Accountability and dialogue
Principle A of the 2018 UK Corporate Governance Code makes clear that the role of the Board is not only to generate value for shareholders but contribute to wider society. This raises key questions about accountability:
- To whom should the Board be accountable and for what?
- If the purpose is in some sense to benefit society, how does the company “know” what society expects and needs?
The response of the Council of Institutional Investors to the US Business Roundtable statement on purpose was that “the statement undercuts notions of managerial accountability to shareholders…accountability to everyone means accountability to no-one.”
The key to a good answer is to recognise that a purpose-led business is a series of enduring human relationships, a complex web of promises, commitments and expectations, with employees, customers, suppliers, communities, regulators, future generations and of course investors. At the core of any relationship of dignity and respect is openness to dialogue and acceptance of accountability for decisions and actions that affect others. Businesses seeking to be purpose-led want and need a range of accountability mechanisms as vital feedback loops both to enable and welcome scrutiny of alignment of performance to purpose and also to ensure the quality of relationships needed to pursue that purpose effectively.
Innovative and bespoke accountability models are required, as well as careful thought about how best to ensure that mechanisms are properly representative of the organisation’s stakeholders and the long-term interests of society. A shared understanding of what the purpose means for the organisation, together with a shared vision of how the purpose manifests itself in say 5 or 10 years time (ie. a clear picture of the impact of the purpose which includes how it impacts wider society) helps and provides a reference point for relevant financial and non-financial measures and metrics for which the business is accountable (see more on assessing progress below).
More companies are now using the obligation to provide a s172 report to indicate how key stakeholders are taken into account in key decisions. Using this not only as a prompt for better reporting but also a provocation for more searching internal discussion can help promote a broader perspective when decisions are being made. (NB s172 is the section of the 2006 Companies act that defines the duties of directors and it sets out a range of considerations they must “have regard” to alongside shareholders when decisions are being made).
Who are the ‘stakeholders’?
The word ‘stakeholders’ is commonly used to refer to employees, customers, investors, suppliers and so on – but the term conjures up an image of people each claiming their share or stake and acting only out of self-interest. Our Principles, which provide a picture of how a purpose-led business ‘shows up’, is also a map of the relationships on which the success of a business depends. The guiding thought is that the relationships created go beyond self-interest and are the result of people committing to a shared worthwhile endeavour. This is referred to by Professor Alex Edmans as a mindset which considers the potential of “growing the pie” to create value for society (where the pie represents value in its broadest sense, not just financial value) rather than focussing on “splitting the pie” (where the value that a company creates is fixed and business is a zero-sum game). The relationships in our Principles include employees, customers and suppliers and of course investors, but there are also quadrants representing ‘a good citizen’ (wider society) and ‘a guardian for future generations’. See course on Understanding the Blueprint Principles for a detailed exploration of the relationships in each of the Principles.
In thinking about the relationships on which the long term success of the business depends it is helpful to think about this more broadly. For example, some businesses rely on a broad range of workers that may not be traditional employees, including those who work for them via the gig economy or outsourced services. Whole communities could be directly affected by the direct or indirect operations of a business or by their goods or services, and the business’ operations could be having a significant impact on future generations. In some industries, businesses could benefit from embracing dialogue with activists or NGOs, politicians, policy-makers or academics and experts. Many of these stakeholders don’t have a direct ‘stake’ in the business but are influenced by and could have a significant influence on the long term success of the business; engaging in dialogue with them to understand issues and concerns and where appropriate to co-create solutions could be important and helpful both to the business and benefit wider society.
Dialogue – considerations
As well as considering who the stakeholders are, how can Boards enter into effective and constructive dialogue with them?
There are of course different ways of engaging with each of these stakeholders and engaging with wider society to inform being a ‘good citizen’ and acting as a ‘guardian for future generations’ is more complex than engaging with employees, customers or suppliers.
Example:
This document Engaging with stakeholders sets out how Unilever thought about engaging with their stakeholders, including wider society through engaging with NGOs, communities, peer companies and government.
In Blueprint’s thinking dialogue between the Board and stakeholders is not simply about informing stakeholders – with a mindset of doing things ‘to and for’ them. To be genuine, dialogue needs to invite and be ‘with and alongside’, seeking insight and collaboration, and building relationships.
Some considerations are shared in this Blueprint blog: Navigating dialogue in business
One mechanism that Boards can use is the AGM. Currently, this focuses on shareholders but could this be reimagined to embrace dialogue with a broader group of stakeholders? This paper released by Share Action Fit for Purpose – The Future of the AGM sets out a bold new vision for the purpose of the AGM of the future. It addresses how companies, shareholders, stakeholders and policy-makers can play their part in making the AGM of the future the backbone of corporate governance and investor stewardship where the AGM is regarded as a key component in an annual process that encourages robust engagement between investors, stakeholders and the company throughout the year. But companies do not need to wait for a formal change in the role of the AGM – introducing regular mechanisms for dialogue with different stakeholder groups throughout the year can enrich and enhance the AGM and strengthen relationships with stakeholders.
Board Membership
As Patrick Dunne notes in his book, Boards – A Practical Perspective (p. 14), part of the point of the Board is to challenge the executive, and to embody different perspectives. He distinguishes three states: two extremes of low alignment – either a “disorganised rabble” or “monarchist state” and a middle state:
Where they are all pointing in the same direction but have enough creative tension and challenge to avoid complacency and groupthink. The paragons in the middle are rarely satisfied, value diversity and different perspectives and have a healthy and robust way of challenging themselves.
Bringing in different voices and perspectives on the Board is another way to engage with stakeholders to ensure that all those who are affected by the company’s decisions are effectively considered. This includes:
- Employee voice – this is specifically highlighted in the FRC code which proposes different ways in which Boards can do this. Capita, for example, has placed two employees on their Board, and have reported this to be working very effectively
- Ensuring a range of different relevant skills and expertise, for example, an understanding of climate issues. At a time when a growing number of companies are setting climate targets, a 2020 study of the biographies of over 1,000 board members of the 100 largest US companies revealed that just 3 directors had expertise in climate and just 6% had broader environmental experience. See: Too many boardrooms are climate incompetent and the full study Corporate Boards Suffer from Inadequate Expertise in Financially Material ESG Matters
- Cognitive diversity – this is a function both of sufficient diversity in gender and other characteristics, and also of effective dialogue and collegiate decision making by the Board so the contributions of all feed into decision-taking, and different perspectives, including from society, are taken into account
Some companies (such as Engie) have created a responsible business charter and then established an external scrutiny board as a supplement to their statutory Board to hold themselves accountable.
Effective engagement with investors
As set out in our Principles, a purpose-led business has a purpose which delivers long-term sustainable performance and generates a fair return for responsible investors. It, therefore, seeks to attract ‘responsible’ investors and this necessitates effective dialogue with investors so they understand the purpose and support a long-term outlook. Regular communication and dialogue between the Board and investors so that they understand the purpose and the implications of the purpose on the strategy and performance (financial and non-financial) of the business is key.
It is of course important for the purpose to be accepted and supported by the organisation’s shareholders. Since 2018, when BlackRock CEO’s letter to CEOs highlighted the importance of purpose, there has been a gradual increase in investor interest and invigilation of company management over purpose alongside performance. Since 2020 this has been amplified by the sharp growth in ESG funds. Whilst there are still many situations where the dialogue between the board and investors still consist of two parallel conversations – one with the portfolio manager about financial performance, and another with the governance team about purpose, the situation is evolving.
What is key is for companies to be able to bring together in a single narrative how purpose and performance go together, and what the long-term plan is. For a company to be able to pursue an effective purpose-led strategy over time, the support of investors is essential. What is also clear is that purpose-led leaders are able to influence their investor base and to some extent choose their investors. Long term purpose-led companies need patient capital and effective leaders can attract it.
Examples:
Severn Trent CEO Liv Garfield has made it her particular mission to create a base of shareholders who share her and her board’s commitment to Severn Trent’s purpose. It is hard work – but a vital prerequisite to what the company wants to do.
“Probably twelve or thirteen of my top twenty shareholders have stayed with us. If I look at my top five, I’ve worked to introduce three of them to the company, then worked to increase their shareholding so they now own big numbers. Of my top five, three were not in the water industry until my time. We targeted them because they are really good, long term shareholders of the type we would like – ESG oriented and wanting long term investment.” The Purpose Tapes (p34)
Unilever is a good example of a company that has sought to be clear about its purpose and vision, what this means for the business, and communicates this to their investors.
“We know the economy-wide shift to net-zero emissions will require a greater and deeper level of engagement between companies and their investors. In setting out our plan, we hope this increased level of transparency and accountability will strengthen this dialogue and encourage other companies to follow suit. As we pursue our bold vision to be the global leader in sustainable business, demonstrating how our multi-stakeholder model drives superior performance, the plan reinforces our confidence that ambitious climate action will create value for our stakeholders” Unilever Climate Transition Plan