Building the Modern Boardroom April 1, 2019

The Rise of Stakeholders (Not Just Shareholders)—and What It Means for the Modern Board and Corporate Director

By Coco Brown Founder and CEO

At a Glance

Stakeholders—such as investors and employees—have risen in importance.

Boards have a responsibility to pay attention to macro trends and our changing society.

By maintaining a close connection to its bench strength, boards can be more effective at succession planning and helping companies evolve.

The boardroom of the past operated under the accepted governance mandate of “shareholder primacy” with a single audience in mind: the shareholders. But the definition of good governance is now evolving and today’s boards must operate with many stakeholders in mind. Stakeholders include investors. It also includes employees, customers, executive leadership, and the greater community. If a board cannot address the needs of all stakeholders, it cannot fully meet its responsibility for duty of care.

To benefit all stakeholders, boards must become more engaged with their organizations, with the approval of their CEO, outside of the formality of board meetings. This increased involvement also allows a board to understand their organization’s bench strength, a key part in succession planning and longevity.

From shareholders to stakeholder

It wasn’t too long ago that boards considered their relationship with key stakeholders insular. They didn’t interact with shareholders. Instead, communications flowed through investor relations. Public board directors were typically kept at arm’s length from investors, and even their interactions with top executives outside of the CEO and CFO were fairly limited.

Now, it’s still common to hear boards refer to “maximizing shareholder value”—yet consider the shift in what it means to be a shareholder. Last century, a shareholder was an individual. This individual might have owned stock in a company for years, or perhaps several decades. However, today’s shareholders are less interested in putting money into individual stocks and more about investing it with financial institutions that invest in indexes. They are focused on gaining returns to pay for their homes, to fund their children’s college education, to save for retirement.

In parallel, financial institutions are increasingly focused on investing in companies that rank high in ESG, which has proven to provide better long-term financial performance. According to Fortune, “When companies make decisions that show respect for the environment, their communities, and their employees, there’s less likelihood that they’ll be hit with the kinds of fines, public backlash, and boardroom turmoil that can slam their share prices.”

Additional stakeholders to consider are customers and employees. Stakeholders, in the role of a customer, treat their day-to-day interactions with brands much like a relationship. They have the power to take down companies in a minute—through the media, social channels, and word of mouth. Plus, employees’ expectations are shifting, too. They want to work for companies with a purpose (not just a profit). They desire flexibility and a career with a company whose values mimic their own.

Sweeping shifts in the way we live, work, and interact

Without a doubt, more is expected today from board members than ever before, including staying on top of dramatic demographic changes. For example:

  • Caucasians are predicted to become the minority in the U.S. by 2045.
  • Millennials have taken over the workforce. More than one in three workers in the U.S. is a Millennial.
  • The new rising workforce is filled with digital natives, the most tech-connected and tech-savvy generation to date. Companies are forced to rethink how they market to (and interact with) consumers.

Additionally, it’s becoming increasingly difficult for companies to ignore ESG issues. While a company’s “shareholders” may be anonymous, many stakeholders look to brands to take a stance and to make a difference—or at least, attempt to. Even if they are not a traditional shareholder.

Take a look at the news to see evidence of this, every day. Facebook questioned about their data security and policies. Gillette dominated headlines with its commercial in support of the #MeToo movement. Microsoft committed $500 million towards Seattle’s housing crisis. It’s become almost unavoidable: organizations have relationships with stakeholders and stakeholders have expectations.

Board members, with first-hand knowledge and experience with these complex demographic and social changes, are in rising demand.

A greater understanding of bench strength

For an organization to be prepared for whatever is to come its way, it must also understand the evolution of its talent line-up. This means a board must be connected to the bench strength of the organization—beyond the C-suite.

The workforce is diverse, spans multiple generations and includes activist employees who care about values and the decisions being made at the top. Of course, it’s not only about what boards know about their employee base; often, it’s what they don’t know that can pose the greatest risk. After all, how can board directors steward long-term value, purpose, and company culture if they don’t understand it themselves? Progressive boards and CEOs are working fast to become entrenched within the organization, to gain a better understanding of the organization’s path to evolution, culture, and corporate values. This includes understanding employee engagement, developing metrics to grasp talent ROI, and re-thinking everything from compensation strategies to employee onboarding.

Additionally, formal and informal structures are being leveraged to help a board engage with leadership across the organization. For example, it’s becoming much more common to see social events with rising leaders in conjunction with board meetings, or board directors making site visits to retail and manufacturing facilities to see first hand the processes and meet workers and their management teams, with management’s blessing.

In parallel, company leaders must get comfortable performing in the boardroom. It doesn’t matter that they are not on the board, or even in the C-suite. Leaders at all levels bear a greater responsibility to consider the company’s long-term strategy. The board and the leadership team must work in tandem to keep each other informed.

A new definition for duty of care

It’s always been part of a board’s duty of care to connect with the hearts and minds of its customers, but now institutions such as BlackRock are demanding it. BlackRock CEO, Larry Fink, wrote:

“The public expectations of your company have never been greater. Society is demanding that companies, both public and private, serve a social purpose. . . Companies must benefit all of their stakeholders, including shareholders, employees, customers, and the communities in which they operate.”

To address these modern challenges, board directors must meet these challenges where they’re at—within their management teams, with their investor groups, with their rapidly evolving customer and employee bases—they must move beyond the boardroom to stakeholder engagement.