Endorsement of Value Preservation by Governance Bodies as Core Purpose and Fiduciary Duty
Common sense suggests that for effective delivery of stakeholder value in a sustainable manner for the long-run requires strict focus on value creation as well as value preservation. Thus, it is logical to assume that, in today’s corporate world, prudence should be exercised in maintaining a healthy balance between the attainment of these two business objectives. With this frame of reference in mind, we can associate the value preservation imperative with the fiduciary responsibility to preserve and protect stakeholder value against the threats of erosion and destruction.
Apart from being a historical perspective and in addition, as covered in depth in a recent publication, corporations today have addressed value creation as an explicit imperative on a strategic front through corresponding vision and mission statements as well as their corporate strategy. In stark contrast to this, the value preservation imperative, while sometimes touched upon in an indirect manner, has hardly been addressed on the strategic front explicitly. As is the norm, statements from high profile individuals in the corporate world today, refer to value creation explicitly without a correspondingly equal focus towards value preservation.
For any business, the term “value creation” implies a focus towards bringing revenue in through one’s front door. In contrast to this, value preservation implies a focus towards preventing one’s revenue sources from exiting the back door. The nuances that lie in-between overtly addressing a corporation’s value creation responsibility while covertly dealing with its value preservation duties is quite significant. As such, it does have a deep impact on a business’s corporate culture and its consequent corporate attitude. This has resulted in what can be referred to as systemic deficits in value preservation and a somewhat apparent lack of maturity in the way that the corporate decision-making processes work. As a result, consistent corporate misendeavours and apparently never-ending corporate scandals have become a hallmark in exposing the lack of focus towards value preservation.
Advancements by Governance Bodies
In response to this injustice, a few progressively-oriented regulators, standardizing organizations as well as some other governance bodies, have just now begun to tackle this glaring issue. As a first step, these bodies are now explicitly focusing on the duty to preserve value with the same attention as the responsibility to create it and in the process, giving it a fairer and more comparable footing. Below are some examples of the significant advancements in this direction from recent years:
- The International Corporate Governance Network’s Global Stewardship Principles (2016) added value preservation on their stewardship agenda by emphasizing that one of the primary duties of stewardship is to ensure preservation of, and enhance, value in the long run on behalf of all stakeholders and clients.
- The Financial Reporting Council’s UK Corporate Governance Code (2018) took steps towards influencing corporate culture & behavior in addition to board leadership along with company purpose by stating in no ambiguous terms, in its core provision that “the board is responsible for assessing the grounds on which the company creates and preserves value in the long run.
- The World Economic Forum’s Integrated Corporate Governance: A Practical Guide to Stakeholder Capitalism for Boards of Directors (2020) explicitly reaffirmed the point that the ability of any corporation in preserving its value represents a core focus towards effective stewardship and also forms an integral component of the fiduciary duty that these corporations are to exercise.
- The revised International Corporate Governance Network’s Global Stewardship Principles (2020) went farther than its predecessor did when, in 2016, they explicitly stated that investors’ governance is to be carried out by their core fiduciary responsibility to preserve and enhance value which is found to be in the interest of all stakeholders.
- The International Integrated Reporting Council’s revised International Integrated Reporting Framework (2021) referred to value creation in an explicit manner in addition to value preservation and reduction in quite a few pages throughout the literature while its 2013 version only referenced value creation. As such, it can be clearly stated that this document categorically endorsed the value preservation objective as one of the all-embracing perspectives of integrated thinking, integrated reporting, and in effect, the work of the International Integrated Reporting Council itself.
It most definitely is quite encouraging to witness these governance bodies in addition to others that are addressing this all-important problem in an optimistic and energizing manner. Achieving a strong balance between the two corporate duties of value creation and value preservation is most definitely quite a ways away. Nonetheless, these recent steps do represent a move in the right direction towards a broader acceptance of value preservation as a core objective.
If this trend were to continue, it will most definitely be only a short while before a point is reached when a corporation’s performance will be evaluated based on a set of criteria that brings their board to account for both the value creation and value preservation actions that they are responsible for. Therefore, corporate boards will have to step up to the mark if they wish to meet ever-changing stakeholder expectations since inevitably, the final responsibility lies with the boardroom and on its members.