Purpose, Human Capital and Profits: Five factors to drive enduring shareholder value.

• Author: Bremen, John M.

Regardless of a board's position on the purpose versus profits debate, human capital issues are an essential component of their discussions on how to drive shareholder value.

Why? There are well-documented advantages to shareholders of having healthy, engaged, hard-working, and productive leaders and employees. The result is good for performance, and leads to superior financial returns. As such, boards now are reviewing steps to ensure their organization engages in practices that lead to effective and sustainable human capital outcomes.

Determining appropriate levels of oversight --as well as identifying how to measure the efficacy of human capital outcomes --was a focal point of discussion among board members, institutional shareholders, proxy advisers, judicial and government leaders and corporate governance thought leaders at the November 2019 Directors & Boards' forum, "The Character of the Corporation."

Based on those discussions, and from our collective experience, significant empirical evidence points to five factors in driving long-term shareholder value through sustainable human capital practices.

Factor #1: Multiple Stakeholder Alignment

There is nothing new about recent focus on the need to manage the interests of multiple stakeholders while in the service of maximizing long-term shareholder return. Addressing the needs of buyers, sellers, and labor, and creating strong communities in which to operate, have been essential functions of commerce, if only on a pragmatic basis for centuries, as acknowledged in Adam Smith's Wealth of Nations in 1776 and Milton Friedman's 1970 essay "The Social Responsibility of Business is to Increase Profits." Countless contemporary research studies by academics and management experts from Michael Porter to Jim Collins, as well as our own organization, have validated this premise.

Corporations generate profits by creating and executing strategies that create benefits to society, such as saving lives by developing new drugs, distributing household goods, providing capital, creating vacation memories, allowing people to travel great distances, making other companies or markets more successful, providing nourishment and powering cities. While the role and causality of corporate and societal purpose should be debated philosophically and practically by boards, the fundamental benefit of multiple stakeholder alignment (including loyal buyers and productive, skilled employees) cannot be credibly disputed when it comes to driving growth and long-term shareholder value.

Factor #2: Culture, Leadership and Risk

Board members report that company culture has become a topic of greater direct focus in recent years. For example, many organizations view board responsibility and oversight to include:

* Setting the tone from the top.

* Defining company values and acceptable behaviors, as well as leadership trust and credibility.

* Addressing areas related to inclusion & diversity.

* Managing human capital risk.

Increasingly, however, boards also have been considering broader governance in areas such as employee wellbeing, engagement, purpose...