Long-term value creation: win-win
The importance of shareholder value in the boardroom seems to be losing ground. Directors are becoming increasingly interested in a social mission (purpose) and core values for their companies. Nowadays, long-term value creation is being incorporated into companies’ strategies and governance codes. You could say this is good news. However, these good intentions are often just all talk.
Long-term Value creation
Long-term value creation, beautifully articulated in a social mission, new core values and updated strategy... often, none of this is reflected in the company’s daily operations. Critical questions may also be asked, such as 'Are the socially-driven core values truly visible in the corporate culture and leadership style? Are the non-financial objectives reflected in the remuneration policy? Do the company and its directors really feel responsible for social issues?’
Corporate governance code and long-term value creation
For instance: in Belgium, long-term value creation is an essential aspect of the 2020 revised version of the Corporate Governance Code. In the latest version, long-term value creation is defined as follows: ‘Objectives that transcend financial performance. Both the needs and expectations of society and the interests of shareholders and other stakeholders should be factored in.’ In the Netherlands, long-term value creation has been the guiding principle in the Corporate Governance Code since 2016. Since then, most (listed) companies have begun drawing up a long-term value creation model. This model outlines financial and non-financial input and output objectives, and other aspects through which the company wants to add social value.
A major drawback is that there are no general guidelines for annual reporting on the achievement of non-financial objectives and social impact. Companies can address these matters in their annual reports as they see fit. Reporting styles can vary from lots of glossy pictures next to a nice story to over thirty objectives with an attempted explanation of the results achieved in figures. As a result, it is difficult for shareholders and other stakeholders to monitor the results of long-term value creation, let alone compare them with results achieved by other companies. Therefore, in order to account for long-term value creation, two important steps need to be taken first.
First of all, in order to prevent long-term value creation from becoming an empty phrase encompassing unclear objectives, measurable, comparable and verifiable reporting principles need to be developed. This will clarify exactly what companies are doing, which objectives they are setting themselves and to what extent they are realizing those objectives. These standards do not yet exist. However, in the spring of 2021, five major international organizations, including the International Accounting Standards Board (IASB), announced their intention to define them in a joint effort. Also, the European Commission adopted a proposal for a Corporate Sustainability Reporting Directive (CSRD), which would amend the existing reporting requirements of the Non Financial Reporting Directive, and the first set of standards will be adopted in October 2022.
Next, these measurable objectives need to be demonstrably incorporated into the company’s daily management. This means that the remuneration policy also needs to be adapted in order to incorporate the non-financial objectives, for example. Despite the great stories about value creation, almost 90% of remuneration policy in the Netherlands still focuses on financial objectives. The same applies to the company’s mission and core values. If they are beautifully formulated but not visible in the corporate culture, leadership style and daily operations, they remain empty promises.
For that reason, long-term value creation needs to be better embedded. One final observation: financial value creation and non-financial value creation are often considered two separate – even competing – objectives. However, they cannot exist without each other. Healthy financial performance is essential to continuity, but by the same token, customer satisfaction, employee satisfaction and a good reputation are also essential to healthy financial performance. Integrated management based on long-term value creation is therefore a win-win, rather than a must.
This article originally appeared as a column by Prof. dr. Mijntje Lückerath in CFO Magazine Belgium, September 2021.
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