In theory most rational board members intuitively understand that the delivery of sustainable enterprise value over the long-term requires a healthy focus on both value creation and value preservation. Prudence and common sense would therefore suggest that companies should consider these two business imperatives in decision-making throughout their enterprise, be it at strategic, tactical or operational levels.
In practice corporate boardrooms tend to explicitly address the value creation imperative at a strategic level through their vision, mission statement, and business strategy. The value preservation imperative however while perhaps sometimes implied is rarely explicitly addressed at a strategic level.
Recent conversations regarding the purpose of a corporation in the 21st century continue to highlight this inequity. Three notable examples include: (1) Larry Fink’s 2018 BlackRock letter to CEOs entitled A Sense of Purpose, (2) The Business Roundtable’s 2019 publication entitled Statement on the Purpose of a Corporation, and (3) the World Economic Forum (WEF)’s Davos Manifesto 2020 entitled The Universal Purpose of a Company in the Fourth Industrial Revolution. These high-profile statements explicitly refer to value creation and associated terms such as value generation, enhancement, and realisation. Regrettably, none of these statements have explicitly mentioned terms such as value preservation, preserving value, or the preservation of value.
Protecting enterprise value
In this context the value preservation imperative is associated with the moral obligation to preserve, protect and defend enterprise value against value erosion, reduction, and destruction. This is something that stakeholder groups not only expect but are increasingly demanding of their boards. Logically boardroom priorities need to be explicit in nature as enterprise priorities begin in the boardroom and cascade right through the company to the frontlines.
The difference between explicitly addressing the value creation obligation and implicitly addressing its value preservation obligation is significant, and its impact has already been considerable in terms of both corporate culture and behaviour. Such an approach has created a systemic cognitive bias, leading to a strategic imbalance between the boardroom focus on value creation and its focus on value preservation.
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 the global environment.
Regulatory and governance developments
In a response to this concern certain regulators, standard setters, and other governance bodies have recently began to address this challenge. For the first time these bodies are now explicitly referencing the obligation to preserve value in the same breath as the obligation to create value, and thereby placing it on a more equal footing. The following represent twelve significant developments which have occurred in recent times:
- The ICGN 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.
- The IAASB chair Professor Arnold Schilder in his keynote address at The Future of Audit (2016) conference identified value preservation as representing a cornerstone of a robust future audit.
- The IFAC publication Enhancing Organizational Reporting: Integrated Reporting Key (2017) encouraged organisations to consider how a robust organisational reporting framework should address value preservation issues.
- The COSO publication Enterprise Risk Management: Integrating with Strategy and Performance (2017) explicitly associated creating and preserving value with an organisation’s strategic purpose and related strategy setting.
- The ICGN Global Governance Principles (2017) placed preserving value on the board governance agenda. It explicitly stated that the board is accountable to shareholders and other relevant stakeholders and responsible for preserving and enhancing sustainable value over the long-term.
- The FRC’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.
- The ICGN Guidance on Investor Fiduciary Duties (2018) explicitly described the imperative to preserve and enhance long-term corporate value as a primary investor responsibility and a fundamental fiduciary obligation.
- The Investor Forum’s Defining Stewardship and Engagement (2019) explicitly placed the preservation of value at the very core of contemporary investor stewardship obligations.
- The NACD’s publication of its Blue Ribbon Commission report Fit for Purpose: An Urgent Imperative of Board Leadership (2019) explicitly outlined 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.
- The WEF’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.
- The revised ICGN 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.
- The IIRC’s revised International <IR> 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 IIRC itself.
Should the above trend continue then surely this is a matter which will need to be explicitly addressed through the board agenda. Board members will need to consider the extent to which they are fulfilling their moral obligation to preserve, protect, and defend enterprise value. For example, how is the value preservation imperative explicitly addressed in the company’s purpose, vision, mission statement, or business strategy? Going forward boards will need to adapt if they are to meet evolving stakeholder expectations.
Sean Lyons is an author, value preservation activist and corporate defence pioneer. He is the author of Corporate Defense and the Value Preservation Imperative.
This article is based on a more detailed paper entitled Value Preservation Increasingly Acknowledged as Primary Purpose and Fiduciary Duty.