Corporate Governance for a Changing World

Dr Jeroen Veldman and Professor Hugh Willmott from the Modern Corporation Project at Cass Business School presented their report "Corporate Governance for a Changing World" as part of an international roundtable series in Brussels.

The Modern Corporation Project (MCP) seeks to connect corporate governance to political economy by debating contemporary corporate governance theory and practice. Its contributors include academics from the fields of law, economics, accounting, management and politics.

The Report is part of the Purpose of the Corporation Project, an initiative led by the European law firm Frank Bold and supported by Cass Business School.

The Brussels roundtable series engaged with over 260 practitioners and academics in Europe and the US to investigate how businesses can address complex challenges such as inequality, climate change and sustainability and how they can negotiate the complicated relationship between globalisation, development, and human rights.

Keynote speeches were delivered at the launch by Věra Jourová, EU Commissioner for Justice, Consumers and Gender Equality; John Kay, author, economist and columnist at the Financial Times; and Richard Howitt, MEP and incoming CEO of the International Integrated Reporting Council.

In a LinkedIn post, Paige Morrow, Head of Brussels Operations at Frank Bold, discussed the five key principles for creating long-term sustainable value and building resilience in publicly traded companies:

1. Define the purpose of the corporation
A company's purpose determines its ability to recognise, respect, and balance stakeholder needs, which are key to its long-term success. The purpose of the publicly traded company should be understood as being to create sustainable long-term value while contributing to societal well-being and environmental sustainability - not just short-term shareholder value. Corporations should create real value for customers and wealth for shareholders as joint and mutually reinforcing objectives, while taking account of environmental sustainability and societal well-being.

2. Improve executive pay and employee incentives
Incentives effectively determine the goals of corporate directors and managers. A significant part of top executive pay consists of incentive plans based on stock options, which tend to be set based on short-term performance. This can perversely reward executives who divert corporate resources from investment in innovation or employee well-being to strategies aiming to increase short-term share price.

3. Integrate stakeholder voice into decision-making
Businesses ignore the interests of stakeholders other than shareholders at their peril. Stakeholders are crucial to the company's long-term success; these include employees, creditors, suppliers, customers, local communities, and the environment. A business strategy that profits at their expense can quickly undercut a corporation's social license. Moreover, the scale and complexity of social, environmental and economic challenges facing our societies require that businesses actively contribute to solving rather than causing them.

4. Clarify the obligations of company directors
There are two distinct forms of obligations, called fiduciary duties that are relevant to improving corporate governance: (1) those of corporate directors to promote the success of the corporation, which are owed to the corporation itself; and (2) those of institutional investors (such as pension fund trustees) to act in the interest of their beneficiaries. There is a lot of confusion about the content of these obligations. Company directors and pensions are legally permitted, and in some cases required, to take the environment and human rights into account. Also, there is an obligation to proactively and critically evaluate material financial risks and opportunities - which is increasingly being understood to include climate change, for example.

5. Improve corporate reporting
The way that businesses report on their activities to investors and other stakeholders has a huge impact on how observers perceive the corporation. The form of reporting used creates powerful incentives for boards to set targets and the strategies use to hit those targets. Current accounting models focus mainly on short-term financial information and do not address many issues that are essential for businesses' ability to create sustainable value. At the same time, investors are increasingly interested in the value creation process and there is a clear trend among successful corporations towards reporting on long-term value creation. This is supported by research that shows that corporations with good ESG performance and reporting outperform their peers on the stock market in the long-term and benefit from lower cost of capital.

You can read the full Report here.