March 30, 2021
Board Oversight of Stakeholder Strategies
By: RJ Bannister, Partner, Farient Advisors
Companies around the world are including “stakeholder” considerations in their strategy and culture. Today’s stakeholders expand beyond investors, and regulators, and include customer and community interests, suppliers and employees. As stakeholder prominence becomes commonplace, every company should consider two fundamental questions: (1) what is your company’s stakeholder strategy and culture?, and (2) how do you measure and report on your strategic progress? Appropriate board oversight will be essential in answering these questions as well as a powerful catalyst for change. Roles and responsibilities for stakeholder strategy oversight, however, should be clearly defined and delegated.
Farient Advisors LLC recommends using a Stakeholder Strategy Oversight Matrix to capture the desired oversight using two key variables: the dimensions of stakeholder value and the typical Board structure. Farient’s recent research with our partners in the Global Governance and Executive Compensation Group, “2021 and Beyond: Global Trends in Stakeholder Incentives,” highlights three dimensions of stakeholder value: (1) strategy and culture, (2) measuring and reporting, and (3) incentives and other pay levers. All three dimensions, though different, play a supporting, yet reinforcing, role in achieving stakeholder objectives. The typical Board structure consists of the overall Board and its primary Committees, typically comprised of Audit, Compensation, and Nominating and Governance. Although risk has become another important issue at the Board level, we have kept the framework to just these three Committees for now. By utilizing a simple framework, it becomes clearer how appropriate stakeholder strategy oversight can be defined and delegated.
Figure 1 provides an illustrative example of Farient’s Stakeholder Strategy Oversight Matrix. This illustration provides a simple baseline. Each company will likely have its own variation of this matrix based upon how their organization has incorporated stakeholder prominence. As expected, the full Board provides primary oversight for the strategy and culture stakeholder dimensions and delegates responsibility to its Committees to support and execute. The Full Board also owns the measures of stakeholder dimensions while the Committees own the reporting.
Figure 1: Stakeholder Strategy Oversight Matrix
Moreover, when considering incentives and other pay levers, the Compensation Committee plays a critical role, since employees are an integral part of the stakeholder equation. Compensation Committee charters have broadened over the past decade to incorporate how companies address various human capital issues within their organization from health and safety to diversity, equity and inclusion. To this end, many Compensation Committees have changed their charters and names to reflect new oversight responsibilities (e.g., Talent Management and Compensation Committee, Organizational Management Committee, Leadership Development and Compensation Committee, etc.).
This expanded role has increased the workload for Compensation Committee members who now shoulder additional stakeholder oversight responsibility as compared to the other Committees (see Figure 2).
Figure 2: Compensation Committee Stakeholder Interaction Oversight
From COVID to adverse weather conditions to customer whims, this Stakeholder Strategy Oversight matrix will likely evolve over time as companies incorporate various strategies within their organizations. For the immediate future, Compensation Committees and the full Board will continue to define how various stakeholder strategies impact their organizations, attract and retain talent, and enhance the reputation of the company among all stakeholders.
RJ Bannister has more than 25 years of executive compensation and corporate governance experience. He is a partner with Farient Advisors.