Whom Do Public Companies Now Serve? Performance Metrics, Compensation and Outcomes

Thoughtful commentators are increasingly noting the convergence of strategy, performance and governance. As the legal and practical definition of who is served and who is responsible for serving evolves, companies and their boards must weigh the business benefits - and some are finding surprising results.

Donald Delves comments in Forbes on the evolution of governance, responsbility and measurement.

"Historically, there has been little debate about whom U.S. public companies and their boards serve. The unequivocal answer has always been: their shareholders. The answer to this question is now becoming more inclusive as the definition of corporate governance at some companies becomes more ecumenical.

Increasingly, large companies are demonstrating direct responsibility not just to shareholders, but also to employees, communities and the environment. Among the more forthcoming examples is Wal-Mart Stores, which recently announced new vendor requirements to gradually lower the sodium content of grocery products on its shelves — a move certain to influence the entire retail food industry, given the chain’s market dominance. Another example is Kimberly-Clark, whose emphasis on public accountability earned it Corporate Responsibility magazine’s top “Best Corporate Citizen” rating last year for a consumer non-food company, based on criteria that included environmental and human rights concerns.

To the extent that these companies are now serving multiple constituencies, they and their boards are evolving from their role of being responsible exclusively to shareholders. In the U.S., Canada and England, this shareholder-centric mentality is rooted in legal obligations to shareholders relating to “the primacy of ownership and property rights,” according to Holly J. Gregory and Marsha E. Simms, partners in the law firm of Weil, Gotshal and Manges.

In a paper presented at the 9th International Anti-Corruption Conference in Durban, South Africa, the attorneys state: “Under this view, employees, suppliers and other creditors have contractual claims on the company. As owners with property rights, shareholders have a claim to whatever is left after all contractual claimants have been paid.” Hence, boards are legally obligated to serve the interests of shareholders because they are the “residual claimants.”

In some other nations – including Germany, France, the Netherlands and some countries in Asia — the question of whom public companies and their boards serve is answered quite differently. Companies in those nations are obligated to satisfy social expectations by tending to the interests of employees and other stakeholders, the paper states, including “the communities in which these corporations operate.”

Public companies in these countries report to this far broader constituency on how well they have served their interests. The practice of combining reports on social goals and financial results is known as integrated reporting.

Now, integrated reporting is a reality in the U.S. Southwest Airlines issued its first integrated report in 2009, combining financial and non-financial performance assessments, including information on reaching corporate responsibility goals. By instituting this new form of annual report, which it calls the “One Report” or “People, Profits, Planet,” Southwest Airlines has placed these broader goals on the same glide path with corporate performance. Thus, the company has codified its accountability to multiple constituencies.

This comes at a time when the American corporations are increasingly using nonfinancial performance metrics for innovation, succession planning, employee engagement, diversity and inclusion and community involvement. The increasing importance, and the evolution of performance measurement was recently studied by a commission appointed by the National Association of Corporate Directors (www.nacd.com). The results are discussed in an excellent report from the commission, titled Performance Metrics: Understanding the Board’s Role.

As companies adopt more non-financial and corporate citizenship goals, metrics for them will make their way into incentive compensation plans for employees and executives. This will motivate executive leadership not just regarding the interests of shareholders, but also those of stakeholders and communities.

However, this doesn’t mean that corporate leaders will necessarily be giving shareholders less attention. Indeed, social responsibility isn’t just good citizenship; it’s also good business.

It could take a decade for the government to resolve to lower sodium in groceries, and it would cost taxpayers dearly. But a company like Wal-Mart Stores can resolve to do so overnight — at no public expense. This kind of action can not only result in healthier customers, but in a healthier culture in which people will likely make it a point to patronize — and buy shares in — responsible companies.

So shareholders of companies that broaden their definitions of corporate governance and put them into action can be enriched not just ethically and socially, but financially as well.