Ira Millstein, Bob Denham and Bill Crist led a lively debate last month at the Conference Board’s spring global corporate governance symposium, with delegates from 14 countries.
Japanese CEOs have criticized the American model of corporate governance as too oriented toward shareholders at the expense of other stakeholders, such as employees. On the other hand, some say stakeholder models of governance have been too unresponsive to changing economic requirements and not paid enough attention to shareholder value. What is the right balance between shareholder and stakeholder needs?
Slow start
The debate in the US started off poorly because the stakeholder issue got taken up in the 1980s as an excuse for directors to refuse a takeover bid. If directors could point to strategies which projected long-term returns, they could take into account stakeholder – as opposed to immediate shareholder – benefit from the higher takeover premium. ‘Stakeholder interests’ became a code for management entrenchment.
In the early 1990s, the Conference Board had started its own study of strategic performance measures. Major companies such as Polaroid, First Chicago Trust of New York, Dow Chemical and Skandia were breaking down functional responsibility to create value by working backwards from measures like customer satisfaction. This involved identifying the value of ‘intangibles’ including quality of output, development of intellectual capital, customer satisfaction and employee training. These activities were frequently associated with those very stakeholders who created such controversy in the prior decade, yet they clearly were adding value to the company.
The Conference Board work led to the creation of a dashboard for companies to track progress in achieving strategic measures of success (see illustration). The concept was simple: when you drive a car, you look at several key gauges, each gauge representing an intricate meshing of gears and equipment under the hood. The dashboard approach to strategic measurement, unlike the balanced scorecard, provides a more dynamic three-dimensional way to incorporate things like R&D and training as part of the detail behind several gauges.
As companies pursue strategic performance measurements, two key questions arise: what effect will this have on the shareholder versus stakeholder debate; and will the stockmarket understand the measures and revalue companies accordingly?
How then will the markets react? Right now, companies don’t disclose many of their internal strategic performance measures. Until they are convinced they won’t be challenged in the courts they are unlikely to be more forthcoming.
But as investors make it known that they care about such things, we may begin to see supplements to company financials, such as those produced by Skandia, which track some of these measures.
Momentum or program traders, who react to tiny differences in analyst expectations, account for about 25 percent of trading in the US. Replacing them with investors who take an in-depth approach (judging a company based on its long-term potential to generate value), could lower a company’s stock price volatility, reduce its market risk and its cost of capital.
Improving the dialogue between companies and their investors over intrinsic value – and the potential for improved strategic performance – can only yield positive results for companies, investors and the corporation’s other stakeholders. This is the only way to truly reduce the polarization inherent in the shareholder versus stakeholder debate.
Dr Carolyn Kay Brancato is director of The Conference Board’s Global Corporate Governance Research Center
