James de Gaspé Bonar
Ph.D., CEC, PCC
October 24, 2016
Ph.D., CEC, PCC
October 24, 2016
Large publicly traded multinationals are considered by some to be the real centres of power of the global economy in the 21st century, where technology and innovation are integral to success (See James McRichie, The Individuals Role in Driving Corporate Governance, The Hand Book of Corporate Governance, Wiley, 2016). If true, this is both a challenge and an opportunity to shareholders’ long-term value creation.
The challenge, here, is that these corporations are so widely traded, have such vast resources and large global foot prints that they risk being more accountable to management than to shareholders. According to Robert A.G. Monks, a shareholder activist and corporate governance advisor, shareholders’ ultimate right to control corporations is “aspirational at best”. Today’s corporations, he contends, are “so widely owned and so widely traded that they have no owners” (defined by the SEC as 10% or more). Control, in such scenarios, has effectively been separated from ownership (“The Happy Myth, Sad Reality: Capitalism without Owners Will Fail”, The Hand Book of Corporate Governance). Corporate managers thus might end up being too focused on quarterly results to the detriment of considerations of the public good and long-term corporate sustainability.
Large multi-nationals, as well as large privately-held companies, naturally do gravitate to countries offering the best incentives and the lowest corporate tax rates. This, over time, could exacerbate strains between economic winners and losers. Some evidence suggests that wealth inequality measures are the widest ever recorded. (Jill Treanor, “Richest 1 Percent Own Nearly Half of Global Wealth, Says Report”, The Guardian, Oct. 14 2014). This leads to the social and political unrest stirring in many advanced economies.
Conversely, the very power of multinational corporations with their vast resources, global footprint and market orientation positions them well to alleviate these dangerous tensions. These corporations advance employment and reduce poverty through access to new markets, workforce development, product innovation and distribution. Unilever’s purpose, for example, is to make sustainable living commonplace by enhancing the livelihoods of millions of people as it grows its business. (See Unilever’s 2014 Annual Report).
Increasingly corporations are being held to account by their stakeholders - shareholders, employees, vendors, customers, the larger community and the environment. While companies depend on profitability for their existence, forward-looking corporate boards recognize that it is not sufficient in and of itself (see my September 6 2016 post, CEOs & Stakeholders’ Value Creation). The most successful boards are comprised of directors of diverse experiences, expertise, age and gender. They understand that “non-financial” environmental and social issues are risks that can over time impact corporate capital and long-term shareholder value creation. They realize that devastation created by the increasing frequency and severity of natural disasters due to climate change; scarcity of food, water and medicine; and poverty are global existential threats.
Forward-looking boards focus on generating sustainable value for all their stakeholders. They recognize that the interests of each stakeholder complement synergistically the others and lead to the creation of even greater, sustainable, value. These companies codify and publicly state their commitments to ethical, socially responsible and sustainable business practices. A number report on how they perform in the financial, social and environmental areas. There is a clear connection between such a corporate culture and profitability. Research indicates that the performance of stock prices of companies is influenced positively by clearly stated sustainability practices. (See Alice Korngold, “Board Governance for a Better World, The Hand Book of Corporate Governance).
The success of companies to resolve the highly complex and volatile challenges they are facing rests on the excellence of the CEOs, and of the boards of that hire them and provide strong oversight, strategic direction on long-term value creation and support.