Originally published in Board Agenda

It’s no longer about show and tell: now it pays to build an honest relationship with your investors, customers and other stakeholders

“Engagement with shareholders and other stakeholders was once viewed as an optional, precautionary effort designed to disclose whatever management chose to disclose (which was usually as little as possible) and to garner support for new corporate initiatives,” writes Helle Bank Jørgensen, CEO and founder of Competent Boards, in her book Stewards of the Future, A Guide for Competent Boards.

Things have changed. Bank Jørgensen goes on to say that the “convergence of political, social, and financial risks is forcing boards to rethink their approach”.

‘Stakeholder concerns are shareholder concerns. The increasing focus by investors, consumers, and other stakeholders on sustainability is directly influencing value creation.’
—Jane Diplock, Value Reporting Foundation

Boards would be wise to listen to investors, or face the prospect of a shareholder revolt. And recent FRC guidance on changes to pre-emptive rights also highlight the need for a long game: for corporates to work at building up a relationship of trust with its stakeholders. Non-financial disclosures, done well, will help to build that trust.

In Bank Jørgensen’s book, Patrick McGurn, proxy adviser ISS’s former head of strategic research and analysis, warns that “starting in 2022, if boards have not responded by bringing some additional diversity into their boardrooms, they can expect to see that advisers are going to consider at least recommending against heads of nominating committees or other board positions in order to really light a fire under them to be responsive to shareholder concerns in this area.”

Where do you stand on ESG?

Despite a growing backlash in the US against ESG as a concept, the ‘E’—environment—remains at the forefront of stakeholder concerns. In Stewards of the Future, Kingsdale Advisors’ Wes Hall points out that “people want to know that you have a social conscience as a company”.

Bank Jørgensen advises boards to familiarise themselves with climate reporting initiatives, in particular the Task Force on Climate-related Financial Disclosures (TCFD) and the Prototype Climate-related Financial Disclosure Standard. The prototype is emerging as an influential template for future reporting standards and the TCFD is already embedded into regulation in many countries, she writes.

Bank Jørgensen also cites the return on sustainability investment initiative, designed by the NYU Stern Center for Sustainable Business in collaboration with the pharmaceutical, automotive, retail, apparel, and food industries, among others.

Tensie Whelan, the centre’s director, says: “To help identify the implementation of certain sustainability strategies, we have identified nine practices that drive value in a variety of different ways. These include: innovation and growth, operational efficiency, employee engagement, productivity, retention, reduction of risk, and supplier and customer loyalty.”

How to deliver the message

A roadshow or a quarterly earnings call, Bank Jørgensen points out, is often spent telling investors what management wants them to hear, instead of listening to their suggestions and concerns.

“What investors are looking for is honesty and openness, rather than a scripted sales pitch,” she writes. “By being more proactive and transparent, companies can build trust, ensuring that shareholders remain loyal if and when the activists come knocking.”

The messaging should be concise, simple, and as specific as possible, she advises, and the emphasis should be on the future rather than on the past or present.

If there’s good news, make sure people hear it: Bank Jørgensen gives the example of one company’s waste reduction strategies resulting in $235m in extra pre-tax income.

‘If you can’t tell me or an investor or the CEO what you think the purpose of the company is, then something really big is missing.’
—Robert Eccles, Boston Consulting Group

Once you’ve established who the shareholders are, careful thought is needed to find the most effective ways of engaging with the investors who are most important to the company. Bank Jørgensen advises that, to avoid unpleasant surprises, the board should insist on regular feedback from meetings with these investors.

She cites CDP’s Paul Dickinson’s take on sharing information: that boards deal with their investors as they would with a health insurer. “Let’s say that the patient, or the insured party, fills out a questionnaire and explains how they’re living: what they weigh, how much exercise they take, if they smoke, if they drink. Now, imagine you’re the insurer, and the patient doesn’t even bother to fill out that information. Are you going to put a risk premium on them? Of course you are.”

And Federated Hermes’s Timothy Youmans says “there’s a difference between active shareholding and activism. Talking to investors is the number one way for boards to inoculate themselves against activism and proxy fights.”

Even so, Nancy Lockhart, a George Weston director, takes the view that boards need to pick their battles: “It’s not a company’s job to answer every little stakeholder group. What’s really important is that the company be aware of the issues that are raised, accept or reject them based on science or data, and deal with the ones that are most important. You can’t do everything.”

Be selective

In terms of what information is disclosed, Bank Jørgensen writes: “You should be going through the same type of process with your ESG key performance indicators as you do with all your business indicators. When people ask why you are not giving them a hundred metrics, you can say, ‘Because this is our strategy, this is why we’re focused on these metrics, and we’re not going to be reporting on things that aren’t material to our business strategy.’”

“Smart business leaders understand that sustainability and financial performance go hand in hand,” writes Bank Jørgensen. “One obvious way of recognising that symbiotic relationship is through integrated reporting.”

She quotes Richard Howitt, former CEO of the International Integrated Reporting Council, who cautions that this is a learning process and that “if companies wait until they can do a perfect integrated report, they’ll wait forever.”

‘The good corporation is an integral part of the network it operates in. It has a relationship with its clients, suppliers, neighbours. It does not live in a vacuum.’
—Hakan Lucius, European Investment Bank

Howitt recommends a gradual approach, stretching over at least four years. Perhaps in year one, companies commit to integrated reporting and using the principles of the international integrated reporting framework. By year two, they might well have an analysis of the resources and relationships the company draws upon to undertake its business. By year three, they might have translated that into a stronger, clearer definition of their own business model. And by year four, they might have fully integrated key financial and non-financial performance indicators in the long term as well as the short term. Companies will do it in different ways, and it’s a learning process, he says.

Stewards of the Future lists guidelines for boards on the issue of stakeholder engagement, together with ten questions that directors might like to ask themselves or use as the basis for board discussion. With Helle Bank Jørgensen’s permission, we’ve reproduced these below:

Guidelines for Boards

⇒ Know who your shareholders are and how they make voting decisions.

⇒ Be sure that directors engage with shareholders as well as other stakeholders before and beyond proxy season.

⇒ Draw up a concise ‘statement of purpose’ unique to your company that spells out who your key stakeholders are and what issues are material to them. It should also detail long-term financial and ESG goals.

⇒ Examine which sustainability risks and opportunities are material to your company’s business, and how they might fit into one or more of the emerging reporting standards.

⇒ Seek out partnerships with suppliers, customers, competitors, governments, NGOs, and relevant academics to tackle the risks facing your company.

⇒ Aim to publish an integrated report.

⇒ Ensure that you are proactively engaged in and sign off on sustainability, ESG, or integrated reports.

⇒ Prepare for further integration of financial and non-financial filings by staying abreast of reporting developments.

⇒ Be sure that internal governance mechanisms match your professed policies.

⇒ Consider expanding proxy disclosures beyond legal requirements.

10 key questions

1. Do you have the right board structure to address and communicate the specific risks that threaten your industry and your company?

2. What progress is your company making towards compiling an integrated report?

3. Which board members have the expertise to exercise oversight in ESG reporting and identifying issues material to the company’s business?

4. How are material issues identified, and could this process be improved?

5. Is your company using its financial reporting to reinforce its sustainability goals?

6. Are you discussing ESG issues at investor days and on quarterly earnings calls?

7. What is the board doing to stay up to date with the evolving concerns of shareholders, employees, suppliers, customers, regulators, and other stakeholders?

8. What is the board doing to open channels of communication with ESG activist investors?

9. How is the company engaging shareholders on material ESG issues ahead of the annual proxy season? Are you open to organising a governance roadshow?

10. What procedures are in place to ensure maximum transparency and quality in company communications, including regulatory filings?

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