Boards and Stakeholder Engagement: Why It Matters
By Carissa Duenas
The expression “no man is an island” can be just as easily applied to organisations. No company can function, much less enjoy any form of long-lasting success, if it operates in a vacuum. It would be difficult to run any business if it fails to consider that it exists in an ecosystem of stakeholders.
The topic of stakeholder engagement is sometimes met with resistance. After all, there is the notion that shareholders’ interests are compromised or eroded when the company factors in the interests of other groups.?
But does that position always hold true?
In this article, we define stakeholder engagement and provide some context as to why it makes sense for the business from a board governance perspective.
WHAT IS STAKEHOLDER ENGAGEMENT?
Stakeholders can be defined as those with a “stake in the company, and have the possibility of gaining benefits or experiencing losses or harm as a result of company operations.” Some examples of stakeholders are “employees, local communities, local elected officials (along with local and central governments), regulatory agencies, customers, suppliers, financiers, shareowners, and non-governmental organisations.”
Stakeholder engagement, as defined by this Harvard article, is therefore “the strategic process of consulting with key stakeholders on matters important to them and the company.” From a business perspective, it is also the act of fostering and building stakeholder relationships based on shared values and goals, achieved through constructive dialogue.
THE SHAREOWNER MODEL vs. THE STAKEHOLDER MODEL
Most countries have legislation in place that establishes shareowners as owners of companies. In the shareowner model, boards of directors have the fiduciary responsibility to act primarily in the owners’ interests. Companies are seen as another form of “personal property ownership.”
In the stakeholder model, companies are managed to consider the interests of multiple stakeholder groups when it comes to wealth and value-creation. They must ensure that the company avoids causing harm to these key groups.
The stakeholder model’s foundational premise is that stakeholders contribute (either voluntarily or involuntarily) to the company’s ability and capacity to build wealth. They are either potential beneficiaries or risk bearers of company operations and activities. Their interests should therefore be considered by management and the board.
THE BUSINESS CASE FOR STAKEHOLDER ENGAGEMENT
Companies who engage stakeholders have greater chances of achieving success than those who don’t. This is because companies have increasingly begun to operate in an environment where complex relationships have to be navigated. By engaging with stakeholders, the company is able to achieve the following:
A. CREATE WEALTH AND VALUE
Organisational wealth, as defined by the Next Generation paper linked to above, is “the cumulative result of corporate performance over time, including all of the assets, competencies, and revenue-generating capacities developed by a company.” To measure organisational wealth, one needs to look into the tangible and intangible assets of the company.?
The components of organisational wealth can be broken down into the following:
This perspective on wealth value and creation places ample focus on the importance of collaborative stakeholder engagement. Since every company has critical stakeholders in every angle or dimension of its operations, mutually beneficial stakeholder relationships can help “create wealth” while conflict with stakeholders “limits or destroys wealth.” In this light, maintaining stakeholder relationships is important. Without it, the long-term profitability is compromised.
Stakeholder engagement also enhances social capital. It’s another form of organisational wealth. This type of capital “connects people or groups of people in social networks that generate solidarity, goodwill, and mutual influence” — which ultimately contributes to creating sustainable businesses and promotes the common good. By strengthening social relationships, business operations thrive.?
In addition, the abovementioned paper also highlights that (at least for Fortune 500 companies) there is a correlation between stakeholder engagement and company’s growth. Solid financial performance is “linked to good treatment of employees, customers, communities and other stakeholders.”?
B. REDUCE RISKS
Companies can reduce financial and reputational risks by effective stakeholder engagement. This is especially true for businesses with well-established and recognisable brands.
By veering away from such risks and managing societal and environmental expectations better, businesses can leverage benefits such as “improved access to capital and insurance, cost savings and reduced vulnerability to regulatory changes.” It can also win the support of local communities — allowing companies to acquire and retain customers while avoiding boycotts or other negative consumer actions.?
Stakeholder engagement can also “forestall legislation,” with the adoption of voluntary programs. This permits businesses to develop standards that better suit their particular circumstances and challenges.?
Engaging stakeholders is also a proactive way of helping companies understand their changing needs and expectations. Through dialogue and negotiation, companies can identify critical factors that may impact the way the business operates early-on. Effective risk management systems can be put in place.
C. INCREASE ACCOUNTABILITY
Key components of good corporate governance are accountability and transparency.?
By committing to appropriate levels of transparency, the process of stakeholder engagement becomes an avenue to challenge and question business operations. Both shareowners and stakeholders benefit in this regard.
If one were to look at the example of Enron, engaging with feedback from media and the financial community about the company’s reporting standards could have served as a warning and red-flag for the board. Instead, the unwillingness of the board to demand transparency and accountability is believed to have led (at least in part) to the firm’s collapse.?
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D. EXPLORE AREAS FOR INNOVATION
Stakeholder engagement gives companies a clearer picture and understanding of the society in which they operate. For instance, a company might be able to identify ways to increase efficiency and reduce operational costs via sustainable energy.?
Stakeholder engagement also provides the company with an opportunity to better understand the markets they serve and improve their own products and services.
BEST PRACTICES: BOARDS AND STAKEHOLDER ENGAGEMENT
The business case above reinforces the importance of board leadership when it comes to stakeholder engagement.?
Stakeholder engagement outcomes can drastically alter corporate purpose and strategy.
So what can the board do? The Harvard and the Global Corporate Governance Forum articles suggest the following:
1. Place stakeholder engagement on the agenda
This necessitates a change in mindset. Stakeholder engagement should be viewed as a strategic process with concrete financial implications. For stakeholder engagement to be effective, there has to be board ownership. This sets the tone for transparency, accountability and openness. It defines stakeholder engagement as a core value.
2. Set-up a committee for board ownership
It would benefit companies to institute a formal process and reporting mechanisms to tackle stakeholder views, be it through an informal stakeholder committee, the assignment of stakeholder representatives on the board, or broadening the scope of existing board committees (such as that of the audit committee).
More and more companies today have stakeholder groups review the business’ approach to assessing and reporting its social and environmental performance as it relates to company activities. An advisory committee or stakeholder panel to serve as proxy for stakeholder groups can be formed. A non-executive director can chair this body to ensure issues are raised and factored into the board’s decision-making process.
3. Identify, discuss and prioritise key risks associated with changing societal expectations
Boards must listen to the voices of those that need to be heard, and subsequently prioritise their issues. To a degree, a level of flexibility must be accommodated to address changing expectations.?
4. Determine the board’s financial and non-financial information needs for decision-making, management oversight, and monitoring key stakeholder relationships associated with generating value and wealth?
On top of this, the board needs to establish key performance indicators (KPIs) to assess and monitor stakeholder engagement initiatives.
5. Approve a policy for external reporting
Annual sustainability reports are increasingly being used by organisations to communicate with stakeholders about the company’s environmental, social, governance, and economic impacts and internal performance.?
Triple-bottom line, or sustainability reporting, is aimed at a multi-stakeholder audience. It’s part of a broader strategy to communicate and report on the status of dialogues and consultations with key stakeholder groups.
Reports should consider who the stakeholder groups are, the engagement processes undertaken, and a brief explanation as to how the company is addressing stakeholder priorities. It would also be insightful to document how feedback and engagement processes have been integrated into the company’s decision-making processes.
6. Integrate stakeholder issues into annual general meetings (AGM) of shareowners
This establishes the criticality of stakeholder engagement for the organisation, and can be the appropriate platform to explain and report to shareowners how it integrates with company purpose and long-term profitability.
7. Discuss the risks and impacts of operations and provide transparent disclosure information to shareowners and other key stakeholder groups
As mentioned earlier, transparency is imperative. Risks, opportunities, impacts, and challenges need to be documented, tracked, and reported. If certain agreed-upon objectives can’t be met, it would serve the company well to be open about the problems faced, communicate what what actions are being undertaken to overcome these, or state what other avenues or options are being explored.
8. Convene stakeholder forums and invite key stakeholder representatives to address board meetings
The board must do what it can to ensure it has access and exposure to stakeholder groups. This deepens their understanding of the impact of key issues on the business, alongside the community and society it operates in. It informs strategic planning.
CONCLUSION
A mere “tick-the-box” approach towards stakeholder engagement can be short-sighted and ultimately diminish good faith and the organisation’s credibility. The reality that leaders must accept is that stakeholders’ priorities and concerns need to be considered in the shaping, and implementation, of corporate strategy. This is why it matters to the board.
However, shareowners and stakeholders don’t necessarily have to adopt an “us” vs. “them” stance. Engaging in intentional, thoughtful dialogue with stakeholders remains central to the process. Collaboration provides an avenue to negotiate and factor in shared goals and mutual objectives.
It has been proven in many instances: environmental and societal good can intersect with the long-term value-creation and profitability objectives of a company. There is a path forward, and it can yield a win-win situation for all.
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