Abstract
Stakeholder groups appear to intuitively understand that logically the delivery of sustainable value over the long-term requires a healthy focus on value creation and value preservation. Historically, organizations have explicitly addressed the value creation imperative at a strategic level through their company purpose, vision and corporate strategy. The value preservation imperative, however, while perhaps sometimes implied, has rarely been explicitly addressed in the same manner at a strategic level. The difference between explicitly addressing the value creation obligation and implicitly addressing the value preservation obligation is considerable, and its impact has already had a profound effect on corporate culture and resulting corporate behaviour.
This article outlines the significant developments that have occurred in recent times (2016–2022), as a growing number of regulators, standard setters and other governance bodies finally begin to include explicit references to the value preservation imperative. These incremental steps are now directly impacting on corporate boardrooms, as the moral obligation to preserve, protect and defend stakeholder value is increasingly viewed as an important corporate consideration in terms of both company purpose and fiduciary duty.
Value Creation and Value Preservation as Twin Imperatives
Logically, the delivery of sustainable stakeholder value over the long-term requires a healthy balance between the focus on value creation and value preservation. In this sense, value creation is associated with the focus on bringing the dollar in through the front door, while value preservation is associated with preventing the dollar from leaving through the back door. This duality is similar to the concept of offence and defence in the sporting context (Lyons, 2014). It is certainly not rocket science, it is just basic common sense, which even an 8-year-old child can instinctively understand. Therefore, in theory at least, most rational businesspeople can intuitively understand these two antagonistic yet complementary principles.
In-practice organizations tend to explicitly address the value creation imperative at a strategic level through their company purpose, vision and corporate strategy. The value preservation imperative, on the other hand, while perhaps sometimes implied, has rarely been explicitly addressed in the same manner at a strategic level. Typically, these corporate purposes, visions and strategies explicitly refer to value creation and associated terms, such as value generation, value enhancement and value realization. This approach also typically applies to numerous corporate publications and public statements issued on behalf of institutions, associations or other representative groups.
For example, Larry Fink’s BlackRock letter to CEOs entitled A Sense of Purpose (BlackRock, 2018), the Business Roundtable’s Statement on the Purpose of a Corporation (Business Roundtable, 2019) and the World Economic Forum (WEF)’s Davos Manifesto 2020 entitled The Universal Purpose of a Company in the Fourth Industrial Revolution (WEF, 2020a) all explicitly refer to terms such as value creation, the creation of value and creating value. Regrettably, not one of these publications has explicitly mentioned terms such as value preservation, the preservation of value or preserving value. For an increasing number of stakeholder groups, this is a matter of genuine concern.
Value Creation Obligation
In this context, the value creation obligation is primarily concerned with focusing on exploiting the potential upside, delivering the resulting rewards and increasing stakeholder value. Value creation is, therefore, generally associated with providing benefits to shareholders, investors and other stakeholders and is considered a potential source of competitive advantage. Consequently, value creation activities (e.g., sales, advertising, marketing, public relations, research and development and customer service) are, therefore, generally prioritized within the organization. Sadly, in the twenty-first century, there are already far too many examples of where a focus solely on value creation is typically associated with short-term financial rewards, often at the expense of, and/or neglect of, longer term value preservation and sustainability.
Value Preservation Obligation
In this context, the value preservation obligation is primarily concerned with the social and moral obligation to preserve, protect and defend stakeholder interests and enterprise value. Value preservation is associated with sustainability and safeguarding enterprise value over the long-term. This requires focusing on mitigating the potential downside, protecting against hazards and preventing a decline in enterprise value. It is, therefore, concerned with defending enterprise value against value erosion, reduction and destruction. In this regard, enterprise value is increasingly associated with the six capitals: (a) financial capital, (b) manufactured capital, (c) intellectual capital, (d) human capital, (e) social and relationship capital and (f) natural capital (IIRC, 2021). Value can be eroded or destroyed at strategic, tactical and operational levels; however, the examples of the benefits of robust value preservation measures can include protecting the organization’s reputation at a strategic level, help to provide greater transparency and accountability at a tactical level and help improve efficiency and effectiveness at an operational level (Lyons, 2016).
In-practice value preservation activities (e.g., governance, risk, compliance, intelligence, security, resilience, controls and assurance) are often only addressed at a tactical and operational level rather than at a strategic level. Unsurprisingly, an inability to successfully preserve value over an extended period of time will inevitably result in a decline in, or the destruction of, enterprise value. It is, therefore, common for post-mortem investigations into the causes of corporate scandals to highlight ineffective value preservation efforts and to identify various value preservation deficiencies and weaknesses. These usually include failures in corporate governance, poor risk management, compliance failures, unreliable intelligence, inadequate security, insufficient resilience, ineffective controls and failures by assurance providers (Lyons, 2016).
The Elephant in the Corporate Boardroom
In reality, the difference between explicitly addressing the value creation obligation and implicitly addressing the value preservation obligation is considerable, and it has already had a profound impact on corporate culture and resulting corporate behaviour. This has led to a strategic imbalance between the focus on value creation and value preservation in the boardroom, resulting in a systemic value preservation deficit and a lack of maturity in our strategic decision-making. Unfortunately, this value preservation deficit has served to perpetuate the practice of value preservation being viewed in a negative light and considered as a necessary evil rather than being regarded as a positive investment in a sustainable future. As a result, seemingly endless corporate scandals continue to expose this ongoing value preservation theatre and window dressing, the mere illusion of value preservation.
This strategic imbalance has been in plain sight for many years and represents the Elephant in the Corporate Boardroom. If history teaches us anything, it is that corporate boardroom priorities need to be explicit in nature as the board sets the Tone at the Top of the organization. Company priorities begin in the boardroom and cascade right down through the organization all the way to the front lines. Consequently, value creation tends to be considered a top priority in organizations and tends to be at the front of people’s minds when it comes to decision-making. Value preservation, on the other hand, is considered less of a priority and often tends to be considered as an after-thought rather than part of the initial decision-making process.
Corporate Decision-making
Prudence would suggest that it is imperative that all boardroom decisions need to be adequately informed and, therefore, should give sufficient consideration to both value creation and value preservation. Indeed, basic common sense would suggest that this should apply to all corporate decisions made throughout the enterprise, at strategic, tactical and operational levels. Corporate decisions are increasingly required to be more comprehensive in nature and embrace integrated thinking in order to mature towards integrated decision-making. Integrated decision-making means that they need to be multidimensional, interdisciplinary and cross-functional in approach. All corporate decisions should consider appropriate time horizons in terms of short-, medium- and long-term implications. A prudent board in the twenty-first century should intuitively understand that their chances of successfully and sustainably navigating the corporate minefield are enhanced if they are in possession of both value creation and value preservation intelligence and capabilities. Corporate boardrooms, therefore, simply need to regard value creation and value preservation as two sides of the same coin.
Stakeholder Expectations
Stakeholder groups appear to be increasingly concerned by this serious matter, as intelligent boardroom decisions logically require an appreciation and understanding of both value creation and value preservation. While this is an issue that has been of concern for some time, it appears that topical issues such as sustainability, stakeholder capitalism, and environmental, social and governance (ESG) have to some extent been super charged by more recent concerns over climate change and the COVID-19 pandemic. Whether the value preservation imperative represents a legal fiduciary duty or not, boards are still expected to fulfil their social and moral obligation to preserve, protect and defend stakeholder interests. Corporate boards would be well advised to adapt if they are to meet evolving stakeholder expectations and, therefore, need to act on this and take ownership for value preservation within their own organizations.
Recent Advancements by Governance Bodies
In response to this inequity, in recent years, some of the more progressive regulators, standard setters and other governance bodies have reacted and begun to address this elephant in the boardroom. For the first time, these groups have finally recognized that the delivery of sustainable value over the long-term requires a strategic focus, not only on the value creation imperative but also on the value preservation imperative. In fact, many have taken overt action to finally deal with this elephant in the room. For the first time, these organizations are acknowledging value preservation as a primary purpose and a fiduciary duty. They are now explicitly mentioning the obligation to preserve value in the same breath as the obligation to create value and thereby placing it on a more equal footing. This is a very welcome and long overdue development. The following represents important examples of the significant advancements, which have been introduced by prominent regulators and standard setters:
International Corporate Governance Network—Global Stewardship Principles (2016)
The International Corporate Governance Network (ICGN) is an investor led organization and its stated mission is to promote effective standards of corporate governance and investor stewardship to advance efficient markets and sustainable economies worldwide. In September 2016, the ICGN published its ICGN Global Stewardship Principles (ICGN, 2016), and this article was a significant advancement in corporate thinking in relation to the importance of value preservation as a fundamental stewardship obligation. These principles set out ICGN’s view of best practices in relation to investor stewardship obligations, policies and processes. This publication outlines that stewardship is about preserving and enhancing long-term value as part of a responsible investment approach. It placed value preservation on the stewardship agenda by affirming that investors should recognize that a principle aim and a primary responsibility are to preserve and enhance value on behalf of and in the interest of beneficiaries or clients.
International Auditing and Assurance Standard Board—Chairman Keynote Address: The Future of Audit (2016)
The International Auditing and Assurance Standard Board (IAASB) is an independent body responsible for setting international standards for the global auditing and assurance profession. In November 2016, the IAASB Chairman, Prof Arnold Schilder delivered the keynote speech at an international conference in Brussels entitled The Future of Audit 2 (IAASB, 2016). In this keynote address, Prof Schilder referred to and quoted from Corporate Defense and the Value Preservation Imperative 3 and stated that understanding the business of the auditee, its corporate defence and value preservation was a cornerstone of a robust audit. It serves to highlight to the audit profession and other assurance providers, an explicit expectation to formally assess how the auditee organizes its value preservation efforts.
International Federation of Accountants—Enhancing Organizational Reporting: Integrated Reporting Key (2017)
The International Federation of Accountants (IFAC) is the global organization for the accountancy profession, which supports the development, adoption and implementation of high-quality international standards. In January 2017, IFAC published a policy position entitled Enhancing Organizational Reporting (IFAC, 2017). This article focused on the key role of the accountancy profession in the development and implementation of organizational reporting frameworks that go beyond traditional financial reporting. In this article, IFAC states that broad-based information provides critical information for external stakeholders to make decisions that are the basis for an organization’s ability to preserve and create value over time. It also states that integrated reporting (IR) is founded on integrated thinking leading to a change in the way businesses think about preserving and creating value. This IFAC publication is considered to be a significant development, as it requires organizations to not only change how they think about preserving value and their ability to preserve value over time but also consider how a robust organizational reporting framework should address value preservation issues.
Committee of Sponsoring Organizations of the Treadway Commission—Enterprise Risk Management: Integrating with Strategy and Performance (2017)
The Committee of Sponsoring Organizations of the Treadway Commission (COSO) is a private-sector initiative dedicated to providing thought leadership through the development of comprehensive frameworks and guidance on internal control, enterprise risk management and fraud deterrence designed to improve organizational performance and oversight and to reduce the extent of fraud in organizations. In June 2017, COSO released a publication entitled Enterprise Risk Management: Integrating with Strategy and Performance (COSO, 2017), which was aimed at highlighting the importance of considering risk in both the strategy-setting process and in driving performance. This publication stated that the purpose of managing risk was creating, preserving and realizing value. In this publication, COSO explicitly associates creating and preserving value with an organization’s strategic purpose. It also associates high-level strategy-setting and execution with the preservation of value in the risk management context.
International Corporate Governance Network—Global Governance Principles (2017)
In July 2017, the ICGN approved its revised Global Governance Principles 4 (ICGN, 2017). This publication introduced preserving value as a core corporate governance responsibility of the board of directors. In this publication, the ICGN placed preserving value over the long-term as an explicit board governance responsibility. It placed preserving value on the board governance agenda by explicitly stating that the board is accountable to shareholders and other relevant stakeholders and responsible for preserving and enhancing sustainable value over the long-term. The updated publication is considered important, as it continues to reinforce the ICGN’s belief that preserving value is considered an important obligation both as a board governance and stewardship responsibility.
Financial Reporting Council—UK Corporate Governance Code (2018)
The Financial Reporting Council (FRC) sets the UK Corporate Governance and Stewardship codes and UK standards for accounting and actuarial work. As the competent authority for audit in the UK the FRC sets auditing and ethical standards and monitors and enforces audit quality. In July 2018, the FRC published an update of the UK Corporate Governance Code (FRC, 2018) focusing on the application of corporate governance principles. In its press release entitled A UK Corporate Governance Code that is fit for the future, the FRC stated that boards are asked to create a culture that aligns company values with strategy and to assess how they preserve value over the long-term. Provision 1 of the Governance Code itself stated that the board of directors should assess the basis on which the company generates and preserves value over the long-term. This update is considered to be a major development in the UK by recognizing the importance of this value preservation imperative in the delivery of long-term sustainable value.
International Corporate Governance Network—Guidance on Investor Fiduciary Duties (2018)
In October 2018, the ICGN published Guidance on Investor Fiduciary Duties (ICGN, 2018). This publication addresses the alignment between investor fiduciary practices and fundamental fiduciary obligations. In the press release, the ICGN’s CEO stated that it is part of an investor’s fiduciary duty to take into account all information that helps to mitigate risk (or preserve value) on the one hand, while identifying sources of wealth creation (or enhance value) on the other. The guidance states that when delegating certain tasks, investor fiduciaries must act to preserve the interests of the ultimate beneficiaries. This publication addresses the perspective of investor fiduciaries (asset owners) who seek to preserve and enhance long-term corporate value on behalf of their underlying beneficiaries. It explicitly identifies value preservation as a primary investor responsibility and a fundamental fiduciary obligation.
The Investor Forum—Defining Stewardship and Engagement (2019)
The Investor Forum is an independent, not-for-profit organization, which is funded by a membership comprising of leading asset managers and owners of the UK equity market. Its stated purpose is to position stewardship at the heart of investment decision-making by facilitating dialogue, creating long-term solutions and enhancing value. In April 2019, the Investor Forum published a paper entitled Defining Stewardship and Engagement (Investor Forum, 2019), which sets out the Investor Forum’s thoughts on the important areas of stewardship and engagement. In this publication, the Investor Forum in defining stewardship stated that they believe that stewardship is preserving and enhancing the value of assets with which one has been entrusted on behalf of others. It goes on to state that the underlying aim of the engagement dialogue should always be to preserve and enhance the value of assets on behalf of beneficiaries and clients. In this publication, the Investor Forum firmly places the preservation of value at the very core of contemporary investor stewardship obligations.
National Association of Corporate Directors—Fit for the Future: An Urgent Imperative of Board Leadership (2019)
The National Association of Corporate Directors (NACD) was founded with the stated goal of educating directors. As the recognized authority on leading boardroom practices, NACD helps boards strengthen investor trust and public confidence by ensuring that today’s directors are well prepared for tomorrow’s challenges. In September 2019, the NACD published that its Blue Ribbon Commission Report Fit for the Future: An Urgent Imperative of Board Leadership (NACD, 2019) aimed at leading boards into the future and about positioning boards to help their companies meet the challenges of the future. In the report, the NACD states that businesses are confronting a wave of major, simultaneous and interconnected trends that are redefining how companies create and preserve value. It also states that the ways in which firms create and preserve value are dramatically changing, demanding new types of expertise and thinking tied to the organization’s shifting strategic needs. In this Blue Ribbon Commission report, the NACD clearly outlines to US boards that the preservation of value forms a central part of company purpose and is considered to be a primary strategic objective of a company.
World Economic Forum—Integrated Corporate Governance: A Practical Guide to Stakeholder Capitalism for Boards of Directors (2020)
The WEF is an international organization for public–private cooperation. It engages the foremost political, business, cultural and other leaders of society to shape global, regional and industry agendas. In June 2020, the WEF published a white paper entitled Integrated Corporate Governance: A Practical Guide to Stakeholder Capitalism for Boards of Directors (WEF, 2020b), which examined the practical implications of stakeholder capitalism for corporate governance and boards of directors in particular. In this report, the WEF states the ability of companies to address a variety of challenges impacts their ability to create and sustain economic value and to manage risks and preserve value. It also states that effective stewardship of the firm’s ESG and digital (ESG&D) footprint is also increasingly important for value preservation. It goes on to state that the new materiality of ESG&D factors to value creation and value preservation creates an imperative for them to be integrated fully into the theory and practice of corporate governance, including the board’s oversight of capital allocation, risk management, reporting and performance evaluation and remuneration. This WEF white paper is considered extremely significant, as it highlights the importance of value preservation to boards of directors in the context of stakeholder capitalism in the 2020s.
Primary Purpose, Fiduciary Duty and Fundamental Concept
The important developments outlined since 2016 have certainly helped to raise the profile of the value preservation imperative vis-à-vis the value creation imperative. Each of these developments in turn has contributed to fostering the importance of explicitly focusing on the obligation to preserve, protect and defend a stakeholder value. Perhaps, the most significant developments in this space, however, have occurred most recently.
International Corporate Governance Network—Revised Global Stewardship Principles (2020)
In September 2020, the ICGN published a revision of its 2016 Global Stewardship Principles (ICGN, 2020). The revised publication, as with its predecessor in 2016, continues to promote and endorse the dual boardroom imperatives of both value creation and value preservation. In the ICGN press release, the Chief Executive stated that this new iteration takes stewardship to a new level with a primary purpose to help investors preserve and enhance long-term value on behalf of their beneficiaries. The 2020 publication included a significant addition to its predecessor, where it states 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. The new publication notably goes further than its predecessor in 2016, by in effect, reimagining the definition of fiduciary duty in the context of investor stewardship and governance. By clearly stating that ‘fiduciary duty: 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’, the ICGN has sent out a strong and explicit message regarding future investor standards and expectations in relation to both value preservation and value creation obligations.
International Integrated Reporting Council—Revised International <IR> Framework (2021)
The International Integrated Reporting Council (IIRC) is a global coalition of regulators, investors, companies, standard setters, the accounting profession, academia and nongovernmental organizations. Its mission is to establish IR and thinking within mainstream business practice as the norm in the public and private sectors. The IIRC’s IR framework establishes fundamental concepts, guiding principles and content elements governing the preparation and presentation of an integrated report. In January 2021, the IIRC published their revised International <IR> Framework (IIRC, 2021), which now explicitly refers to value creation, preservation or erosion in many areas throughout the document where it previously only referred to value creation. The revised goes much further than the original 2013 framework by clearly endorsing the value preservation imperative as one of the overarching considerations of integrated thinking, IR and indeed the work of the IIRC itself.
International Corporate Governance Network—Revised Global Governance Principles (2021)
In September 2021, the ICGN published a revision of its 2017 Global Governance Principles (ICGN, 2021), and this publication continues to promote and expand upon how preserving value is a core corporate governance responsibility of the board of directors. In this publication, the ICGN places preserving value over the long-term as an explicit board governance responsibility. The revised publication is considered important as it continues to reinforce the ICGN’s belief that preserving value is considered an important obligation both as a board governance and as a stewardship responsibility.
Value Reporting Foundation—Integrated Thinking Principles: Supporting Holistic Decision-Making (2021)
In 2020, the IIRC and the Sustainability Accounting Standards Board (SASB) 5 announced their intention to merge into the Value Reporting Foundation (VRF), which was officially formed in June 2021. In December 2021, the VRF published its Integrated Thinking Principles (VRF, 2021) to provide a structured approach for considering how to create the right environment within an organization, as well as for reviewing what can, at times, go wrong. The principles are designed to be embedded into an organization’s business model and applied across key activities overseen by the board and managed by the senior management team. These Integrated Thinking Principles are considered significant because they highlight how preserving value is considered an overarching consideration in relation to integrated thinking. By explicitly including this obligation within these principles, it helps to foster holistic decision-making and also helps to ensure that this imperative is appropriately considered in decision-making processes at strategic, tactical and operational levels within an organization.
Stepping-stones Towards Greater Acceptance
These recent developments should be regarded as incremental steps towards a greater acceptance of the value preservation imperative. The result of each of these individual developments has been that they have had a compound impact, as overtime the value preservation imperative has been clearly identified as having the following key characteristics:
a primary responsibility on the stewardship agenda, representing a cornerstone of a robust future audit, a necessary element of a robust organizational reporting framework, being associated with an organization’s strategic purpose and related strategy-setting, being an explicit responsibility on the board governance agenda, a primary board corporate governance provision in terms of corporate culture, board leadership and company purpose, a primary investor responsibility and a fundamental fiduciary obligation, lying at the very core of contemporary investor stewardship obligations, forming a central part of company purpose and a primary strategic objective of a company, representing a primary focus of effective stewardship and forming an integral part of the exercise of fiduciary duty, a primary purpose and a primary fiduciary duty, a fundamental concept and responsibility, an explicit board governance obligation and responsibility and an overarching consideration in integrated thinking and decision-making.
The Continuous Journey Ahead
Ensuring that there is a healthy equilibrium between the focus on value creation and value preservation is, however, a continuous journey, one for which there is in practice no actual final destination. Clearly, there have been some significant advancements in this space in recent years; however, these merely represent essential individual steps on this journey. While this article only addresses the value preservation imperative from a boardroom perspective, it must be acknowledged there is also much work to be done at tactical and operational levels, which is outside the scope of this article. In particular, the concept of value preservation still needs to be more clearly defined, and the important roles of associated value preservation activities need to be further examined both individually and collectively. It is certainly encouraging to see the contributions of so many prominent regulators, standard setters and other influential governance bodies who are already actively addressing this issue in a positive and proactive manner. While these developments are certainly to be welcomed, make no mistake, there is plenty of effort still required before the value preservation imperative is globally accepted on a par with the value creation imperative. At some point in the future, this may well become an actual legal fiduciary duty; however until then, each board of directors will need to consider for themselves the extent to which they are fulfilling their social and moral obligation to preserve, protect and defend stakeholder value.
Footnotes
Declaration of Conflicting Interests
The author declared no potential conflicts of interest with respect to the research, authorship and/or publication of this article.
Funding
The author received no financial support for the research, authorship and/or publication of this article.