To Create and Sustain Tremendous Long-Term Value – Let’s Add to the List

Is the recently released Business Roundtable value creation stakeholder list inclusive enough? The answer is simply No! But let’s celebrate the list we got.  For the first time, this group of 200 CEOs who preside over $7tn in annual revenue have publicly acknowledged that to create value for the enterprise, one needs to have more than shareholders in mind.

Almost exactly twenty years ago, I wrote about the need for Auditor Independence and strong Board Oversight. Excerpts of that paper appeared in the 1999 August Edition of the CFO Magazine. It has been said that the Securities and Exchange Commission used some of the thinking in that paper for the passage of the Sarbanes-Oxley Act. Looking back, there has been a lot of education in this arena from the likes of the National Association of Corporate Directors to bring pertinent value creation and sustainability issues to the forefront.

While one can downplay the importance of auditor independence, a lot of value has been lost since 1999, due to audit failures. The Business Roundtable can help with the creation and sustainability of value by ensuring that the auditors have the necessary wherewithal to audit and advice management accordingly. This will allow aggressive business practices to surface early enough.  As it was the case with Enron and many such entities, the auditors could have communicated to the Board accordingly and even to the general investing public without the fear of losing their mandate.

Auditors need to be properly selected and compensated.  They have to be independent, so as not to subordinate their opinions to management’s, for the fear of losing their contracts. They need to staff their engagements accordingly, employing staff with the requisite expertise. This may lead to Public Accounting firms hiring more experienced finance professionals to audit companies, as opposed to junior staff taking care of details that they may overlook, to the detriment of value creation and sustainability.

It goes without saying that the list certainly could have benefited from more government inclusion (some regulation is not a bad thing). Government is still a partner in many instances where value creation and sustainability are needed. In the US, this will take the form of companies working with the Securities and Exchange Commission to resolve issues long before the parties get into loggerheads. Shareholders may feel more comfortable sharing concerns with the SEC and therefore, a better channel with the company will allow management to be mindful of shareholder interests. This needs not be adversarial.

Interestingly, the list did not include management or the Board either. Perhaps it was self-evident but we believe that distinguishing management from employees will allow management to be aware of the differences between them so that inclusion as stated on the list can be properly thought through. The advancement of the Environmental, Social and Governance (ESG) issues involving companies will benefit from some form of cooperation with governments. As of 2018, there was about $30.7tn under management in the sector. Meaningful regulation will help avert catastrophe.

While the list was not exhaustive enough, those of us who have long been in the practice of long-term value creation for shareholders, believe that the first installment from the Business Roundtable is encouraging for us to begin the dialogue for tremendous value creation for all stakeholders.