In the Nation's Interest

William H. Donaldson’s remarks on release of CED’s policy statement, Rebuilding Corporate Leadership

About a year and a half ago, CED released a report titled Built to Last: Focusing Corporations on Long-Term Performance. That report called on business leaders to reject the pressures of short-termism-in effect, to end corporate practices that focus on short-term financial reports rather than on actions to build long-term value. Unfortunately, not enough business leaders heeded that report's message. If they had, we might not be in the crisis we are in today, with the economy sinking and our financial system in tatters.

Immediately following release of that report, the CED subcommittee on corporate governance set out to expand our thinking about long-term corporate performance and its relationship more broadly to societal performance.

The central conclusion of the work we are releasing today is that although public corporations increasingly are the core of a system unsurpassed in creating jobs, income, and wealth, corporate leaders-directors and managers-must do better, by integrating societal concerns into corporate strategy to strengthen long-term competitiveness and in so doing, the sustainability of both the corporation and the society in which it operates. In short, corporate leaders cannot ignore their place in the social fabric.

As we neared completion of our work last fall, financial markets in the United States and other parts of the world fell into a crisis that saw in quick succession the collapse of some of the nation's top financial institutions, mass layoffs of workers throughout the economy, and the bankruptcy or threat of bankruptcy of small and large businesses, even threatening America's big three automobile manufacturers.

Some people have said that our timing is off for release of this report. That right now is not an appropriate or opportune time to talk about corporate leadership; that corporate involvement with public goals is a costly diversion of resources from the need to bolster the bottom line; that an open debate about corporate leadership accountable to public goals might appear insincere or self serving against the backdrop of a financial crisis and the growing expenditure of public money to support private businesses; and that business leaders should try to stay out of view and fly under the radar of public attention.

I strongly disagree. Now is not the time to rely on the same tired thinking that helped get us into this mess. Now is the time to be thinking about the long-term sustainability of the corporation. Now is the time for the business community to think seriously about its interdependent relationship with the broader society. Now is the time to reevaluate failed strategies and to think about how we might do things differently.

As presidential assistant Rahm Emanuel wrote "we must not let a crisis go by without using it for a whole new beginning."

American corporations have been deeply wounded by events stretching at least as far back as the corporate scandals of Enron and WorldCom, and forward to today's economic and financial crisis. The cumulative effect has been an overall erosion of public confidence in business and business leaders. Public anger has boiled over, heated by reports of greed, conflicts of interest, other misdeeds, and simple miscalculations. The rebuilding of trust and confidence in corporate America won't be easy, but it is critically important for business leaders to act to buttress support not only for themselves and their corporations, but for the free enterprise system itself.

Some of you may know that I recently had the privilege of being named to the President's Economic Recovery Advisory Board. Of course, everyone's focus is set on the economic stimulus bill and other steps the Administration might take to set our economy back onto the right course. An underappreciated but integral element of economic recovery is for corporate leaders to take seriously President Obama's call for a ‘new era of responsibility.'

Businesses that fail to heed the call for "responsibility" are likely to find themselves at a disadvantage as society increasingly values social engagement and the pursuit of common purpose rather than self interest. Corporate leaders should be national leaders in rethinking the short-term incentives and systems that were prime contributors to the steep rise and fall of the U.S. economy. They should focus on programs and policies that add to the sustainability of their business for the long term, and that reassure customers, suppliers, employees, and others that theirs is a business in which to have confidence.

This means acting responsibly, pragmatically, and mindful of broader societal concerns. It means becoming more energy efficient throughout the supply chain by cutting waste and investing in new technologies. It means reducing carbon emissions, preparing for climate change legislation, thinking through other potential regulations, adhering to good labor practices, and respecting fundamental human rights for all people, everywhere. It means identifying what works, what doesn't, what will add long-term value to the firm even if there are short-run costs, and acting accordingly. It means not reverting to short-term solutions that might look good in quarterly financial reports but fail to enhance the durable value of the firm - its sustainability.

Short-term pressures, of course, are real and difficult to evade even in good economic times. Today's economic climate creates pressures for businesses to cut every cost.
Anything that does not obviously appear to boost today's share price, that lacks a clear-cut "business case," or doesn't literally buttress this quarter's bottom line is at risk of being cut. In this environment, some shedding of jobs and cutting of benefits or social programs is inevitable. But business leaders must lift their sights to gain greater perspective and, ultimately, more durable performance.

To make corporate responsibility and long-term sustainability integral to the company's daily operations and long-term strategic goals requires not just a change in governance structure or corporate policy, but more fundamentally, a change in how executives and boards of directors think about their interdependence with the society around them. At the most basic level, society provides both literally and figuratively a ‘license to operate.' It establishes and secures property rights and provides the environment in which businesses can exist and prosper.

In the best cases, an effective and equitable system of justice keeps all parties productively engaged in the pursuit of the common good and protects individual rights. An excellent and equitable education system provides a productive and innovative workforce. Intelligent policies towards land, water, energy, transportation, communication, health care, and other concerns sustain the environment, improve commerce, and maintain a vibrant society. It is without question in each corporation's interest to help the society in which it operates to thrive.

Fortunately, there are corporations that have begun to think in these terms and act accordingly. Many large, mostly global corporations are paying greater attention to their longer-term interests by striking a better balance between short-term commercial pursuits and such societal concerns as the environment, labor standards, and human rights.

Many companies have also found ways to turn such concerns as the effects of climate change and other environmental damage into profitable commercial opportunities. The existence of myriad and varied approaches by these corporations to societal concerns demonstrates that such practice is not only possible but necessary to achieve their long-term interests and have sustainability. However, too few business or political leaders are following these paths. And despite the many surveys that show support for these ideas, talk far outpaces action.

This report is addressed primarily to America's corporate directors. Individual directors and the boards they compose can make an enormous difference by motivating management to identify and execute long-term value solutions to the economic and social pressures their businesses face. The report is an urgent call for those directors of public corporations who have yet to address the new realities of global competitive markets to become more active stewards of the corporations they are supposed to direct.

Directors should become leaders in evaluating the long-term sustainability of their business strategies in light of societal concerns, including those growing out of the current economic downturn.

I want to highlight just a few of the key recommendations of the report. I will leave it to you to consult the report itself for a more detailed list of recommendations.

  • The foremost conclusion of the report is that directors have a legal and right obligation and duty to address the long-term performance of the corporation. Directors' fiduciary duties include broader societal concerns that affirmatively affect the corporation's performance and long-term sustainability. To meet that duty, directors must consider the concerns of all-not just current shareholders, managers, or other powerful constituents-who are in a position to affect a company's long-term performance.
  • Boards of directors should widen the purview of their deliberations to give weight to societal issues that impact the firm's longer-term performance. In today's environment, boards must know that they are empowered to reject actions that produce only short-term financial results at the expense of the long-term interests of the corporation.
  • Our basic recommendation with regard to societal issues is not a "one-size-fits-all" solution. As each corporation is unique, each will have unique societal issues that may impact its performance. Our recommendation is simply that boards should play an active role in encouraging company management to evaluate the options available and to decide explicitly what it ought to do based on sound business grounds that incorporate a longer-term view. Once a decision has been made and justified, the board should monitor implementation and continue to evaluate the company's strategy on the basis of long-term costs and long-term benefits.
  • Directors regularly should consider how the company plans, manages, and communicates its interaction with society. The board should insist that management report regularly to it and to the public on non-financial performance, including social performance. To institutionalize the process, the board may want to establish a special committee or empower its governance committee to take responsibility for oversight. That committee should report to the full board and appear regularly on its agenda.
  • Directors should recognize the value of corporate communication with shareholders and the public on issues that bear on the company's reputation and brand value, even when such communication may not be required by regulation or fit neatly into financial disclosure formats. Boards that have a non-executive chair or lead director may want to consider a communications role for that person on such issues and topics.
  • Directors should promote honesty in reporting not only on financial results and other non-financial aspects of their company's operations, but also on the risks, opportunities and results of its social interactions. Such reporting should show how the company evaluates the long-term impact of potential costs and benefits. Directors should use their authority to help their companies find a firm-specific way to communicate effectively with shareholders and the public-through the regular annual report to shareholders, in a separate public report, or in some other way.
  • When choosing a CEO, the board's selection committee should be mindful of the role that person will play in setting the tone and direction of the company with regard to ethics, integrity, and engagement with shareholders and other interested parties.


Boards should tie a portion of CEO and senior management's performance compensation to metrics based on the corporation's performance on such concerns.

Conclusion

Just as there are some who want corporate leaders in the current environment to sit quietly on the sidelines or focus narrowly on this quarter's bottom line - there are many who say that our proposals cannot work in theory even though they see them working in practice. There are skeptics who question whether corporations can sustain societal-based strategies and cynics who wonder whether corporations should. But as our report demonstrates, there are global corporations that are paying greater attention to their interdependence with society, and are redefining the balance between commercial concerns and societal concerns. These firms prove both skeptics and cynics wrong, and they are leading the way by showcasing the new competitive strategies of the 21st century.

In the end, these strategies require that societal and business leaders view and treat each other as partners, not adversaries. Of course, business leadership is only one half of this formula. Political and other societal leaders must reform their outlooks too. As I hope our report and this event convey, business leaders cannot wait. Now is the time to act; business leaders must answer the call for a new era of responsibility.

William H. Donaldson was the 27th Chairman of the U.S. Securities and Exchange Commission (SEC), serving from February 2003 to June 2005. He is Chairman and CEO of Donaldson Enterprises.

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