The 4 Developments Changing Stakeholder Engagement

The global business landscape is being redefined as companies and their boards consider the evolving environment in which they operate, the multiple paradigm shifts including evaluating demographics and customer behavior, emerging technologies, climate change, geopolitics and other factors. Despite a sustained period of disruption, a new report by the Nasdaq Center for Corporate Governance focuses on developments that are most likely to become new foundational topics in the upcoming and future engagement and reporting seasons.

“With board priorities ever-increasing and becoming more complicated, we expect these developments to shape engagement conversations and long-term expectations about the roles, responsibilities and knowledge requirements of individual directors and their boards,” the report stated.

The four global developments that boards may encounter when engaging with stakeholders and institutional shareholders in particular are:

Corporate purpose, culture and values recognized as driving long-term value creation

Increasing investor focus on corporate purposes is prompting boards to examine how purpose and profits fit into their strategic plans. Notably, in 2019, the U.S. Business Roundtable redefined the role of a corporate – shifting away from the “shareholder primacy” paradigm toward a commitment to all stakeholders. Meanwhile, some financial regulators have called out the importance of boards embedding appropriate cultures and values throughout their businesses. ¹

As more financial regulators, investors and other organizations recognize that corporate purpose, culture and values are driving long-term value creation, boards may want to consider understanding and communicating why their companies exist and what needs they fulfill, according to the report. A significant portion of the largest U.S. and U.K. companies have started to include so-called purpose statements in their proxy statement, “which is indicative of a rapid response to the broader stakeholder-driven developments,” the report said.

Emerging consensus that the Task Force on Climate-Related Financial Disclosures (TCFD) and the Sustainability Accountability Standards Board (SASB) are the standardized frameworks for ESG reporting

According to the report, more institutional investors, such as State Street and BlackRock, are actively seeking ESG data from companies. To this end, global investment stewardship teams are increasingly advocating using the TCFD and SASB disclosure frameworks. SASB provides research-driven and industry-specific disclosure standards and metrics, while TCFD recommendations focus primarily on the financial impacts of climate change.
“The TCFD and SASB support each other in providing institutional investors with ‘decision-useful’ information, especially on risk, with both frameworks being closely aligned with industry-standard accounting concepts of materiality,” according to the report.

Investors strengthening their approach to business sustainability and board accountability

General investor support of management teams remains high, as evidenced by recent proxy votes. However, last year saw a gradual willingness from investors to contemplate voting against management in particular circumstances, namely director re-election resolutions and compensation matters.

This year, boards may witness an increase in investor engagement on these topics and others, such as environment and sustainability, performance and strategy, as well as human capital management.

Companies focusing on relationship-building and a multi-disciplinary approach to investor engagement and broader communications

While stakeholder engagement is expected of U.K.-listed companies’ board members – but is not mandated in the U.S. – companies are pushing forward to enhance disclosures, allowing stakeholders a better opportunity to understand the company’s ESG efforts. However, the report suggests that there may be a need for a consistent, multi-stakeholder approach to disclosures and stakeholder communications, which has led to enhanced collaboration between the corporate secretary, investor relations, sustainability and human resources teams.

“Relationship-building with investment stewardship teams is a growing driver of off-season engagement and more board members are making themselves available to participate in these conversations,” the report said. “Conversations in the market suggest closer collaboration is likely to continue, with companies beginning to emphasize an integrated approach to engagement, as well as strategy and risk oversight disclosures.”

The Nasdaq Center for Corporate Governance expects these developments to shape investor engagement conversations and long-term expectations about the roles, responsibilities and knowledge requirements of individual directors and their boards.

To explore the findings further, please read the full report.

¹ Australian Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry website; Transforming Culture in Financial Services, Financial Conduct Authority, March 2018

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