On 26 September, ICSA: The Governance Institute and the Investment Association published our joint guidance on the stakeholder voice in board decision making.
Stakeholder engagement is essential for all organisations. It should be used to inform the decisions that the group takes, whether about the products or services it provides, its strategic direction, its long-term health, or its relationship with its workforce and the societies in which it operates.
If taken seriously, stakeholder engagement will strengthen the organisation and boost its long-term success, to the benefit of stakeholders and shareholders alike. Paying lip service to engagement is of limited value to anyone.
The aim of this guidance is to help the governing bodies of all organisations think about how they understand and weigh up the interests of their key stakeholders when taking strategic decisions.
It has been drafted using a corporate vocabulary – boards, companies, directors and shareholders and so on – as it forms part of the response of both ICSA and the Investment Association to the government green paper on corporate governance, and includes specific reference to the statutory duties of directors under section 172 of the Companies Act 2006. However, many of the principles apply for the governing bodies of all types of organisations.
The guidance is designed to take boards through the different elements involved in understanding and assessing the impact on key stakeholders. It is divided into seven sections dealing with: directors’ duties; stakeholder identification; board composition; director induction and training; engagement mechanics; reporting and feedback; and how the board can account for stakeholder impact in its discussions.
Each of these elements should be closely considered, as failing to deal with any of them could undermine the potential benefits of the others.
Ten core principles
The guidance identified ten core principles which we believe directors should bear in mind:
1. Boards should identify, and keep under regular review, who they consider their key stakeholders to be and why.
2. Boards should determine which stakeholders they need to engage with directly, as opposed to relying solely on information from management.
3. When evaluating their composition and effectiveness, boards should identify what stakeholder expertise is needed in the boardroom and decide whether they have, or would benefit from, directors with directly relevant experience or understanding.
4. When recruiting any director, the nomination committee should take the stakeholder perspective into account when deciding on the recruitment process and the selection criteria.
5. The chairman – supported by the company secretary – should keep under review the adequacy of the training received by all directors on stakeholder-related matters, and the induction received by new directors, particularly those without previous board experience.
6. The chairman – supported by the board, management and the company secretary – should determine how best to ensure that the board’s decision-making processes give sufficient consideration to key stakeholders.
7. Boards should ensure that appropriate engagement with key stakeholders is taking place and that this is kept under regular review.
8. In designing engagement mechanisms, companies should consider what would be most effective and convenient for the stakeholders, not just the company.
9. The board should report to its shareholders on how it has taken the impact on key stakeholders into account when making decisions.
10. The board should provide feedback to those stakeholders with whom it has engaged, which should be tailored to the different stakeholder groups.