Last year was a headline-making year in the governance space, with the evolving purpose of a corporation and other prescient topics generating national attention. PwC’s Paula Loop highlights governance trends boards need to be aware of in 2020.
It’s 2020 – the beginning of a new year and decade – and the dialogue and sentiment around business is changing. What are the big topics of conversation going to be this year? There are several.
For one, there will be more conversations about the role of the corporation as expectations grow for companies to define their purpose and balance the interests of their broader stakeholder group. Topics like social issues, talent matters and corporate culture will also set the tone for 2020. And crisis management will be a common topic of discussion – because any topic can easily manifest into a crisis, and boards need to be prepared.
Here is a snapshot of what’s happening and what your board needs to know to get your arms around this changing sentiment:
1. A Continued Dialogue on the Purpose of the Corporation
After decades of general support by U.S. businesses for Milton Friedman’s view of shareholder primacy, the thinking about a company’s purpose has started to change. BlackRock CEO Larry Fink’s recent letters to shareholders and the Business Roundtable’s August shift in its “the purpose of a corporation” statement have sparked a new dialogue. The statement says companies should commit to deliver value to customers, invest in employees, deal fairly with suppliers, support communities and generate long-term value for shareholders. This conversation will likely be the headline for 2020, with greater expectations for companies to consider the interests of their broader stakeholder group as they look to create value.
The needs of different stakeholders may not always align or may even be in conflict, though, so management, the board and investors will have to work together to find the right balance when determining how to define their purpose and how to measure, report and communicate success.
2. Social Issues Take the Spotlight
ESG (environmental, social and governance) is an increasingly common topic of conversation in the C-suite and boardroom, and it ties directly into the purpose conversation. While environmental issues have gotten most of the ESG attention in recent years, the “S” category of social issues is what will likely take some of the spotlight in 2020. Social issues include privacy, human rights, diversity and inclusion and worker health and safety, and they matter to a variety of stakeholders — customers, employees and investors, both institutional and individual, among others. Nearly three-quarters of Americans consider social issues when making a decision to invest in a company, a recent survey showed.
While social issues are intangible and therefore may be more difficult to measure, they can still impact company performance. Boards can expect more investor engagement around social issues that are important to society, communities and employees.
3. An Increased Focus on Talent and Talent Management
While there are elements of talent that fit into the social category of ESG, this is another topic that can stand on its own. Even though talent is not listed on a company’s balance sheet, it is likely one of a company’s biggest assets today. Talent management is both an important and volatile focus for companies and boards alike given today’s tight job market. The ability to attract and retain top talent is increasingly competitive and can be a differentiator for companies.
Talent also ties in closely with purpose. Workers today want more than just a job with a good paycheck. They want their work to have meaning and to work at a company that has integrity. In fact, a recent PwC survey found that 62 percent of job seekers said they’re more likely to apply for a job at a company that is openly committed to improving diversity and inclusion in their workforce. And 33 percent of C-suite candidates said they’d take a pay cut to work for a mission-driven company that aligns with their ideals.
Talent and human capital are top of mind for some institutional investors, too. BlackRock, for example, sees “a company’s approach [to human capital management] as a potential competitive advantage.” State Street says it’s “a core asset and driver of long-term sustainable performance.” Both investors say they plan to engage with companies on the topic in 2020. The SEC has also proposed enhancements to human capital disclosure. Boards should consider how their companies are communicating their talent strategies and whether they could be doing a better job. They should also take a fresh look at their role in talent management oversight.
4. The Importance of Corporate Culture
A company’s culture often proceeds from its purpose, and it drives strategy. A strong corporate culture can enable business and promote innovation. It can help attract and retain talent and contribute to the company’s long-term success. A positive culture is an asset to your business. But culture can also impede business. A poor corporate culture can promote unethical behavior and produce disengaged employees. It can set the stage for all sorts of things to go wrong. And when things go wrong, they can quickly swell into a crisis. The board’s role in overseeing culture is critical: Nobody wants to be the company making headlines for a corporate culture problem.
Culture can be challenging to understand, however, because it’s intangible. Boards can get a better sense of their company’s culture by looking at data and metrics — what customers and employees are saying and what’s on social media and job sites. When there is a weak corporate culture that needs to change, don’t expect a transformation overnight. To shift to a stronger culture — one that’s an asset — you need a thoughtful and focused strategy with set tasks to achieve. And you need to incent people to take the steps forward.
Crisis is the New Normal
All of these things are interconnected. And any one of them can quickly spiral into a corporate crisis. These days, a crisis is almost inevitable: 98 percent of U.S. executives expect to see a crisis in the near future, according to PwC’s 2019 Global Crisis Survey.
Some crises can be avoided — if your company is well prepared. But being prepared means more than just having a crisis response plan. That’s certainly important, but a plan needs to be reviewed and tested, and companies need to get actual value from it. It’s also important to remember that an ounce of prevention is worth a pound of cure, so having a strong culture, internal control environment and risk and compliance program and an updated and well-defined succession plan for key executives are baseline “hygiene” efforts that could prevent or be helpful in any crisis.
When a crisis does hit, it’s easy to make mistakes. But knowing what to do and what common mistakes to avoid can be the difference between just getting through a crisis and emerging from one a stronger, transformed company. Crisis is a big risk to all companies, and crisis management is critical to survival. Boards play an important role in making sure the company is getting crisis planning right.