Last month Peter Dey, Chairman of Paradigm Capital, and Professor Sarah Kaplan at the University of Toronto’s Rotman School of Management published “360˚ Governance: Where Are the Directors in a World in Crisis?” While the focus of this study is board governance in Canada, its insights are fundamental and globally relevant. As noted in the first sentence of the report, “The year 2020 is forcing a reckoning about the role of the corporation in society, and along with it, the responsibilities of boards of directors to the corporation’s myriad stakeholders.”

360 Governance: Where are the Directors in a World in Crisis? | SARAH KAPLAN

The work for this report began soon after the Business Roundtable (BRT) published, with much fanfare, its August 19, 2019 “Statement of the Purpose of a Corporation.” This statement indicated at least some rhetorical reframing of why the world has companies. In explaining why, she and Dey started this project, Kaplan explained “It’s one thing to say that a company will pursue value creation for all stakeholders, it’s another thing to make that reality. I’d written in my book, The 360º Corporation, about what I think executive leadership has to do, but through my conversations with Peter Dey, I realized that we needed to elevate the conversation to corporate board governance.” 

The timing of the BRT statement and this research project was propitious. On December 31, 2019 the World Health Organization first announced the arrival of Covid-19 and one month later declared it a global health emergency. This created an admittedly unwelcome natural experiment. How would companies and their boards respond to the challenges being created by this crisis, forcing tough tradeoff decisions to be made? Like between dividends and employment (with dividends often winning out in the end). Although almost none of the BRT CEOs who signed their statement cleared this with their boards, the argument was that “Hey, we’ve been doing purpose for decades so no big deal.” Then why all the fanfare? But I digress…

The report begins by noting the forces that require new governance standards. These include: (1) the central role companies must play in addressing social ills, such as the devastating personal and system-level effects of inequality in its many forms (income, gender, and racial), (2) the increasing importance of stakeholders for value creation for shareholders—who are ultimately stakeholders as well (e.g., employees with a pension), (3) inevitable legislation and regulation implemented to ensure that companies are not creating shareholder value at the expense of society through unpriced externalities (e.g., carbon emissions or child labor), (4) the war for talent (Millennials don’t want to work for a company that is making the world a worse place), (5) customer demand (the Millennials factor in here as well but companies themselves are increasingly focused on risks and opportunities in their supply chain), (6) operational disruptions (Covid-19 just being the most dramatic example but climate change and social unrest present a broad range of challenges), (7) the now-demonstrated fact that performance on material sustainability issues contributes to financial performance at the company level, and (8) the growing concern of large asset owners and asset managers who are “universal owners” and thus concerned about the system-level risks posed by their portfolios in aggregate—leading to increased engagement and stewardship activities with all of their holdings. Reflecting on all of these reasons, Dey stated that, “Our objective is to get every corporation to address the social and environmental issues we have identified and for the corporation to explain its response. Doing so will provide stakeholders with the information to which they are entitled and will be good for the business of the corporation in the long term.”

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