Authored by Michael Wilkins / Senior Research Fellow, Sustainable Finance, S&P Global Ratings

The traditional corporate imperative of maximizing shareholder value is increasingly under siege.   Companies are fast adopting ‘stakeholder capitalism’, focusing on long-term value creation for customers, employees, society, and the environment rather than just short-term value for shareholders. 

According to our recently published whitepaper "Stakeholder Capitalism: Aligning Value Creation with Protection of Values," we believe the pandemic has served to accelerate this shift, with substantial government support for businesses raising expectations of corporate social responsibility. Recent surges in sustainable investing and increasing market scrutiny of ESG factors are calling into question the purpose of corporations and asking where their responsibilities to society begin and end. Companies are now expected to invest more in employee health and wellbeing, safety protocols, and ensuring business continuity. But this means aligning these objectives with sometimes-contradictory shareholder interests.

Striking the balance 

The core premise of stakeholder capitalism is to find a balance and compromise in meeting the needs and serving the interests of all stakeholders and shareholders. It implies a company's purpose is to create sustainable long-term and shared value for all. 

Value creation is not just about profit maximization for shareholders but instead encapsulates a more holistic purpose, aligning the broader values of a corporation with those of society, while considering externalities. Yet, the "value" created by the pursuit of stakeholder capitalism is difficult to measure, which limits its current operational effectiveness. It requires the enhancement and standardization of nonfinancial disclosure around different metrics to ensure more transparency and accountability. Ignoring externalities such as global warming, increasing social fragmentation, and unrest may eventually backfire on a corporation's long-term operating environment and profitability. Ongoing shifts in stakeholder expectations vis-à-vis corporations may have tangible business and financial consequences. The balance between stakeholder and shareholder interests has become a delicate one.

Effective stakeholder management 

Covid-19 may have acted as stimulus for sustainability-related growth but also, indirectly, as an opportunity for corporations to refocus their priorities in line with market expectations around sustainable growth.

While it remains to be seen the extent to which Covid-19 will lead to lasting fundamental changes, it is likely that effective stakeholder management will become increasingly important for companies to successfully operate in a world of weakened public finances, social scars, and environmental degradation. However, it remains difficult to measure the stakeholder value a company creates.

Improving that measurement will require enhanced disclosure.

A case for sustainable investing

The growth of sustainable investing could reflect stakeholder capitalism taking root. Companies that have focused on sustainability issues have empirically been shown to achieve lower costs, enhance employee productivity, mitigate risk, and generate new growth opportunities. Effective sustainability performance is also said to strengthen corporate resilience. Research from Bank of

America Merrill Lynch even suggests that the integration of ESG initiatives and greater stakeholder engagement could help prevent around 90% of bankruptcies. 

The COVID-19 crisis has sharpened the focus on stakeholder value. The pandemic has reaffirmed the materiality of sustainability-related risks and the deep links between businesses and their stakeholders across the value chains. In response to the pandemic, governments have provided substantial support to corporations to prevent economic collapse. This in turn has raised expectations about corporate responsibility and the purpose of corporations. Companies are now expected to invest more in employee health and wellbeing, safety protocols, fortifying cyber security, and ensuring business continuity.

Redefining purpose and responsibilities 

Following the stakeholder approach can raise issues around accountability because environmental, societal, and economic issues may end up being tackled by non-democratically elected leaders. Indeed, corporations may argue they are paying taxes to governments to cover these very matters. Inside of a company, employees want to see the CEO and they also want to see the company take a stand on issues that are important to them that advance social change or advance things in the communities around us. People realize that for true change to occur, they cannot just rely on the government. The change also must come from the private sector and its leaders.

In conclusion, the purpose of a corporation is being redefined. The aim is to increase economic and societal resilience by accelerating inclusive economics and societies while shaping a new concept for economic integration and digital revolution. A more inclusive and holistic approach is even more crucial during the current volatile times in which many people are without their jobs and companies are forced to shut. The values that a corporation embraces can be as important as the value that it creates. From a stakeholder perspective, the two are inextricably linked.

The conversation on sustainability usually centers around cutting carbon emissions and increasing renewables. However, sustainability goes past this to thinking about tomorrow’s future leaders. 

Businesses and countries targeting economic diversification, such as the UAE, focus on succession planning to ensure a steady stream of Emiratis to lead the sector into the next 50 years and beyond. 

The departure rate of CEOs at the world’s 2,500 largest publicly traded companies in 2000 was 12.9%, but only half were planned, according to research by PricewaterhouseCoopers (PwC). Fast-forward eight years to 2018, and overall turnovers climbed to 17.5%. However, planned successions drastically increased to make up nearly 70% of that figure.

There is no one way to plan for the next round of leaders. Secondments and job rotations can test employees’ adaptability and flexibility, while pushing to extend further than the original scope of work. It also provides the ability for professionals in emerging markets to work with more mature firms alongside experienced professionals with international experience.

This is what helped shape Majd Al Menhali, Chief Financial Officer for Mirfa International Power and Water Company (MIPCO), which operate Al Mirfa power generation and desalination plant with a capacity of 1.6 MW and 53 MIGD on behalf of owners TAQA (60%), ADFG (20%) and Engie (20%). He has fostered a culture of teamwork and implemented internal controls and processes, which he says are key to his success. Yet these skills didn’t come overnight. Al Menhali says many were learned during a secondment to ExxonMobil in Houston, changing his views on how organizations are run.

“Give yourself time to learn as much as you can,” he says adding that it’s important to recognize when it’s time to move on so that you always look to innovate rather than stagnate. 

This is just one step in a leadership succession plan, many of which start right at the point of hire. Proactive companies pinpoint candidates, help them develop professionally and even get them to consider their replacement when they move on to the next challenge. 

Yet, succession planning isn’t just about a handover. It takes shape in knowledge transfer.

A few questions after graduating a scholarship program led Alawi Al Jefri to his current position.
A leader from the program asked him where he saw himself. “Do you want to go to routine corporate work, do you want to work on operational assets, such as oil and gas, or are you seeking some exciting opportunities,” Al Jefri recounts.

And these questions are what led him to diving deeper into where he saw his path, leading him to positions with Mubadala and Masdar. He was able to work on exciting projects such as Hydrogen Power Abu Dhabi and London Array. He also spent time in Senegal and Jordan gaining skills from waste-to-energy projects before seizing the opportunity at Al Taweelah Refining. He then joined Abu Dhabi Power Company, which merged with TAQA in 2020, and stepped into the EMD role at the Fujairah Asia Power Company (FAPCO).  The project company, majority owned by TAQA, operates the Fujairah 2 power generation and desalination plant with a capacity of 2.1 GW and 53 MIGD. 

“I’m lucky – my experience with each of these entities was quite good for me,” Al Jefri says. “It has enriched and broadened my experience.”

He uses those questions to help prepare his employees today, asking where they see themselves when they retire. Al Jefri says that he wants to encourage his staff to lay the foundation to build a path leading them to that goal. “I tell them that once you see an opportunity, make sure you grab it. Enjoy and maximize the experience so you have no regrets about missed opportunities.” 

It’s the same for Abdulla Al Khemeiri, Executive Managing Director of Arabian Power Company, which operates the Umm Al Nar power generation and water desalination plant with a capacity of 2.2 GW and 95 MIGD. He says having clarity about your current role coupled with future objectives and targets is necessary for all levels. 

Companies that practiced successful succession planning approached it as developmental rather than a replacement process. And this is what Al Khemeiri hopes will help the UAE’s future power and water sector. 

His advice to the next generation: “You need to not only understand your existing role, but how you’d like it to evolve into for the future.”

By AbdulAziz Al Obaidli, Director of UAE Asset Management at TAQA Group

Like many attendees, I found Abu Dhabi Sustainability Week (ADSW) generated renewed inspiration and better ideas about building a sustainable future. 

Unfortunately, after conferences end, like New Year’s resolutions, our excitement can quickly fade as we return to daily routines and obligations. However, our global challenges, and the opportunities they generate, require more consistent dedication; or as this year’s ADSW challenged us “How are you contributing to a decade of action?”

There are three interconnected areas for GCC families– their business, their different generations, and their portfolio – where the energy from ADSW can become meaningful action.

Family Business

Many families are assessing and preparing their own businesses for the implications of climate change - both physical and transition risks. 
Increasingly visible and severe, every business faces physical risks due to both event-driven or long-term shifts in climate patterns. The chance, and consequences, of any particular risk and impact will vary by sector, company, and location. 

Moreover, with growing public sentiment, countries and companies are being expected to take more action, and faster, to address their contribution to climate change and reduce their carbon emissions. This creates the corollary of transition risks, or the financial risks which could result as economy shifts leaving unprepared companies stranded. As heard in several “Work & Invest” panels, multinational corporations are seeking to transition and transform to be viable in a future low-carbon economy. 

Another area of discussion is whether family assets, sometimes long-held and cherished, will continue to maintain the income streams or attractive valuations in the coming years. Moreover, whether younger generations have the same appetite for their family name and legacy to be associated with carbon intensive assets. 

These are not always easy conversations. But helping to establish a clear family business vision and strategy, as well as knowledge of options, can ensure decisions are made consciously rather than by default or at a distressed moment. Conversations about existing businesses provide opportunities to diversify or augment family portfolio into new sectors too. Again, ADSW showcased many of these disruptive innovations ranging from circular economy to sustainable fashion, food, or cities, that could be valuable to family businesses in related sectors. 

Intergenerational Engagement

Secondly, families can benefit from the enthusiasm of their younger generations around sustainability. As well, their involvement can be a bridge to prepare them for forthcoming intergenerational wealth transfer. 

Younger generations, recognising they will probably be the most affected in the future by a failure to address climate breakdown, are becoming the advocates for making changes now. 
We recently conducted research into how to enable Smarter Succession in intergenerational wealth. We found in 56% of families it is the younger generations who are leading their families on sustainability matters. In fact, for GCC families this is slightly higher at 59%. 

We are seeing these “younger” generations, who may be in their 30s, 40s and 50s, take a more vocal and active role in management of family wealth and businesses. This is valuable as our research shows nearly half of GCC families are concerned that their children will take greater risks when they become responsible for the family wealth. Rather than exclude them, involving them earlier with the right space and boundaries can build trust and readiness to inherit wealth and carry on the family name when the time does come.

Family Portfolio 

Finally, families might also need to think on how to position their investment portfolios given the volatile markets and to be more sustainable. 

Throughout the third theme of “Work & Invest” and during Abu Dhabi Sustainable Finance Forum we heard a range of distinguished institutional, sovereign, and financial players make the case for sustainability in investment portfolios. So while I don’t need to repeat their counsel, I would encourage those who missed those sessions to review them. 

Sometimes investors struggle to be confident to effectively change their portfolios. In those cases, it can help to focus on three activities - education, articulation, and execution. 

Education starts with investors increasing their understanding when it comes to different investment approaches, and their implications, as well as what the evidence and research shows. In the area of sustainable and impact investing, we´re proud to have supported the Investing for Global Impact report, which surveyed over 300 leading families and family offices from 41 countries about their sustainable investing practices. Amongst a range of unique insights, most importantly we found that average portfolio allocation to sustainable investing is set to almost double in the next five years. 
It is also important that families or organisations articulate their values and beliefs for their investments. This provides the compass point for forthcoming changes. This usually requires a deeper discussion into what they want to stand for, to achieve with their portfolio, and want their legacy to be. This conversation can bridge generations, which can be particularly powerful.

Another important activity for investors to take into account is execution. This means identifying potential investments that fit their investment objectives and sustainability aims. 

Markets and the world this year continue to be challenged by the physical and economic dynamics of the pandemic. However, as ADSW reminded us, climate breakdown has returned to the agenda for governments in stimulus plans and with forthcoming COP26 this year. 

Therefore, families, taking action now across these three areas are likely to  be better positioned to enhance not only their wealth and legacy, but contribute in the coming decades to a more sustainable and inclusive world. 

Barclays Bank PLC is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority (Financial Services Register No.122702) and is a member of the London Stock Exchange and NEX. Registered in England. Registered No. 1026167. Registered Office: 1 Churchill Place, London E14 5HP.

By Damian Payiatakis / Damian Payiatakis, Head of Sustainable and Impact Investing, Barclays