Corporate boards are missing the big picture – and profits(Read article summary)
Boards of directors need to maximize value for stakeholders, not just shareholders. Why? It's good business.
A board member of a Fortune 100 company told me recently that he wouldn't "spend a cent on Facebook." I asked if he meant he wouldn't buy something via social media. "No," he said. "I wouldn't support my company making investments to use such websites to advance our business."
I didn't break it to him that Facebook is free of charge. I did confirm that I did not own any of his company's stock. Corporate boards are imperiling profits by ignoring social media, and ignoring social trends.
Maximizing shareholder value has been the mantra of corporate boards for at least the last two decades. But the ways to boost profit have changed dramatically in that time, and boards are struggling to keep up.
In search of growth, businesses have gone global, leading to greater involvement with local communities and thorny questions of fairness and responsibility. Evidence of a link between climate change and human activity continues to mount. Citizens worldwide are demanding change from regimes in both the public and private sectors. Today, corporate boards should represent the best interests of all these stakeholders, not just shareholders. There's a moral reason to do this: Global society loses by not having its environmental challenges and social equity problems addressed by one of its most dynamic instruments for change. But there's also a financial imperative.
Embracing sustainability is linked to higher profits. Instead of viewing environmental and social challenges as costs, companies need to view them as markets with unmet needs. Smart boards see that now is the time to modernize in order to lead their companies to new heights of prosperity.
How can boards modernize their thinking? Here are three recommendations:
1. Prepare to create value for stakeholders. The most important step toward change is first accepting the premise that change is needed. Some boards point out that they have a public-issues or public-policy subcommittee that reports to the board. That's great if the subcommittee regularly assesses the company's environmental, social equity, and social media stances, and acts on the insights garnered. My experience, coupled with experts' observations, suggests subcommittees that do this are the exception rather than the rule.
2. Change the board's alchemy. One way to shake up a myopic board is to change its composition. Several small and mid-size companies are adding seasoned executives who are savvy about sustainability and/or social media. Boards should resist the temptation to "balance" these new members by adding more risk-averse directors. That will frustrate board advocates for change. It also will appear superficial to stakeholders.
3. Let stakeholders audit the board. A growing number of prominent companies are seeking out feedback from nongovernmental organizations to evaluate their environmental and social equity performance. This feedback is then discussed during recurring stakeholder meetings with senior executives. With certain provisos in place, boards could engage the groups to audit them, which also would go a long way toward re-earning society's trust.
It's time for corporate boards to adjust in order to guide and oversee their companies' efforts to deliver value to stakeholders worldwide. Global society will be better off – and probably wealthier – as a result.
– Eric Lowitt is a research fellow at the RoseMont Institute for Transformational Leadership and author of "The Future of Value."