This article originally appeared in our sister publication, Private Company Director.
It’s not news that privately owned companies in the United States are facing turbulent times. In addition to normal business challenges, many federal government programs are being curtailed or eliminated, resulting in layoffs at the government level and at impacted companies.
At the same time, sustained attacks on company initiatives focused on environmental sustainability and DEI are causing companies to rethink everything from substantive programs to marketing for fear of crossing ill-defined lines and losing the support, or incurring the ire, of various groups.
These challenges, however, present an opportunity for private company boards. Instead of merely an oversight role, boards should take a more proactive leadership role (as a matter of fiduciary duty) to work with their senior executive teams to address those challenges and chart a course for the future.
The reasoning comes down to company sustainability and, ultimately, survival. These challenges cumulatively are having, and will continue to have, a significant adverse effect on a company’s stakeholders, including owners, customers, suppliers, workforce, community and the environment. For example, as layoffs spread, a company’s customers will have less money to spend and will be more selective in their purchases. As of this writing, companies are already experiencing disruptions in their supply chains. That will impact not only those companies within the supply chain but, as the ripple effects grow, other stakeholders as well. Company employees will experience increased health and childcare challenges and have fewer resources available to help them with those challenges. As a result, companies can expect lost time and productivity, reduced motivation and a reduction in the number of available workers. Companies can expect to see effects in their communities ranging from impacts on education to damage from severe weather events.
In this environment, boards should look beyond profit and loss to:
- Explore how their companies are impacting their stakeholders positively and negatively.
- Engage in a deeper dive to examine their companies’ long-term purpose in relation to their stakeholders.
- Identify practical ways to embed purpose and stakeholder value into their companies’ operations.
Stakeholders
As an initial step, a company’s board should identify who the company’s stakeholders are, the impacts the company is having on those stakeholders and how those stakeholders are being (and will be) impacted by current and future challenges. With that knowledge, the board should then explore ways the company can positively impact and support those stakeholder groups.
Purpose
Next, the board should lead an effort to understand, define and, if necessary, modify the company’s core purpose, meaning its reason for being. How can the company be a better version of itself? In its daily operations, what value does it add to its stakeholders? In a bigger sense, what value does it add to the world? How will it be remembered? Purpose-driven companies already do this. They operate from clear core values that guide decision-making and short- and long-term growth. (For purpose-driven companies, this would be a good time to engage in a similar exercise.)
Embedding Purpose
Finally, the board should work actively with management to embed specific actions and desired stakeholder impacts — as well as the company’s core purpose — into its DNA. Examples include:
Board-level changes. Traditionally, board composition has reflected a company’s desire for directors with experience that will aid the company’s business operations and growth. But to embed purpose, having a director who serves as a dedicated, independent voice for the company’s purpose (an “impact director”) can be an effective way to keep it on track.
While directors with business-relevant backgrounds naturally must be aligned with the company’s purpose, the impact director has a more significant role when it comes to purpose. He or she can help the company define and refine its purpose and impacts and provide effective guidance and oversight over the company’s activities and programs that implement purpose and impacts. In addition, the impact director can be a guiding and stabilizing force for embedding the company’s purpose, impacts and values for later generations. He or she can also be an educator for other board members as well as an advocate for the company’s stakeholders.
Boards often have executive, audit, compensation and governance committees. The board could also create a purpose or impact committee that is charged with oversight over how effectively the company is achieving its purpose goals and impacts. The committee could also provide guidance for management in defining and measuring its purpose and impacts and how the company communicates its purpose and impacts internally and externally.
Finally, a company might consider having an advisory board focused on impact and stakeholder engagement. Because an advisory board does not have fiduciary responsibilities, it could be a very effective vehicle for brainstorming, gaining feedback, generating and incubating new ideas for defining purpose goals and impacts, and learning new perspectives.
Ownership-level changes. A starting point is to provide shareholders with rights to approve or disapprove certain company actions that may affect the company’s purpose or impacts. These rights could be granted to shareholders generally or to holders of a particular class of shares in the company’s certificate of incorporation or in a shareholders’ agreement. In a family-owned business, a shareholders’ agreement can also be used to articulate and embed values for future generations of the family. That can be accompanied by provisions to include nonfamily directors and officers to manage the company in a manner that prioritizes furthering the company’s purpose over the long term, especially if there are no family members who are willing and qualified to manage the company.
Going one step further, the company, through its certificate of incorporation and either a shareholders’ agreement or a trust arrangement, could adopt an approach known as steward ownership. Steward ownership involves having a class of shares that have voting rights but no economic rights. Those voting rights could include some of the consent rights described above or could be embodied in a single golden share, which is held by a steward for the purpose. The steward could be, for example, a nonprofit organization or a perpetual purpose trust.
To effectively address the challenges that privately owned companies are facing today, boards should lead with purpose, working with senior management and stakeholders to guide their companies toward long-term sustainability and impact.