By Peter Brabeck-Letmathe and David P. Frick
Over recent years, Nestlé has demonstrated that shareholder dialogue in a highly diversified shareholder structure – Nestlé has approximately 150,000 registered shareholders – is both possible and beneficial.
Through shareholder meetings, surveys, chairman’s roundtables and engagement calls, bilateral investor meetings and engagement with investors at press conferences, roadshows and investor conferences, the company regularly solicits input from investors on governance topics. Insights are regularly incorporated in the board’s governance documentation and practices.
These efforts are not unique to Nestlé. They have been driven by companies’ recognition of the benefits of such dialogue, as well as by emerging best practices and new legal requirements.
At the same time, challenges remain. First and foremost, the benefits of increased ‘say’ must always be balanced against shareholders becoming selectively involved in decisions that should properly be left to the board. Only the board has a fiduciary obligation to the company, is legally committed to a long-term view and has access to the internal information necessary for many key decisions. Second, efforts to engage with shareholders must avoid selective disclosure and ensure the equal treatment of shareholders. Finally, unintended consequences, such as leaks of confidential information, the intransparent coordination of voting rights or the transfer of power from the silent majority to vocal minorities or activist investors, must be avoided.
“Holistic, or board-centric, governance should include all responsibilities of the board relating to governance, risk management and compliance, but also sustainability and strategic direction of the business”
Therefore, there is an increasing recognition that boards should not abandon their own responsibilities in a misplaced desire to satisfy pressures from outside. In fact, keeping governance ‘board centric’ can help reduce a company’s vulnerability to activists and short-term investors. Good corporate governance is not an end in itself, but helps focus on the long term and ensure capital for sustainable growth.
Holistic, or board-centric, governance should include all responsibilities of the board relating to governance, risk management and compliance, but also sustainability and strategic direction of the business. Under Swiss (and other) laws, these are ‘inalienable’ obligations of the board, which cannot be delegated ‘up’ to shareholders.
Ensuring the company’s long-term success requires proper succession planning by the board. But it should also include other aspects of economic, social and environmental sustainability. Some boards currently address these topics in the full board’s agenda, but in the largest companies at least, it may be beneficial to create a special committee that prepares the full board’s discussion of such non-financial responsibilities. Similar to the audit committee’s responsibilities for financial reporting, compliance and risk management, a board sustainability committee can oversee non-financial reporting, safety and health, the company’s environmental footprint and other aspects of corporate and social responsibility relevant for that particular company.
At Nestlé, such concepts are based on the purpose clause of its articles of association. Accordingly, Nestlé shall, in pursuing its business purpose, aim for long-term, sustainable value creation. We recognise that we can only create long-term value for our shareholders if we also create value for society.
Either the full board or a sustainability committee will, therefore, monitor how material non-financial issues affect financial performance and how the company’s long-term strategy relates to its ability to create shared value. It will regularly review the company’s ownership profile and the priorities of each group and it will identify other stakeholders relevant for the company and their material interests.
This then closes the link to another aspect of holistic/board-centric governance, which is the board’s reporting to shareholders and other stakeholders. In its annual report, the board and its management give insights into which material issues they consider relevant to the company’s ability to create value over the long term. The board’s report needs to be responsive not just to shareholders, but also to the other stakeholders, such as employees, suppliers, customers, communities, regulators and arguably even future generations affected by the company’s activities.
This is much aligned with the aim of an integrated report as defined by the International Integrated Reporting Council (IIRC). Such a report is meant to be a concise communication about how an organisation’s strategy, governance, performance and prospects, in the context of its external environment, lead to the creation of value in the short-, medium- and long term.
It has been suggested by R.G. Eccles and T. Youmans of Harvard Business School that within a decade every listed company around the world will be issuing such an integrated report, which will function as an organising document for a board-centric governance.
Holistic governance, a dedicated sustainability committee and integrated reporting can be valuable additions to the shareholder dialogue that has been the focus of governance efforts over recent years. They can help address vulnerabilities to short-term pressures. They can also bring back the purpose of governance from a compliance exercise to a value-adding effort to secure a company’s licence to operate, ensure its sustainable long-term growth and align its interests with all its stakeholders.
The Ethical Boardroom’s 2016 award is a welcome recognition of Nestlé’s efforts in this regard.
About the Authors:
Peter Brabeck-Letmathe is Nestlé’s Chairman and David P. Frick is Secretary to the Board, Nestlé S.A.