Conscious Capitalism: The New Norm

Although ESG has been a driving force among investors for the past several years, COVID, civil rights issues, gender parity, sustainability and lack of government regulations have encouraged corporations to step up on behalf of their stakeholders.

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FEI Daily spoke with Founder and CEO of Farient Advisors Robin Ferracone about how companies are prioritizing stakeholder value and recommendations on restructuring board processes.

FEI Daily: Can you explain, for those who might not know, what we mean when we say “conscious capital”?

Robin Ferracone: The concept of conscious capital is being echoed around the world. Companies see the importance of social, climate and other non-financial factors as critical for their long-term viability and success. In January of 2020 The World Economic Forum (WEF) released a set of universal environmental, social and governance (ESG) metrics and disclosures to measure stakeholder capitalism in which companies can report regardless of their industry or region. Organized around the pillars of principles of governance, planet, people and prosperity, the WEF identified metrics and disclosures align existing standards, enabling companies to collectively report non-financial disclosures. 

Companies are being asked by shareholders and proxy advisors to assertively address stakeholder issues, primarily by articulating a compelling strategy as to how companies are approaching the sustainability of the business from environmental, human capital, and values -based perspectives.

Conscious capital is “doing well by doing good.” It is designed to yield financial gains that will return long-term value to stakeholders.

One global director we interviewed for our recent study, 2021 and Beyond: Global Trends in Stakeholder Incentives, framed this quite well when he said: the best force to change the discussion is for companies to stand up and be counted. It’s not because activist groups are on your case, it’s because it’s the right thing to do.

FEI Daily: One of the recommendations from Farient’s global report, is to restructure board processes. What might that look like?

Ferracone: Restructuring board processes involves how boards oversee stakeholder issues. As we mentioned in the report, there has to be a “home” for each issue requiring board oversight. On behalf of the entire board, the Human Resources and Compensation Committee may be assigned diversity, equity, and inclusion (DEI), culture ,employee engagement, and workforce strategies, in addition to its normal responsibilities. In other instances the full board may claim responsibility for environmental matters or delegate to a new ESG committee. Regardless of the approach, the board then needs to determine how it will implement these oversight functions by rethinking board and committee charters, calendars, skill requirements, committee membership, and education. Interestingly, we are seeing compensation committees change their charters to include all aspects of stakeholder prominence and change their names from the compensation committee to the Human Resources and Compensation Committee, Organization and Leadership and Compensation Committee, etc. (Also, as an aside, as cyber security and privacy become huge stakeholder issues, this area is often relegated to the Audit Committee, yet there often is no reference to this vital aspect of stakeholder and systemic risk in the Audit Committee charter, which is slowly changing.) Per the research, and hours of interviews, this is a significant redirect for the board, and many of the global directors we spoke with agree that being proactive can pay significant dividends later, and there growing “cross border” agreement that the board has a critical role to play in providing stewardship so the company can serve broader, long-term stakeholder issues

FEI Daily: Why is prioritizing stakeholder value so important?

Ferracone: Prioritizing stakeholder value is recognizing the criticality of the ecosystem of talent, suppliers, communities, customers, and environment/sustainability. It means creating a culture of inclusion and oversight of the well-being of all employees from physical, financial, and emotional health perspectives. Practices differ around the world—philosophical and cultural underpinnings behind the motivations are important. Companies are recognizing that it’s critical to building cultures of sustainability to support the long-term durability and prosperity of the enterprise (especially through the application of executive incentives).

FEI Daily: Why should companies tie stakeholder issues and values into executive compensation plans? What is the risk if they do not?

Ferracone: Compensation has always been a powerful tool to attract, retain, and motivate executives. As referenced in the report, there is a move globally to include stakeholder incentives in short term compensation. We have seen this recently with Starbucks around diversity, and Apple who announced in their 2021 proxy they will modify executive cash bonuses based on whether the executives act within the company’s social and environmental values.

Our research suggests that stakeholder incentives will move to long term incentives over time since success may take several years. We found in our discussions with directors that companies are stepping up to do the right thing (walk the talk) for their entire ecosystem. Although ESG has been a driving force among investors for the past several years, COVID, civil rights issues, gender parity, sustainability and lack of government regulations have encouraged corporations to step up on behalf of their stakeholders (reinforced from last year’s Business Roundtable letter).  To this end, boards need to provide the oversight to make sure companies are leading. The value of including stakeholder issues in incentive plans is that: (1) stakeholder feel heard; (2) reinforces culture of purpose, which impacts talent, customers, suppliers and the communities where companies operate; (3) customers vote with their purchases and support businesses they feel are in line with their values; and (4) plan participants receive cleat messages as to what is important and where to focus their efforts.