Listening to stakeholders is good governance

Boards that tune into stakeholder demands truly support decision-making and build resilience.

With the increasing focus on Environmental, Social and Governance (ESG) it may come as a surprise to many that new research has shown that corporate boards are detached from how their business engages with stakeholders and often their engagement is filtered, one-directional and absent from decision-making. This is despite acknowledgement that engaging with stakeholders should support business decision-making, drive transformation and strengthen the business model.

Published by the World Business Council for Sustainable Development (WBCSD), in collaboration with DNV, the report – titled 'Boards and their stakeholders: The state of play' – is both a much-needed critique on what is happening in practice and a constructive document that shares practical ways for improving engagement. 

Embraced frequently but not fully understood

In recent years, ESG has been a driving factor for many companies and organisations but research by many bodies has found that while it is often enthusiastically embraced it is frequently not fully understood. Grand statements on purpose that put people and planet at the centre of a business strategy do not suffice if there is no supporting action.

One of the major failings is that entrenched attitudes that see shareholders as the only stakeholders are often creating a negative image of the organisation among other stakeholders such as employees, customers, suppliers, capital providers, governments and civil society. 

Mario Abela, Director Redefining Value at WBCSD said, “Business needs to recognize the interconnectedness of its operations with key stakeholders to move beyond the model of shareholder primacy. WBCSD’s Vision 2050 highlights the need for a mindset shift to drive the transformations urgently required on the purpose of business, resilience and operating regeneratively to create long term sustainable growth.”

The report highlights that company culture is one of the most significant barriers to effective stakeholder engagement. If the company’s historical internal culture and priorities do not include a broader range of stakeholders, this makes a shift toward stakeholder engagement challenging as the necessary mechanisms must be put in place. 

More than 30% of respondents contacted by the reports’ authors when compiling the data, felt that there was limited or no engagement by the board with key stakeholders and that the board had insufficient skills and capability to effectively engage with stakeholders. Over 20% of respondents felt that stakeholder engagement was not a priority for the board. 

Respondents said that boards should be taking a more active role in identifying those key stakeholders and considering the opinions of and impact on those stakeholders when making strategic decisions. 

Need to move beyond shareholder primacy

Echoing Abela’s comments, Jason Perks, Senior Director Sustainability & ESG at DNV, said the COVID-19 pandemic has emphasised the need for companies to move beyond shareholder primacy and consider the purpose of the organisation, its social license to operate and the impacts that it has on both society and the environment. 

“Although Board-level engagement is still somewhat limited, stakeholder engagement is key to helping business better understand ESG-related risks and opportunities. It is time for business to ensure boards are informed and engaged with their stakeholders on ESG topics to ensure future-fit strategic decision-making,” said Perks.

At the heart of good corporate governance is sound and informed decision-making, both in the boardroom and across the company. Decisions that do not take account of the voice of key stakeholders and societal concerns could be later proven bad decisions. Boards increasingly need to have a good understanding of new and emerging risks. Risks should not be examined with hindsight but anticipated and incorporated into decision-making and strategy.

An example of how a bad board decision can result from a lack of stakeholder engagement cited in the report is the recent attempt by leading European football clubs to form a ‘Super League’. In this instance, the owners of the clubs failed to consider the impact on their key stakeholders, players, fans, communities and the government, in pursuit of financial success. The plan was abandoned after protests and actions from the stakeholders involved led to it becoming economically unviable. 

No one-size-fits-all approach

The report authors recognise that business organisations vary enormously in many ways and say there is no one-size-fits all approach to stakeholder engagement and companies in different sectors, industries and geographies will manage this differently. 

Some examples of current practice include stakeholder advisory panels, materiality assessments, understanding the macro landscape to identify risks and opportunities, presentations, external consultants, engagement with employees/unions or suppliers in site visits. 

Encouraging boards to grasp the nettle and move forward in implementing effective ESG strategies, the report suggests several practical steps that can be taken:

• Know your stakeholders,
• Understand the expectations of and impact on those key stakeholders,
• Ensure key stakeholders are consulted in decision making,
• Establish appropriate governance mechanisms to formalize operational relationships with stakeholders,
• Embed important stakeholder discussions into the board agenda,
• Trust the views of stakeholders,
• Acknowledge existing tools and resources that can further embed sustainability,
• Act in the long-term interest of the company.

Commenting on the growing importance of materiality assessments, Perks said the research showed assessments can help businesses understand a broad range of stakeholder views. “Tools such as materiality assessments were identified as key to providing boards with oversight of stakeholder views. Within materiality, ‘stakeholder mapping is an important step to take, to do that, you need to look at the business model. Once you know your stakeholders you can start engaging’. By engaging with and understanding your key stakeholder expectations through materiality assessments, business can be confident that a broad range of views have been understood and embedded in decision-making.”

The report authors also point out that it is important to understand how stakeholder engagement flows through the organization from the operational relationship management through to boardroom strategic discussion. Good stakeholder governance is a business imperative and this should extend through subsidiaries and up to the group. Practices and policies need to encompass both local and global perspectives and should provide clear roles, reporting and accountability.

Sustainable business models depend on the quality of relationships between a company and its key stakeholders. It is not an adjunct to running a successful business but an essential element. Creating and capturing value relies on good relationships with employees, customers, suppliers, capital providers, governments and civil society. It is no longer a matter of trading off one group of stakeholders against another. Rather, the focus has shifted towards enhancing value for all.