Corporate Governance in an Interconnected World: The 21st Century Fiduciary
By Marcy Murninghan, Senior Research Fellow
The massive transformation in public and shareholder expectations of corporate governance and accountability, particularly affecting environmental, social, and governance performance, challenges prevailing assumptions about fiduciary obligations. Fueled in part by the prevalence of digital technologies and the permeability of institutional borders, —along with heightened public mistrust, 24/7 news cycles, and multiple definitions of material risk—CEOs and boards need to rethink their interpretation of fiduciary duty to suit the needs and demands of the 21st century.
This means that as executives and boards calibrate opportunities for long-term value creation with short-term interests, they’re in a position to foster collaborative governance—that that is, a process of listening, engaging, learning, and knowledge-creation. This is a departure from previous modes. By helping to assure better participation and representation of internal and external stakeholders, leaders can leverage their fiduciary duty beyond the bottom line to create more resilient, transformative organizations.
Here are some key ways collaboration and transparency are transforming the governance landscape:
- From “Issue Islands” to Collaborative Engagement: The idea of “collaborative governance” involves changing the architecture of accountability from a unilateral to a multiparty process of deliberation, learning, and problem solving. One example involves changes in the conduct of the Annual General Meeting (AGM). Although still dominated by issue-specific proxy resolutions, leading companies such as Royal Dutch Shell, GE, and Philips have adopted “blended engagement,” a combination of face-to-face and online participation that permits wider participation and dialogue with shareholders over a multitude of issues. These companies also are taking the initiative and dialoguing with shareholder activists and other stakeholders to address sustainability and human rights issues through a process governed by principles and values, not politics and tactics.
- Rethinking Materiality and Reporting: Integrated reporting, which connects financial and sustainability reporting data into a unified whole, has risen to the forefront in recent years. By increasing the flow of data on sustainability, and placing financial and non-financial returns on an equal plane, integrated reporting – not just on paper, but also online – leads to better, more informed management decisions. Other examples of the changing nature of materiality include Goldman Sachs’ and MetLife’s decisions to disclose corporate data on race and gender, and pending state (CA) and federal legislation that would require corporations to report to shareholders how much of their money is going toward political purposes.
- Reshaping the Traditional Board: Board oversight of sustainability initiatives, compensation tied to sustainability metrics, and board diversity have become more important, even as boards are slow to adopt. Smart boards recognize the challenge, and will take the lead instead of waiting for investor pressure.. This proxy season, Harrington Investments filed resolutions calling for board-level sustainability committees with Starbucks, Apple, Microsoft, and Cisco Systems. As for executive compensation, shareholders filed six resolutions linking executive compensation to sustainability metrics with Cabot Oil & Gas, Coca-Cola, Goldman Sachs, JPMorgan Chase, Range Resources, and Southwestern Energy. On the diversity front, Calvert Investments filed six resolutions at major corporations aimed at promoting greater board diversity. Enacting a 21st century fiduciary ethic means embedding sustainability concerns more fully into director duties.
A more “unified” and collaborative model of corporate governance that embraces corporate responsibility and sustainability helps boards and executives think about how best to respond to the changing expectations and demands of the marketplace. It also reinvigorates the fiduciary ethic, more suitable to a 21st century marked by turbulence and change.