Sustainable Enterprise Value Creation

This chapter provides an exposition of the why, what and how of stakeholder capitalism and sustainable enterprise value creation. It defines these concepts, provides a brief overview of their varied historical and legal manifestation around the world and traces the secular forces transforming the contemporary business context and fuelling the resurgence of stakeholder capitalism as a directional concept. This chapter introduces the argument, developed in greater detail in subsequent chapters, that business leaders in this new era must look more rigorously beyond their firm’s near-term operations and financial results, improving their understanding of how underlying economic, social, political, technological and environmental conditions are evolving and likely to affect their firm’s operations and prospects over time. They must proactively translate this wider appreciation of the drivers of enterprise value into strategies and practices that simultaneously benefit shareholders and other stakeholders out of a recognition that such synergy is a source of further firm competitiveness and resilience.

This chapter traces how technological, environmental, geopolitical and socio-economic shifts are changing the nature of value creation, risk and societal expectations of firms. These important changes in the operating context of business are aligning the interests of shareholders and other stakeholders more closely by increasing the financial materiality of environmental, social, governance and data  stewardship (ESG&D) risks and opportunities. The chapter traces the evolution of corporate governance and corporate responsibility since the 1970s and argues that the growing materiality of ESG&D considerations is driving their integration. Such integrated corporate governance, strategy and reporting departs from the mindset and associated practices of shareholder primacy and corporate social responsibility, which regard ESG&D factors as primarily non- or pre-financial matters. Instead, it takes a holistic view of shareholder and wider stakeholder interests by systematically internalizing ESG&D considerations in the firm’s strategy, resource allocation, risk management, performance evaluation and disclosure policies and processes. It does so not for ethical or political reasons, although these are factors that must also be fully considered by firms, but out of a recognition that in the twenty-first century, strong and sustained business value creation beyond the near term is increasingly dependent upon a rigorous understanding and active management of these considerations as part of the core governance and strategy of the firm.

This chapter provides a holistic, thematic overview of the five main elements of a leadership agenda to translate the principles of stakeholder capitalism into rigorous practice within a firm to enhance its capacity to generate sustainable enterprise value. The specifics of this change agenda may vary based on industry sector, ownership form, operating model or geographic reach, but it boils down to five essential priorities for all companies: (1) align governance, strategy and capital allocation with the key drivers of sustainable enterprise value creation; (2) internalize material ESG&D risks and opportunities into enterprise risk management and innovation; (3) reinforce preparedness and resilience to crises and systemic shocks; (4) recognize that the firm is a stakeholder itself in the vitality and resilience of its operating context and partner with other stakeholders to address relevant systemic challenges; and (5) integrate financial and material non-financial information in mainstream reporting. These are the priority actions business leaders need to embrace to respond effectively to the current crisis as well as the secular forces reshaping our economies, societies, geopolitics and environment in the twenty-first century. Most of these leadership priorities touch on more than one corporate function and team, and hence Chaps. 4, 5, 6 and 7 in Part II present a functional view of this agenda, breaking it down into specific recommended practices, including best-practice illustrations of leading companies, for corporate governance and oversight, strategy and capital allocation, disclosure and accountability and partnerships with other stakeholders.

This chapter focuses on six areas of emerging good practice by boards of directors towards a more stakeholder-oriented and integrated approach to corporate governance. It looks at how boards are revising their corporate governance principles or guidelines to explicitly include language about ESG&D considerations and responsibility to stakeholders, in addition to shareholders. It reviews ways in which boards are spending more time on discussions about corporate purpose, strategy and capital allocation frameworks as drivers of long-term sustainable enterprise value, in addition to their ongoing oversight of short-term performance and risk management. The chapter illustrates how boards are expanding their oversight of risks, risk appetite and resilience to include ESG&D risks that are material to the company and salient to people and the planet. The growing need for board-level competence in the areas of climate action, human rights, diversity and inclusion, dealing with systemic shocks and cybersecurity is particularly notable. The chapter addresses how boards are increasing their focus on corporate culture and on talent management and diverse succession planning, including but beyond CEO succession, and how they are starting to integrate ESG&D factors into their oversight of executive performance and incentives and into the company’s public reporting and accountability mechanisms. The chapter concludes with examples of how boards are adapting and strengthening their own operational practices to support the above developments. This includes changes in board organization, such as the creation of dedicated sustainability committees and allocating more time on the full board to review ESG&D risks and opportunities, changes in board composition, especially increased director diversity, and more systematic board engagement with diverse internal and external stakeholders.

This chapter focuses on practical actions that management teams are taking at the firm level to implement a more stakeholder-oriented approach that integrates ESG&D risks and opportunities into their core business strategy, business planning and operations across the entire value chain. The chapter starts by reviewing some of the ways that companies can create shared value, protect value and manage shared risks, and demonstrate purpose and shared values. It focuses on how executive teams are embedding purpose and material ESG&D factors into their company’s core business activities and functions and the importance of rigorous stakeholder consultation and materiality analysis and of credible communication and accountability with respect to these factors. The chapter also reviews good practices for strengthening the company’s understanding and management of material and salient ESG&D risks, including the integration or alignment of these with enterprise risk management frameworks. In addition to the importance of effective and holistic risk management, the chapter highlights some of the untapped opportunities for companies to invest in innovative new technologies, products, services, financing mechanisms and business models to profitably drive more inclusive and sustainable growth. It provides examples of how companies are promoting employee well-being, improving diversity and inclusion, investing in skills and future workforce development and enabling greater employee voice and participation. The chapter concludes with examples of advisory and accountability mechanisms that leading companies are establishing to strengthen their engagement with external stakeholders.

This chapter explains that integrated information and communication, which is to say routine data collection and reporting of material financial and non-financial or intangible aspects of corporate performance, is both the starting point and concrete expression of a firm’s practice of stakeholder capitalism. But while there has been great progress over the past decade in the development and implementation of non-financial corporate performance metrics and their inclusion in integrated corporate reports, the field remains underdeveloped and unfit for purpose in certain critical respects, particularly the comparability, completeness, consistency and relevance of such information to providers of capital. The chapter provides a practical guide for individual companies wishing to navigate this complexity and apply best practice in their own mainstream reporting. It also suggests how the business community as a whole could play a stronger leadership role in helping to improve the overall quality and comparability of non-financial reporting and its connection to financial reporting through the creation of an international standard or set of standards for this purpose. A baseline global sustainability reporting standard  adopted by national regulators is ultimately what is needed to bring the resource allocation of companies, capital markets and entire economies into better alignment with stakeholder capitalism and sustainable enterprise value creation. The chapter concludes by tracing the recent acceleration of progress in this direction by international accounting authorities and recommends how companies can prepare themselves for the likely introduction of such an international sustainability disclosure standard within the next few years.

This chapter focuses on the need for new models of partnership, collective action and systems leadership by companies to accelerate and scale change. Even the most responsible and impactful actions by the world’s largest companies are not sufficient on their own to drive the type of transformation that is needed to tackle the complex system-level challenges that increasingly shape the business operating context, such as climate change, inequality, the future of work and economic recovery from the pandemic. The chapter provides an overview of how leading companies are developing more holistic and multi-level strategies for partnering with each other and with governments and civil society organizations. It profiles financing and operational partnerships between individual companies and other actors at the project level, pre-competitive business alliances among a larger number of companies at the industry level and broader multi-stakeholder institutions, platforms and networks at the national and global levels. It illustrates examples of how these different levels of partnership can help to drive transformational change through mobilizing diverse resources and capabilities to make essential markets and systems more inclusive and sustainable, such as health, food, energy and financial systems. In addition, the chapter provides examples of large-scale coalitions aimed at developing voluntary norms, rules and standards to spread responsible business practices and others that advocate for and aim to influence smart public policies and change public attitudes and behaviours. The chapter concludes with some lessons learned from building effective partnerships.

This chapter provides concluding recommendations regarding what rigorous implementation of stakeholder capitalism through full ESG&D integration implies for the craft of business leadership. It  argues that an integrated approach to corporate governance, strategy and reporting that aims to capture the greatest possible synergy between shareholder and other stakeholder interests as well as short- and long-term performance requires integrated thinking and decision-making on the part of boards and executive teamsr. The chapter examines key elements of integrated thinking and decision-making at the organizational level, the systems level and the personal level, and it highlights the need for individual business leaders to constantly balance qualitative judgements with quantitative calculations as well as values with value creation. It offers corresponding recommendations for business education and talent development, such as providing students and executives with greater experiential exposure to ESG&D issues and dilemmas, enhancing their understanding of different stakeholders and their interests and helping them to build institutional and personal accountability mechanisms and trust. The chapter concludes with a summary of the specific leadership actions that are covered in Chaps. 4, 5, 6 and 7, which together provide a roadmap for strengthening corporate governance and oversight, corporate strategy and implementation, corporate reporting and accountability, and corporate partnerships and systemic change, all with the ultimate goals of creating sustainable enterprise value at the firm level and more inclusive, just and sustainable growth in society.