The expression \u201cno man is an island\u201d 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.<\/p>\n\n\n\n
The topic of stakeholder engagement is sometimes met with resistance. After all, there is the notion that shareholders\u2019 interests are compromised or eroded when the company factors in the interests of other groups. <\/p>\n\n\n\n
But does that position always hold true?<\/p>\n\n\n\n
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.<\/p>\n\n\n\n
Stakeholders can be defined <\/a>as those with a \u201cstake in the company, and have the possibility of gaining benefits or experiencing losses or harm as a result of company operations.\u201d Some examples of stakeholders are \u201cemployees, local communities, local elected officials (along with local and central governments), regulatory agencies, customers, suppliers, financiers, shareowners, and non-governmental organisations.\u201d<\/p>\n\n\n\n Stakeholder engagement, as defined by this Harvard article<\/a>, is therefore \u201cthe strategic process of consulting with key stakeholders on matters important to them and the company.\u201d 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.<\/p>\n\n\n\n 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\u2019 interests. Companies are seen as another form of \u201cpersonal property ownership.\u201d<\/p>\n\n\n\n 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.<\/p>\n\n\n\n The stakeholder model\u2019s foundational premise is that stakeholders contribute (either voluntarily or involuntarily) to the company\u2019s 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.<\/p>\n\n\n\n Companies who engage stakeholders have greater chances of achieving success than those who don\u2019t. 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:<\/p>\n\n\n\n Organisational wealth, as defined by the Next Generation paper linked to above, is \u201cthe cumulative result of corporate performance over time, including all of the assets, competencies, and revenue-generating capacities developed by a company.\u201d To measure organisational wealth, one needs to look into the tangible and intangible assets of the company. <\/p>\n\n\n\n The components of organisational wealth can be broken down into the following:<\/p>\n\n\n\n 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 \u201ccreate wealth” while conflict with stakeholders \u201climits or destroys wealth.\u201d In this light, maintaining stakeholder relationships is important. Without it, the long-term profitability is compromised.<\/p>\n\n\n\n Stakeholder engagement also enhances social capital. It\u2019s another form of organisational wealth. This type of capital \u201cconnects people or groups of people in social networks that generate solidarity, goodwill, and mutual influence\u201d \u2014 which ultimately contributes to creating sustainable businesses and promotes the common good. By strengthening social relationships, business operations thrive. <\/p>\n\n\n\n In addition, the abovementioned paper also highlights that (at least for Fortune 500 companies) there is a correlation between stakeholder engagement and company\u2019s growth. Solid financial performance is \u201clinked to good treatment of employees, customers, communities and other stakeholders.\u201d <\/p>\n\n\n\n Companies can reduce financial and reputational risks by effective stakeholder engagement. This is especially true for businesses with well-established and recognisable brands.<\/p>\n\n\n\n By veering away from such risks and managing societal and environmental expectations better, businesses can leverage benefits such as \u201cimproved access to capital and insurance, cost savings and reduced vulnerability to regulatory changes.\u201d It can also win the support of local communities \u2014 allowing companies to acquire and retain customers while avoiding boycotts or other negative consumer actions. <\/p>\n\n\n\n Stakeholder engagement can also \u201cforestall legislation<\/a>,\u201d with the adoption of voluntary programs. This permits businesses to develop standards that better suit their particular circumstances and challenges. <\/p>\n\n\n\n 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.<\/p>\n\n\n\n Key components of good corporate governance are accountability and transparency. <\/p>\n\n\n\n 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.<\/p>\n\n\n\n If one were to look at the example of Enron, engaging with feedback from media and the financial community about the company\u2019s 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\u2019s collapse. <\/p>\n\n\n\n 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. <\/p>\n\n\n\n Stakeholder engagement also provides the company with an opportunity to better understand the markets they serve and improve their own products and services.<\/p>\n\n\n\n The business case above reinforces the importance of board leadership when it comes to stakeholder engagement. <\/p>\n\n\n\n Stakeholder engagement outcomes can drastically alter corporate purpose and strategy.<\/p>\n\n\n\n So what can the board do? The Harvard and the Global Corporate Governance Forum articles suggest the following:<\/p>\n\n\n\n 1. Place stakeholder engagement on the agenda<\/strong><\/em><\/p>\n\n\n\n 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.<\/p>\n\n\n\n 2. Set-up a committee for board ownership<\/strong><\/em><\/p>\n\n\n\n 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).<\/p>\n\n\n\n More and more companies today have stakeholder groups review the business\u2019 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\u2019s decision-making process.<\/p>\n\n\n\n 3.<\/strong> Identify, discuss and prioritise key risks associated with changing societal expectations<\/strong><\/em><\/p>\n\n\n\n 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. <\/p>\n\n\n\n 4.<\/strong> Determine the board\u2019s financial and non-financial information needs for decision-making, management oversight, and monitoring key stakeholder relationships associated with generating value and wealth<\/strong> <\/em><\/p>\n\n\n\n On top of this, the board needs to establish key performance indicators (KPIs) to assess and monitor stakeholder engagement initiatives.<\/p>\n\n\n\n 5. Approve a policy for external reporting<\/strong><\/em><\/p>\n\n\n\n Annual sustainability reports are increasingly being used by organisations to communicate with stakeholders about the company\u2019s environmental, social, governance, and economic impacts and internal performance. <\/p>\n\n\n\n Triple-bottom line, or sustainability reporting, is aimed at a multi-stakeholder audience. It\u2019s part of a broader strategy to communicate and report on the status of dialogues and consultations with key stakeholder groups.<\/p>\n\n\n\n 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\u2019s decision-making processes.<\/p>\n\n\n\n 6.<\/strong> Integrate stakeholder issues into annual general meetings (AGM) of shareowners<\/strong><\/em><\/p>\n\n\n\n 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.<\/p>\n\n\n\n 7. Discuss the risks and impacts of operations and provide transparent disclosure information to shareowners and other key stakeholder groups<\/strong><\/em><\/p>\n\n\n\n As mentioned earlier, transparency is imperative. Risks, opportunities, impacts, and challenges need to be documented, tracked, and reported. If certain agreed-upon objectives can\u2019t 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.<\/p>\n\n\n\n 8.<\/strong> Convene stakeholder forums and invite key stakeholder representatives to address board meetings<\/strong><\/em><\/p>\n\n\n\n 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.<\/p>\n\n\n\n A mere \u201ctick-the-box\u201d approach towards stakeholder engagement can be short-sighted and ultimately diminish good faith and the organisation\u2019s credibility. The reality that leaders must accept is that stakeholders\u2019 priorities and concerns need to be considered in the shaping, and implementation, of corporate strategy. This is why it matters to the board.<\/p>\n\n\n\n However, shareowners and stakeholders don\u2019t necessarily have to adopt an \u201cus\u201d vs. \u201cthem\u201d 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.<\/p>\n\n\n\n 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.<\/p>\n\n\n\n Ensure your board is well-informed and on the same page.<\/strong> Experience modern board governance with Boardlogic<\/a><\/strong><\/em><\/strong><\/em>, our board portal software, today<\/a>.<\/strong><\/em><\/p>\n","protected":false},"excerpt":{"rendered":" What is stakeholder engagement \u2014 and why should it find its way to the board’s agenda? We present a business case for stakeholder engagement and highlight why it’s imperative from the lens of profitability and organisational success.<\/p>\n","protected":false},"author":2,"featured_media":2155,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_lmt_disableupdate":"","_lmt_disable":"","_monsterinsights_skip_tracking":false,"_monsterinsights_sitenote_active":false,"_monsterinsights_sitenote_note":"","_monsterinsights_sitenote_category":0,"footnotes":""},"categories":[5,2],"tags":[],"yoast_head":"\nTHE SHAREOWNER MODEL vs. THE STAKEHOLDER MODEL<\/strong><\/h1>\n\n\n\n
THE BUSINESS CASE FOR STAKEHOLDER ENGAGEMENT<\/strong><\/h1>\n\n\n\n
A. CREATE WEALTH AND VALUE<\/strong><\/h2>\n\n\n\n
B. REDUCE RISKS<\/strong><\/h2>\n\n\n\n
C. INCREASE ACCOUNTABILITY<\/strong><\/h2>\n\n\n\n
D. EXPLORE AREAS FOR INNOVATION<\/strong><\/h2>\n\n\n\n
BEST PRACTICES: BOARDS AND STAKEHOLDER ENGAGEMENT<\/strong><\/h1>\n\n\n\n
CONCLUSION<\/strong><\/h1>\n\n\n\n
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