Governance Bodies Endorse Value Preservation as Primary Purpose and Fiduciary Duty
Common sense would suggest that the delivery of sustainable stakeholder value over the long-term requires a focus on both value creation and value preservation. Logic would therefore command that in the corporate world, there should always be a prudent and healthy balance between the focus on these two business imperatives. In this context, the value preservation imperative is associated with the moral obligation to preserve, protect, and defend stakeholder value against value erosion, reduction, and destruction.
Historically, and as discussed in a recent paper, corporations have explicitly addressed the value creation imperative at a strategic level through their vision, mission statement, and corporate strategy. The value preservation imperative, however, while perhaps sometimes implied, has rarely been explicitly addressed at a strategic level. Typically, high profile statements in the corporate world explicitly refer to value creation without ever referring to value preservation.
Take three high profile examples. Larry Fink’s 2018 BlackRock letter to CEOs, the Business Roundtable’s 2019 publication ‘Statement on the Purpose of a Corporation’, and the World Economic Forum’s Davos Manifesto 2020 entitled ‘The Universal Purpose of a Company in the Fourth Industrial Revolution’. Each of these publications explicitly refer to terms such as value creation, creating value, or the creation of value. Regrettably, none of them explicitly refers to terms such as value preservation, preserving value, or the preservation of value.
Ideally, value creation and value preservation should be given due consideration in all business decisions. This includes decisions made at strategic, tactical, and operational levels within the organisation (from the boardroom to the front lines) while also holding individuals and groups to account for their responsibilities. In business, value creation refers to the focus on bringing the dollar in through the front door, while value preservation refers to the focus on preventing the dollar from leaving through the back door. The difference between explicitly addressing a corporation’s value creation obligation and implicitly addressing its value preservation obligation is significant, and it has had a profound impact on corporate culture and resulting corporate behaviour. It has resulted in a systemic value preservation deficit and a certain lack of maturity in the corporate decision-making process. Consequently, ongoing corporate failures and seemingly endless corporate scandals continue to highlight and expose a lack of focus on value preservation, often to the detriment of society and our environment.
Advancements by Governance Bodies
As a response to this inequity, certain progressive regulators, standard setters, and other governance bodies have recently begun to address the elephant in the room. For the first time, these organisations are now explicitly referencing the obligation to preserve value in the same breath as the obligation to create value, thereby placing it on a more comparable footing. The following represent examples of significant advancements in recent years:
1. The International Corporate Governance Network’s Global Stewardship Principles (2016) placed value preservation on the stewardship agenda by outlining that a primary responsibility of stewardship is to preserve and enhance long-term value on behalf of beneficiaries or clients.
2. The Financial Reporting Council’s UK Corporate Governance Code (2018) attempted to influence corporate culture, board leadership, and company purpose by explicitly stating in its primary provision that the board assess the basis on which the company generates and preserves value over the long-term.
3. The World Economic Forum’s Integrated Corporate Governance: A Practical Guide to Stakeholder Capitalism for Boards of Directors (2020) explicitly reinforced the message that the ability of a company to preserve value represents a primary focus of effective stewardship and forms an integral part of the exercise of fiduciary duty.
4. The revised International Corporate Governance Network’s Global Stewardship Principles (2020) went further than its predecessor in 2016 by explicitly stating that investors’ governance should be driven by their primary fiduciary duty to preserve and enhance value which is aligned in the interest of beneficiaries and clients.
5. The International Integrated Reporting Council’s revised International Integrated Reporting Framework (2021) explicitly referred to value creation, preservation, or erosion in many areas throughout the document where its 2013 predecessor only referred to value creation. In effect it clearly endorsed the value preservation imperative as one of the overarching considerations of integrated thinking, integrated reporting, and indeed the work of the International Integrated Reporting Council itself.
It is certainly encouraging to see these and other governance bodies addressing this important issue in a positive and proactive manner. Reaching a healthy equilibrium between the corporate focus on value creation and value preservation will undoubtedly take some time. These developments, however, do represent stepping-stones towards a greater acceptance of value preservation as a boardroom imperative.
Should the above trend continue, and it appears to have a certain degree of momentum, it is surely only a matter of time before a corporation’s performance is evaluated based on appropriate criteria which hold their boards to account for both their value creation and value preservation efforts. Boards will therefore need to adapt if they are to meet evolving stakeholder expectations as ultimately the buck stops with the boardroom.
Sean Lyons is an author and corporate defense advisor.
YOU MAY ALSO BE INTERESTED IN