Alignment of Interests. How the relationship between stakeholders has changed and what's needed in the future.
The
alignment of interests between a company’s major constituents is regarded as
the key to long-term sustainability and success. While inherently
interdependent, there is a natural hierarchy in those interests that has proven
itself, over time, to be fair and balanced.
Starting
in the 1980s with the emergence of the power of leverage, the ranking of those
interests began to change, from Customers; Employees; Community; Shareholder to
Shareholder; Customer; Executive Suite; Employees. Advancements in share
ownership and technology further diminished the importance of the employee and
the community, in favor of the owners of the firm.
This
new alignment, however, appeared not only to benefit just two of the major
stakeholders but potentially undermined the interests of the rest. Shareholders
and the Executive Suite found themselves in a new, highly correlated alignment
that often benefitted them at the expense of the others. The expanding
component of stock, RSUs and options in executive compensation meant both
shareholder and executive had a powerful interest in a rising stock price. But
the pursuit of “shareholder value” often came at the expense of the employees
(increased automation; stagnant pay in return for employment) and the community
(outsourcing; inducements to remain).
In a
twist of fate, this new alignment has shown signs of fracturing over the last few
years, as Boards have shown increased devotion to rewarding senior executives,
even when the performance of the company, in real terms, may not have justified
it. The complexity of compensation plans, designed to bring executives in
alignment with corporate performance has, at times, moved in opposition to the
experiences felt by other stakeholders: when employees have lost their jobs;
shareholders have seen the value of their shares go down; and the financial
condition of the company has deteriorated. Under those conditions, Board
committees that continue to increase awards to senior executives have attracted
negative publicity, anger and opposing votes from shareholders and even customer
boycotts.
As
the power of shareholder votes increases (through the weight of passive
investors increasingly engaged in the proxy process), a reversion to earlier alignments
may occur. Ultimately, the most successful companies: make and offer good
products and services; have satisfied customers; enjoy good labor relations
with an experienced, stable workforce: engage with the community that provides
a workforce and an appropriate environment to work in; and have a stable
shareholder base that provides capital for growth.
It
is arguable that the reason alignments change over time stems from ignorance
about both the relevance and importance of each of the major stakeholders.
Better internal communication, led by investor relations teams that exist at
the nexus of these stakeholder interests, offer the most efficient way of
raising awareness and promoting solutions to those problems of alignment that
occur. A degree of foresight and a will to communicate can solve many of these
problems before they happen.
Would you like to share your thoughts?
Your email address will not be published. All fields are required.