Stakeholder engagement: A board and governance issue

1st June 2016

Stakeholder engagement: A board and governance issue

1st June 2016

Stakeholder engagement: A board and governance issue

Most companies communicate with stakeholders, thereby providing information about the organisation and its products, services, and operations to shareholders, customers, staff, business partners, and suppliers. The process of communicating with these groups is one type of stakeholder engagement and the strategic importance of engagement is immediately obvious. There are also many good strategic and operational reasons to engage with less traditional groups and on less traditional issues.

Taking stakeholder concerns and interests into account can improve relationships, which may make it easier for a company to operate, lead to ideas for products or services that will address stakeholder needs and allow the company to reduce costs and maximise value.

Researchers have also found correlations between stakeholder performance indicators and conventional measures of corporate profitability and growth. The reasons may vary. For instance, companies that take a stakeholder view may have a more responsible approach to risk-taking, which can deliver higher returns by not unreasonably pursuing competitive advantage. Stakeholder-oriented companies are also welcomed more readily into new markets, as existing companies embedded in those markets perceive them as less hostile to local values and ways of operating. (Fauver and Fuerst, 2012) Overall, stakeholder responsive corporate governance results in a more comprehensive understanding of corporate risk and opportunity while contributing to a strong reputation over time.

Stakeholders can have economic, technological, political, social or even managerial effects on a company and engagement is therefore an important part of anticipating business opportunities and risks, which, in turn, is fundamental to proactive, strategic management. Over time, as economies, labour markets, and supply chains have become increasingly globalised, the number and variety of stakeholders impacted by individual companies has grown and the need for stakeholder engagement has become an essential part of doing business.

Effective engagement is also characterised by dialogue – a two-way process where stakeholders are not merely consulted or listened to, but the company makes a sincere attempt to respond to stakeholder concerns. Of course, if a company is to avoid paralysis, it must prioritise stakeholder interests.

Stakeholder engagement and the board

In addition to championing engagement as a core business value and ensuring that management is engaging in ways that are useful and meaningful, boards of directors can also be directly involved in stakeholder management. As companies increasingly consider stakeholder issues and concerns when making decisions, boards may incorporate a stakeholder engagement or governance model, managing companies to increase value for all stakeholder groups.

Experience shows that trust and relationships take time to build but are valuable assets. To build trust, the company must show it has listened and acted in response to stakeholder concerns. This is why ongoing communication with and reporting back to stakeholders is such an important component in any engagement strategy. Ultimately, stakeholder engagement should become a core value for the business and be managed as a business function with clear objectives and lines of responsibility.

While board structures and responsibilities vary according to local norms, laws, and regulations, most boards are responsible for:

  • Setting general policies and strategic direction.
  • Shaping the company’s framework for accountability, control, and risk management.
  • Selecting and overseeing compensation of key managers, including the CEO.

The second area of responsibility is where stakeholder engagement – or bringing opinions and information from outside in – relates to board leadership. The board of directors can play an important role in making sure that an outward-looking approach — including transparency, integrity, and win-win relationships — is valued within a company and that these values are implemented. So what can the board do to embed stakeholder engagement in the company’s governance models?

The following are key steps:

  • Define stakeholder engagement as a core value.
  • Identify, discuss and prioritise key risks associated with changing societal expectations.
  • Determine the board’s financial and nonfinancial information needs for decision-making, management oversight, and monitoring key stakeholder relationships associated with generating value and wealth.
  • Discuss and approve key performance indicators for social, environmental, and financial performance.
  • Approve a policy for external reporting.
  • Integrate stakeholder issues into annual general meetings of shareowners.
  • Discuss the risks and impacts of projects and operations and provide transparent disclosure information to shareowners and other key stakeholder groups.
  • Convene stakeholder forums and invite key stakeholder representatives to address board meetings.

In addition to being an important part of corporate accountability, stakeholder engagement can be useful as a learning and information tool for company leadership. While board members are often tasked with maximising shareowner value, different blocks of shareowners may have different interests and ideas about how value should be maximised. Engagement and dialogue can help the board better represent these disparate interests.

Board members also have a responsibility to ensure that appropriate risk management systems are in place. Just as the board should ensure that financial statements are properly audited, it is also responsible for ensuring that management is aware of and properly manages nonfinancial risks. In this regard, stakeholder engagement provides a broader view of potential risks.

Of course, many so-called nonfinancial risks — such as the impact of climate change or global supply chain management — may ultimately have financial consequences. Often it is indirect consequences of nonfinancial risks that are hardest to oversee and manage.

A key element of corporate governance is ensuring the accountability of boards of directors. Shareowners have largely been left with the role of protesting excessive pay or board compositions that do not comply with accepted guidelines. The process of stakeholder engagement increases overall accountability and encourages questions about operations.

Boards should consider that reputational and relationship issues are fundamental to business operations, so stakeholder engagement should be given as much consideration as dialogue with financial institutions. Just as discussions with major shareowners help a company understand how it is viewed and what investors want, engagement with other stakeholders can be crucial to helping companies understand what society expects. Engagement may produce clear financial benefits from increased staff motivation or improved reputation.

Because stakeholder engagement is a part of responsible, ethical management, board members should be briefed about engagement practices and outcomes. Just as the board should be involved in financial reporting, at least a portion of the board should oversee nonfinancial reporting, including reporting to stakeholders that provides information about the steps taken by a company arising from mutual discussions held through formal and informal engagement processes.

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