“Key questions: How are investments in society enhancing shareholder value? How is the company showing leadership in social investments? Is the company focusing on its strategic investors, which represent most companies’ holdings, or more on its short-term traders?”
In this important update of the emergence of traditionally non-financial factors driving corporate value, Daryl Brewster, CEO of CECP, provides some wisdom for corporate leaders who are increasingly being looked to for leadership on many of the world’s most pressing issues. Climate change, for example, will not be successfully addressed unless the world’s largest corporate emitters begin to transform their business models into lower carbon engines of profitability. Leadership on the issues discussed below is more than ever about future-proofing a business. Tim Nixon, Managing Editor, Thomson Reuters Sustainability.
Leading Businesses Embracing New Role: Purpose and Culture Driving Sustainable, Long-Term Growth and Profitability
CEOs from institutional investor firms BlackRock and State Street released their annual guidance to companies on practices they “believe will drive sustainable, long-term growth, and profitability.” These letters were issued amidst widespread cynicism, both socially and economically, while anxious chatter continues about the role of business, capitalism, and strategic time horizons.
The 2019 Edelman Trust Barometer again confirmed that the business-social connection is not optional. Employees trust their CEOs but expect them to act on relevant social issues. The Financial Times asks us, “Should business put purpose before profit?”, quoting Oxford’s Colin Mayer who defines corporate purpose as “producing profitable solutions to problems of people and planet.” Blackrock’s Larry Fink states, “Profits are in no way inconsistent with purpose – in fact, profits and purpose are inextricably linked.” In CECP’s annual trends, it states, “[companies] explore what their purpose is and…bring that purpose to life through intentional practices and strategies. They use a human-centered lens for all business operations … to see around corners and deliver a competitive edge.”
It’s clear that effective companies cannot ignore social needs in pursuit of profit, but how do businesses navigate what’s coming and what role do they play in solving social challenges?
Three Vital Audiences
CECP partners with leading global companies to give shape to and make actionable the high-level encouragement provided by the BlackRock and State Street letters, work CECP has been engaged in with companies for the last 20 years, since its founding by Paul Newman, John Whitehead, David Rockefeller, and other business leaders. In Measuring the Value, CECP identified three vital audiences companies must engage to measure and communicate business’ social impact—1) INVESTORS, 2) INTERNAL, and 3) SIGNIFICANT STAKEHOLDERS:
The First audience: INVESTORS
Key questions: How are investments in society enhancing shareholder value? How is the company showing leadership in social investments? Is the company focusing on its strategic investors, which represent most companies’ holdings, or more on its short-term traders?
CECP’s growing Strategic Investor Initiative (SII), co-chaired by former Vanguard CEO & Chair Bill McNabb and Johnson & Johnson Chairman & CEO Alex Gorsky, provides long-term plan support to the nearly 30 company CEOs and beyond, with a market cap of $2 trillion, who are presenting at SII’s CEO Investor Forums to audiences of 200 institutional investors representing $25 trillion in AUM.
CECP guidance is rooted in issue areas that were identified through investor feedback and a suite of research that provides specific guidance to companies to structure an effective long-term plan, building towards consolidation and comparability. Through these long-term plan presentations, leading CEOs are setting examples for their peer firms to follow.
The hallmark of that guidance is the CECP Investor Letter, signed by a coalition of investors, building on the related work of FCLT and the New Paradigm of Corporate Governance. The letter shares the collective agreement by these investors of what constitutes a long-term view, and what should be shared with investors.
Going one step further, CECP and George Serafeim from Harvard Business School and KKS Advisors studied the economic significance of the CEO Investor Forum-presented plans to date and found that when specific information is shared, aligned with the seven questions, it moves markets.
Effective long-term plans address key issues of long-term value creation, such as overall corporate purpose, strategy, human capital, and corporate governance, which are of enduring interest to investors with a long-term investment horizon.
The BlackRock and State Street letters offer additional guidance on how to operationalize the concepts and strategies of long-termism. While BlackRock’s focus is on corporate purpose, defined as the “animating force behind achieving profits” and State Street’s focus is on corporate culture, defined as “a broad range of shared attitudes shaping the behaviors of individuals as a group across an organization”, there is alignment in many areas of their guidance:
- Corporate strategy and capital allocation
- Material environmental, social, and governance topics
- The perspective of long-term investment value, not from a political or social agenda (aka ‘values’)
- Human capital management, including retention rates, employee satisfaction, and pay differences
- Governance, including a company’s approach to board diversity
- Compensation that promotes long-termism
How do companies operationalize this guidance in the service of sustainable financial performance?
- Seek to understand a strategy for achieving long-term growth versus day-to-day operations through a year-long dialogue
- Analyze, communicate, and monitor how a company’s purpose and culture informs and aligns with its long-term strategy
- Senior leaders manage, define, and shape corporate culture and purpose; Board of Directors assesses and monitors whether corporate culture and purpose aligns with corporate strategy
- Identify increasingly material ESG issues in corporate valuations
- Drive CEO leadership, especially on issues central to the world’s future prosperity
- Focus on talent engagement
- Make difficult decisions in the service of larger strategic objectives
The Second Audience: INTERNAL
Key Questions: To make the case for deeper social commitments, what is the business impact and value of current investments?
The CSR and sustainability heads should provide metrics to the CEO to inform the company’s high- level KPIs, such as employee engagement, customer loyalty, reputational risk, innovation and growth, retention, and others. What gets measured matters. With data, the CEO can track social investment progress over time and connect it to business success. CECP developed a Strategic Scorecard (full tool available to CECP companies) as a template to guide companies.
The Third Audience: SIGNIFICANT STAKEHOLDERS
Key Questions: Are social investments achieving intended results? How can the ROI be estimated for effectiveness across different social investments?
Expanding on the metrics reported to the CEO, additional KPIs can be used with significant stakeholders, to report impact and progress towards more specific social goals. CECP has developed the Total Social Investment metric and is creating custom scorecards with companies to make their work count.
Is your company meaningfully engaged with these three audiences? No? Unsure? Here are the actions you can take to improve the quality of that dialogue:
- INVESTORS: Have your CEO present at a CEO Investor Forum. Work with CECP to prepare your long-term plan. We’re at capacity for February 25, 2019 but accepting CEOs for May 8, 2019 in Chicago. Or develop and present your LTP in a way that fits your company cadence—Investor Day, annual letter, or a designated call. CECP can identify the key questions and share leading practices.
- INTERNAL: Convene a cross-business unit group to gather data from all corners of the business as your company develops its long-term plan. Share data to inform a new way to look at your long-term, three-to-seven-year strategy. Create new bonds between business units to change strategy and operations focused on the long-term.
- SIGNIFICANT STAKEHOLDERS: Streamline your engagement with key stakeholders by outlining key goals and defining shared metrics at the outset. Be clear in your company’s purpose statement about how your company seeks to make social impact with your stakeholders, and authentically engage. Connect with CECP’s fast-track consulting to define your strategic social focus. Take the Giving in Numbers Survey, the unrivaled leader in corporate benchmarking, in partnership with companies, to see how your company stacks up.
Contact CECP today to improve the quality of your engagement with vital audiences.