The COVID-19 experience has been a stark reminder that while meeting the expectations of shareholders is important, it’s only one aspect of the role businesses play. How do business leaders adapt to an environment where an increasingly wide and more diverse set of stakeholders has a concrete influence on the way value is created, protected and sustained? Claude Fuhrer and Christophe Bourgoin touch on some of the changes and their implications for business leaders.
How would you summarise the change that’s going on in the way value creation is viewed?:
Claude Fuhrer: Even before COVID-19 there were signs of a shift in the traditional approach to value creation, away from solely focusing on shareholder value. The disruption of the last few months has accelerated the change, making it increasingly apparent that companies have to do more than merely pursue financial productivity and profitable growth.
Christophe Bourgoin: Yes. Now it’s also about cultivating resilience and contributing to long-term wellbeing, both of employees and of society in a broader context. It’s as if the pandemic and its impact on our lives highlighted the fragility of our ecosystem in general and the value creation ecosystem in particular.
Claude: Look at international supply chains, for example, or homeworking. These acute challenges, especially in the first months of the pandemic, emphasised the shortcomings of existing structures – but at the same time created huge opportunities for players that had the flexibility, imagination and resources to respond quickly and effectively. They highlighted an important aspect of sustainability: creating structures, institutions and approaches resilient enough to serve society going forward, and especially in times of crisis.
But sustainability is nothing new to business, right?
Christophe: True. Sustainability and the related environmental, social and governance considerations have been there for a fairly long time. But what’s interesting now is the way ESG is increasingly impacting value in a more direct and quantifiable way. Investors now apply ESG criteria to their decision-making, and companies embrace it to build better businesses. If a business fails to meet these criteria, it’s literally less attractive to investors. A good example to illustrate this is the recent IPO of Deliveroo in the UK, which resulted in mixed reactions, partly because of significant concerns about ethical issues linked to workers’ conditions. The flipside is that there are enormous value creation opportunities for businesses that manage to fully embed ESG in their strategy to disrupt the market and disrupt themselves, and find the right balance between financial, resilience and societal considerations.
Claude: It’s moved very much from theory to practice. These considerations are now very much part of real deal negotiations on the ground. Buyers are starting to look into whether potential acquisitions can deliver above and beyond shareholder value. At PwC we’re calling this broader value ‘enterprise value’. It involves asking whether the business can create value by addressing societal challenges and considering a broader range of stakeholders. It means asking whether it’s resilient enough, for example in terms of its supply chain or digital platforms, to adjust to outside shocks and stretch to take new opportunities. And it means looking to see whether it’s financially productive – in other words able to invest in a way that both drives growth and improves efficiency to make this growth more profitable.
Sounds good in theory. But a long way from the business or financial reality.
Christophe: On the contrary. For some years now the balance between the three sources of enterprise value – society, resilience and financial productivity – has been shifting. COVID-19 has accelerated this shift and intensified the pressure for companies to deliver, measure and report on longer-term value creation for society, expanding the use of non-financial reporting as a lead indicator for financial reporting. What started as pressure from specific sections of the public, for example the environmental lobby, is becoming mainstream, also in the financial community. Shareholders’ perspective on value is becoming more long-term and holistic. Depending on the industry, this is further amplified by market forces, for example consumers, and so on.
Claude: A good example is the debate around the Responsible Business Initiative (RBI) in Switzerland and the counterproposal. The outcome is not the point. It’s the fact that it got so much attention, both in public and business circles. For me this indicates that ESG issues have reached the mainstream.
Christophe: The RBI is just one a number of initiatives, both voluntary and mandatory, global and local, that are increasing the momentum and adding to the pressure for companies to deliver and report on ESG. Again, things are changing rapidly and globally, so it’s important for business leaders to realise this, monitor developments and act accordingly by better considering stakeholders’ expectations.
What does that mean in concrete terms?
Christophe: Organisations have to start rethinking their value creation strategies in terms of the broader requirements we’ve just been talking about. A good place to start is with the company’s vision and purpose. Having a strong vision and purpose and making sure they’re aligned with your stakeholders’ expectations and company strategy is a good way of building stronger foundations for your business, resulting in greater resilience in an unpredictable environment where the factors that destroy and create value are changing so rapidly.
Claude: I think companies also have to be thinking more like disruptors. A good thought experiment is to consider what strategy you’d adopt if you were entering this marketplace for the first time today. It doesn’t mean you necessarily have to throw everything overboard, but it will enable you to see the opportunities and threats more clearly and formulate an effective response.
Christophe: Yes. It’s also a good opportunity to consider the ESG challenges in your industry or niche and how you can position yourself to capitalise on it and differentiate yourself.
Any other implications for businesses?
Claude: The ability to execute quickly is becoming increasingly important. With all the disruption and intense scrutiny under which businesses find themselves, and with the way the drivers of value are shifting so rapidly, companies no longer have the luxury of rolling out a strategy gradually. If you take too long, the solution will no longer match the problem you were trying to address in the first place. This has been one of the lessons of COVID-19. In some cases it boils down to a make or buy decision: it might make more sense to buy capabilities rather than building them yourself.
Christophe: Tied in with this is the need to be attuned to your ecosystem, usually starting with your clients and your employees. In the environment of accelerating change Claude just described, companies have to be quicker to adapt approaches that aren’t working. They need to be able to respond to new disruptions, risks and opportunities with greater agility. Luckily new technologies and social media are providing the means to keep much closer track of the ecosystem – but having the right talents to derive those insights and act on them will still be key.
Partner, Deals Strategy & Operations Leader, PwC Switzerland
Partner, Investor Reporting Leader, PwC Switzerland