Transparent Corporate Objectives—A Win-Win For Investors And The Companies They Invest In

The continuing debate about the primacy of shareholders versus stakeholders fails to address the essential problem in current corporate governance. Neither companies that claim to prioritize the interests of shareholders nor those that claim to prioritize the interests of stakeholders operate with a transparent governing objective that communicates what they are fundamentally trying to achieve. As a consequence, managers have no sound basis to make decisions; and without knowing how managers decide, boards and investors are finding it difficult to hold them accountable for what they decide. Boards of directors, investors, and proxy advisory firms have no effective benchmark for evaluating a company’s resource allocation decisions and its performance. And as a consequence of all this, investors find it unnecessarily difficult to assess investment risk when valuing shares.

The authors propose that companies follow three essential steps to create a more efficient market for corporate governance. First, companies should choose a clear governing objective. Second, companies should commit to a set of policies, including the use of financial and non-financial metrics in performance evaluation and incentive compensation plans that encourage behavior consistent with the governing objective. Managements of stakeholder-centric companies may prioritize an objective other than creating shareholder value, but they need to disclose the acceptable limit for trade-offs they are willing to make at the expense of their shareholders. Third, companies should publicly disclose the chosen governing objective. This includes the time horizon the company will use in its planning and decision-making processes, as well as its policy for resolving trade-offs when the interests of stakeholders conflict with one another.

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