandates go into effect, especially in Europe, and as government enforcement and private party litigation accelerates. In the US, regulators such as the Federal Trade Commission (FTC) have not done all that much in policing deceptive environmental claims by marketers. However, the FTC has signalled it will refresh its Green Guides in 2022 for the first time in a decade. The Guides serve mainly to communicate to marketers what types of environmental claims the agency may find deceptive under the FTC Act. They are not agency rules or regulations. The number of lawsuits worldwide against governments and private companies for failing to take effective action on climate-related issues has more than doubled since the 2015 Paris Climate Accord, numbering over 1000 since then covering 27 countries. Thirty-seven of them have been ‘systemic mitigation’ lawsuits by climate activists charging governments with inaction against existing targets. In the first one against the Dutch government and brought by sustainability non-profit Urgenda, the court ruled that the Netherlands must take further measures to realise pre-established emissions targets it was not meeting. The government closed a power plant earlier than planned and introduced a new climate plan. Such court victories have emboldened climate activists to bring lawsuits elsewhere, and that trend is not likely to disappear, especially if victories continue as they seem to be. In June 2021, Germany’s Constitutional Court found that the country’s Climate Protection Act lacked emission reduction targets beyond 2030 and ruled Germany’s Climate Protection Act unconstitutional. In another 2021 case brought by several environmental groups, a court ruled that Shell Oil Co. must pare emissions levels by 45 percent versus 2019 levels. Judging by the cases brought, it is likely that climate-change lawsuits will be brought to prevent future emissions contributing to climate destruction, to challenge climate-related legislation and policies, to require governments or regulators to take action to meet commitments, and to compensate for the costs to adapt to climate change.
FW: What advice would you offer to companies on addressing the key issues driving conflict between shareholders and stakeholders? How should they respond?
Gemmill: Management and boards must truly grasp the differences between shareholders and stakeholders. Uppermost, shareholders want them to watch the bottom line and take actions to improve profits, stock price and dividend payouts, while stakeholders want them to centre a lot more on ESG issues that affect them in the workplace and elsewhere. They should gauge what might trigger a lawsuit by stakeholders and what might spark a shareholder lawsuit or even a takeover fight. Management and boards should take a long-term view over expectations for the direction ESG issues likely will take in the future as, increasingly, corporate reputation rests on more than the bottom line. And directors’ fiduciary duties and statutory mandate give them broad ability to exercise their business judgment consistent with their fiduciary duty to consider long-term value. Plus, such a long-term approach appears to benefit companies with strong ESG norms, according to McKinsey research. These companies recorded higher performance and credit ratings when examining such factors as higher productivity, growth, cost reductions, fewer legal and regulatory intrusions, and strong investment and asset use. Still, management and boards should carefully manage their policies and processes toward shareholders by getting input from investors, third-party experts and others on the benefits and risks associated with stockholder interests.
“The pandemic’s impacts have highlighted that companies must rework their mission statements to focus more on their stakeholders.”
FW: How important is it for companies to get their corporate communications in order? What steps can they take to improve their messaging, and the actions behind those messages?
Loeb: A company’s reputation rests on what shareholders, employees, customers and the public think about them. This makes effective communications essential and invaluable, especially in this pandemic environment and a likely post-COVID-19 world. Unfortunately, many companies that did not communicate effectively in the first two years of the pandemic about their responses to, say, the global health crisis, social and political unrest, supply disruptions, and the economic downturn, often saw their corporate reputations weakened. Certainly, consistent and constant communications to employees proves important since today’s talent war is causing more employees to jump ship when they think their employer is not being transparent or is not heeding their views toward work and their wellbeing. But it is also increasingly important to incorporate ESG into a communications strategy for external audiences. ESG initiatives are part of a company’s overall business narrative, so effective communication pays off in improved ‘benefit of the doubt’ scores with stakeholders, some research suggests. The chief executive should be the spokesperson since employees and other stakeholders increasingly favour the chief executive assuming the spotlight on ESG issues. Also, communications should embrace both traditional avenues as well as digital and social media.
FW: Looking ahead, what are your predictions for shareholder vs. stakeholder conflict? What are the likely short- and long-term consequences for companies?
Gemmill: The shift to stakeholder from shareholder capitalism that began during the pandemic and due largely to ESG factors will likely continue for the foreseeable future. Ninety percent of global C-suite executives seem to think so, too. Surveyed in 2021 by The Conference Board, 80 percent of them think the shift is happening at their own company. Recognising this swing and determining how strategically to respond could better position their companies for future success. Proxy issues in 2021 highlighted the ESG influence, and that is likely to continue throughout 2022. As a result, management and boards must continue to evolve their governance process, skills and technology, as quickly as the business environment changes. In terms of the implications and consequences of this shift, first, management and boards are focusing more on ESG, DE&I, the workplace and employee wellbeing, and the impact of social and other issues on the communities they serve. Boards are being counselled by a broader array of advisers, including their own directors of diversity, ESG and HR, among others, as they make decisions. And senior executives are also engaging with more diverse stakeholder groups. Second, management and directors will spend more time discussing frankly what the shift means for the company and its future and developing strategy and clear objectives that apply to the shift. They will recognise that employees’ voices and views have strengthened, especially during the current competition for talent. Chief executives will likely spend more time communicating with employees and externally about stakeholder issues and perspectives. And if they take a stand on social and environmental issues, they will seek to ensure it is a consistent approach that applies and ties to their business and its strategies as well as the company’s mission, values and vision. In essence, boards and management will understand that shareholder and stakeholder value are not mutually exclusive, and that serving all stakeholders is a must. This will complicate their deliberations about how to invest in their workforce, their products and services and their operations, especially to make them more socially responsible and sustainable.
Harlan Loeb is executive vice president at Argyle Communications. He is a widely recognised senior adviser on high-profile organisational risk, crisis management, complex litigation strategy, government investigations and public affairs. He works closely with executive leadership teams and their boards and he has worked across all industry sectors. He has also been a sought-after media expert and has appeared frequently on both broadcast news and in print. He can be contacted on +1 (312) 282 5632 or by email: hloeb@argylepr.com.
Robert Gemmill is a trained lawyer with an extensive background in strategic communications and specialised consulting. He works with a broad cross-section of clients, with a particular focus on reputation risk, crisis management and litigation communications. Over the past decade, he has guided dozens of companies, organisations and prominent individuals, including some of the world’s biggest brands and their chief executives, through major media crises and on a consistent basis achieved positive outcomes for clients. He can be contacted on +1 (202) 494 4070 or by email: rgemmill@argylepr.com.
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