07 March 2018 by Bernadette Barber
Companies can learn from their wider stakeholders, but must prioritise among different inputs
‘No man is an island, entire of itself.’ And so it is as well for businesses.
We are all part of something akin to a complex biosystem, comprising individuals and organisations, which are, to varying degrees, dependent on each other and affected by each other’s actions.
Perhaps nothing has illustrated this relationship of business and stakeholder more clearly than the recent collapse of Carillion.
With its contracts to perform public services as diverse as managing schools and prisons, and maintaining thousands of Ministry of Defence homes, as well as vast construction projects, the reach of the organisation was huge.
Many beyond those directly working for or investing in the company were, perhaps unbeknownst to them, in some way dependent on Carillion’s ongoing success.
The idea that organisations should take account of the wider interests of its stakeholders is not new. As we all know, the principle was enshrined in the directors’ duties set out in the Companies Act 2006.
Notwithstanding the passing of time, however, the concept of stakeholders can still feel fluffy. Although the interests of those with a direct connection with a firm are clear, how genuinely important and relevant are the interests of others?
According to an assertion made in ‘The Stakeholder Voice in Board Decision Making’, last year’s joint ICSA and Investment Association guidance on the subject, ‘Stakeholder engagement is an essential activity for all companies.’
Many hard-pressed boards, may take such a bold statement with a large pinch of salt. ‘Essential’ is a strong word.
“Responsible engagement might be a good thing, but is it ‘essential’?”
The ethical side of stakeholder engagement is clear. Many parties, while on the face of it not having much in the way of a direct interest in a particular company, may have significant exposure to the success or failure of that business.
The knock-on effect to local shops and businesses when a large employer expands or goes bust is an obvious case in point. There is a moral case for taking account of impacts that may reach far beyond factors considered in traditional decision making.
But even though adopting responsible engagement practice might be a good thing, does it fall into the category of ‘essential’?
There is no doubt that engagement with some stakeholders is essential. A company that fails to consult and build positive relationships with its providers of capital, for example, is more likely to run up against problems when it requires support from those parties.
And investor expectations are such that a lackadaisical approach to engagement with them is unlikely to be tolerated.
A board that took a short-term view of such relationships, only putting in effort to court its counterparties in times of need, could certainly be criticised for not having properly managed the risks that would be inherent in such an approach.
But insofar as the wider group of stakeholders is concerned, the benefits of developing an active relationship with them and of taking account of their views is less clear.
It is the current wisdom, however, to assert that such factors are a necessary part of a board’s decision making. Therefore, if nothing else, the idea requires proper consideration.
For most businesses, employees will undoubtedly be one of, if not the, key group of stakeholders. Like other forms of capital that support the business, the organisation’s human capital is an essential element in creating success.
“The views of others may be more or less important depending on the nature of the business”
A firm that fails to look after and nurture its employees is unlikely to reap the full potential of their talents and attract and retain those skilled individuals who can best drive the business forward.
It makes sense to listen to their views and ideas. There is always much to be learned from those who are closely involved in a business and who see its opportunities and problems on a daily basis.
Their perspective will naturally be different from those who are more removed from daily operations. The arguments in favour of finding ways of bringing those views into the boardroom are simple to understand and are compelling.
The views of others may be more or less important depending on the nature of the business. This is where we see the value of ensuring that, in the rush to comply with best practice, we do not take guidelines out of context or misinterpret headline recommendations.
There is, on closer inspection, nothing within the ICSA and Investment Association guidance endorsing an active programme of engagement with every possible stakeholder in a business.
Rather it sets out some sensible suggestions to identify and prioritise those stakeholders that are of importance to the business and to design proportionate mechanisms to inform those groups, to listen to their views and to take account of them in boardroom discussions.