Think like your stakeholders to build long-term value

Long-term value (LTV) is essential to building a sustainable growth strategy.

Three questions to ask

• How does stakeholder capitalism — an emphasis on customer, people and societal value, not just financial metrics — compel companies to focus on long-term-value?
• As the marketplace places more emphasis on nonfinancial metrics, how can companies turn these factors into measurable key performance indicators (KPIs)?
• How should the C-suite expand to include a broader spectrum of voices in corporate performance and real-world strategy?

In an industry marked by daily price fluctuations, an oil and gas company extended its strategic vision beyond short-term financial outcomes. At a time when the demand for energy has never been higher, a utility company responded to calls for it to manage its environmental footprint and social contribution. Amid unprecedented pressure to focus on preventive medicine, a pharmaceutical company broadened its stakeholder lens to include patients, its people, and the planet, empowering working groups within the company to inform its new purpose-driven strategy.

Each of these companies made these strategic decisions, because their leaders understood that investing in a broader set of stakeholder considerations would have a considerable impact on total enterprise value, access to capital and the talent market for their organizations. This is a long-term value approach to building a growth strategy.

The days of focusing solely on the shareholder are over. Stakeholders evaluate an enterprise by considering its customer value, people value, and societal value, in addition to its financial value — the pillars of the EY long-term value framework. Accordingly, companies are rethinking how to grow their businesses while communicating both purpose and strategy — by focusing on long-term value through the lens of stakeholder capitalism. More traditional strategies that narrowly focus on financial output have become increasingly risky. Long-term value has come of age.

Considering the four value pillars can improve your strategy

Our long-term value framework aims to answer two key questions for C-suites, boards, and investors:

• What will drive — or destroy — value for the business in this next era?
• And how can the business be aligned around a wider, stakeholder-driven agenda?

Of course, executives still must keep an eye on short-term performance. Indeed, for most businesses, running a lean and profitable core is vital to driving transformative investments. But we expect corporations that focus on a broader set of stakeholders will perform better — in the short, medium, and long terms — and will be rewarded in the marketplace with lower costs of capital, better human capital engagement, and, in the long run, differentiated growth in enterprise value.

For example, companies are already taking innovative approaches to improve their environmental impact — a key element of our societal value pillar. We see the business community going beyond the calls of regulators and lawmakers, pushing toward tangible carbon-neutral solutions. In the 23rd edition of the EY survey of market sentiment, the EY Global Capital Confidence Barometer (CCB), 97% of CEOs agree that societal and environmental changes have a critical impact on their companies. Many are making plans to become carbon-neutral by 2050.

Practicing what we preach, EY has committed to an ambition to be carbon-negative in 2021 and net zero by 2025. As we advise adoption of new metrics to drive strategic and capital allocation decisions, we have also implemented stakeholder capitalism in our own organization, embedding the EY purpose of “Building a better working world” into our strategy.

Measurement is a must

What has long made business leaders skeptical about nonfinancial value as a key performance indicator (KPI) is the lack of viable measurements. That’s no longer the case. Many stakeholder metrics — especially KPIs related to environmental, social and governance (ESG) criteria — have made their way from the chief strategy officer’s scorecard to the CEO’s. The long-term value pillars (shown in the chart above) that companies focus on include:

• Customer value — including satisfaction, trust and loyalty, and brand equity
• People value — comprising engagement, leadership, employee loyalty, diversity and inclusiveness, and health and wellness
• Societal value — encompassing sustainability, total economic impact, carbon footprint, water consumption, and ethics

Whether or not their valuation models are fully developed, C-suite executives are finding they can no longer ignore these wider-scope factors.

The concept of corporate responsibility is not new; the business community defined it roughly two decades ago. But stakeholders — whether asset managers, shareholders, suppliers, regulators, or, of course, employees — have more recently latched on to a broader framework for judging corporate value. They’re looking for businesses to stop externalizing risk or cost to other stakeholders, including the environment. The COVID-19 pandemic has also challenged corporate strategy and upended baseline assumptions, prompting a fresh look at KPIs. The key to adopting a long-term value mindset is to rebalance capital allocation and communications priorities against this new, more comprehensive set of KPIs.

Taking action: addressing the new stakeholder primacy

The goal for any company, ultimately, is to establish its own story — not leave it to the marketplace to define. Voices with market impact are omnipresent, including institutional investors, regulators, customers, social media, journalists and communities. An organization whose strategy prioritizes all four long-term value pillars — and that can articulate how the customer, people and societal pillars drive financial performance — will outperform its competitors.

To achieve this, organizations should take these critical steps to success:

1. Establish your purpose, define your value creation approach, and understand stakeholder expectations. This is the essence of a long-term value strategy. Beyond defining their purpose, businesses must also identify key stakeholders as well as their specific needs and/or expectations.
2. Build your leadership tent to encompass various perspectives. Properly managing inputs requires expanding the discussion tent so that a range of voices can influence strategies and implementation. This may mean empowering a set of chief officers, or “CxOs,” with varied expertise, including chief growth, transformation, customer, experience and sustainability officers. At the highest levels, CEOs and CFOs are rethinking how to realign their leadership teams to drive, measure, and evaluate enterprise value.
3. Set and measure metrics across stakeholder goals. The importance of this step cannot be emphasized enough. Leadership must maintain a tenacious focus on a comprehensive set of KPIs and use that dashboard to drive investment and communications.

This EY-Parthenon article is part of a sponsored content series as seen on hbr.org.