Conference report: ‘Creating Sustainable Companies’ summit: shareholder primacy needs overhauling

How can we create a more balanced, long-term, inclusive view of corporate governance.

Confronted with rising inequality and advancing climate change – both systemic risks – today’s corporate governance model lacks a social and environmental ‘license to operate’ because it does not challenge the dominant short-term, narrow, shareholder-value focus. This was the broad conclusion of speakers brought together by Frank Bold, the public interest law firm, at a summit in Brussels on September 28 to debate the subject of “creating sustainable companies”.
The panelists agreed that post financial crisis it has become clear that the current model chases short-term profit to satisfy shareholders’ myopic views on value creation, rather than the notion of broader ‘stakeholder’ and societal interest. The summit was tied to the release of a report titled ‘Corporate governance for a changing world’ Link, with feed-in from 260 leaders in business management, investment, regulation, academic and civil society communities around the world. The report also concludes that the excessive drive for profit and shareholder value maximization means companies have lost longer-term ‘purpose’ and value. By chasing near-term targets and KPI’s, they achieve the opposite, the conference heard. John Kay, author, and visiting professor at LSE, says the focus on short-term profit is ultimately self-destructive. He cited the example of ICI, the UK chemicals company, which suffered – fatally in the end – after it changed its mission to maximizing short-term profit at the expense of long-term business planning.
Companies with a sustainable strategy and mission, on the other hand, drive the ambition of its employees to company success, says Susanne Stormer, Vice President of Corporate Sustainability, Chief Sustainability Officer, at Novo Nordisk: “Employees [at pharmaceutical companies] go to work not because of shareholder value but to defeat diabetes.”
On the other hand, business success and long-term strategy is mutually re-enforcing, the report suggests.
Paul Polman, CEO of Unilever, has similarly argued that sustainability is not only compatible with profitability, but indispensable for a corporation’s success in the long-term.One major re-iteration of the report is that the current narrow view of a company’s purpose to satisfy shareholders is not legally anchored. Beate Sjåfjell, Professor Dr. Juris at the University of Oslo, Faculty of Law, Adjunct Professor at the Norwegian University of Science and Technology (NTNU), Faculty of Social Science and Technology Management, Department of Industrial Economics and Technology Management, told the conference it was a “legal myth” that the purpose of the corporation was to solely focus on shareholder profit. From the 70’s onwards, the corporate governance model of “shareholder primacy” manifested itself rapidly in the curricula of many law and management schools, accounting theory, corporate governance codes and incentive structures. The report says: “Shareholders have certain unique rights relating to organization and control of the corporation, but the notion that shareholders own corporations outright is not consistent with corporate law in any jurisdiction worldwide. Fiduciary duties of executives are not owed to the shareholders but rather to the corporation itself.”
The company’s purpose is, according to the roundtable participants of the report, broader and based on being “successful over a long-term period”, in order to satisfy broader stakeholder interests (employees, shareholders, customers, suppliers, society). It says a power shift is required away from shareholder primacy to a more balanced model of interests by integrating long-term goals in corporate strategy and contributing to societal well-being and environmental sustainability, and thereby improving corporate resilience against risks. A range of measures, such as reducing excessive executive pay, clarifying fiduciary duty, and educating board members to cure businesses from chronic short-termism were named in the report and at the summit. But to change the horizon from the short to the long term, capital markets have to change, says Richard Howitt, outgoing MEP and newly appointed CEO of the International Integrated Reporting Council (IIRC). This is much harder than one may think, he said: “We are talking about a paradigm change.”
Powerful corporations are at the heart of a nation’s economy, impacting and shaping the society and the environment around them. To decrease the externalities of these corporations is part of a strengthening trend towards ‘inclusive capitalism’ in the EU. One major legal piece of this puzzle soon to come into effect is the EU non-financial directive requiring large companies in Europe to report on their environmental, social and governance performance.