5 | What do we mean with ‘long-term value creation’? Bookmark has been added
5 | What do we mean with ‘long-term value creation’?
Long-term value creation: fad or fashion?
Compared to prior year’s reporting the term “long-term value creation” is mentioned over five times more by Dutch listed companies. However, in most cases a clear definition is missing. And for who is this long-term value created?
Written by Denise Valkering and Arlette Brouns, Senior Consultant Governance & Strategic Risk
The revised Corporate Governance Code, one year later
This blog is part of Deloitte’s ‘revised Corporate Governance Code, one year later’ series. The blogs address how Dutch listed companies account for their application of the 2016 Corporate Governance Code in their annual report. Deloitte studied which definitions are commonly used, what the most important stakeholders are and how this long term value is created. From our study we can conclude that everyone provides their own interpretation of what that long term value is. And that we are primarily creating this long term value for a broad stakeholder group.
What is long-term value creation?
The 2016 Dutch Corporate Governance Code introduced the term “long term value creation” as one of its key principles. But what does this actually mean? The Monitoring Committee Corporate Governance Code1 provides the following, fairly broad, definition; “A sustainably strategy for the long term, sustainable operations, keeping track of new technologies and changes in business models, meeting stakeholder expectations, taking responsibility for the (business) environment”.
The Committee also indicates that 90% of the companies says to be fully or mostly compliant with these values, which is confirmed by Deloitte’s benchmark study of annual reporting amongst Dutch listed companies. Of the companies included in our study 97% mentioned the term long-value creation at least once. Compared to 2016, the term “long-term value creation” is mentioned over 5 as often. Whether this also means that long term value indeed has become more important remains the question.
The terminology and focus on the long term was introduced (partly) in response to a disproportioned focus on shareholder value. Yet, we still see financially driven definitions of long term value creation like Return on Invested Capital (ROIC), underlying earnings per share, market share or cost reductions in the definitions given by Dutch listed companies.
We also see a lot of different interpretations of the term in annual reports. Among those interpretations were for instance contributing to a healthier, more sustainable world. Others talk about meeting stakeholder expectations. According to the monitoring Committee, the variety in definitions could be explained due to differences in business models, investment strategies and stakeholder/shareholder mandate. Many definitions given relate to expectations of stakeholders, considering long-term impact on society and taking responsibility for the environment.
For whom do we create long term value?
The definitions already provide some insights as to who is the most important recipient of this long term value. The majority of companies create long term value for an audience broader than the shareholder alone: 75% of the organizations state that they create long term value for all their stakeholders. Including parties such as company employees, customers or even broader society. Compared to approximately 10% focusing their efforts on shareholder value. Of course the shareholder can also be viewed as one of the stakeholders, which can pose a dilemma to many board members. Prior research by Deloitte on boardroom dilemmas already showed that putting the company’s interests first is a way to deal with this dilemma. And with that introducing company value. As part our study we saw that approx. 15% companies supported this view by stating that long term value is primarily created for the company itself.
How do companies create long term value?
Now that we know how long-term value creation is interpreted and for who it is created, how is this this value actually created? Organizations use different enablers and strategies to create value for the long-term, regardless of their primary target group for whom long term value is created. Enablers that are mentioned most are; striving for sustainable growth, invest/develop human capital, evolve product/service offerings, considering ecological/sociologic impact on society and monitor and/or adapt to innovative solutions.
While companies seem to take the task to focus on long term value creation seriously (after all, it is mentioned about five times more than last year), a common understanding of what it means is missing. What does long term value mean for your company? And are you focusing your efforts on the right stakeholders? We invite you to open the dialogue on what long term value creation means to your company and share your views with us.
1 Monitoring Committee Corporate Governance (https://www.mccg.nl/?page=5757)
‘The revised Corporate Governance Code, one year later’ series
This blog is part of a weekly series of blogs on the results of Deloitte’s benchmark study, examining annual reports of Dutch listed companies to assess how implementation of the 2016 Dutch Corporate Governance is accounted for in its first year. This benchmark study included the annual reports of 68 Dutch listed entities.
As the Code is principle based, we know from our own experience and those of our clients that applying it to your organization can be challenge. Through this benchmark and this series of blogs we provide insights into implementation of some of the key elements in the Code. Interested to see how Dutch listed companies deal with topics such as risk reporting, remuneration, diversity and corporate values?
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Did the above blog interest you and would you like to know how more about Deloitte’s vision on dilemmas or want to discuss what long-term value means for your organization? Read our recent research on dilemma’s in the boardroom or contact Arjan ten Cate, Director at Deloitte Risk Advisory. He specializes in the practical application of and reporting on the Dutch Corporate Governance Code.