What does stakeholder engagement mean in the 21st century? How has the topic gained such traction over the past few years? What is the role of the compliance professional in stakeholder engagement? How does increased stakeholder engagement help to make companies stronger, more efficient and, most critically, more profitable?
I thought about all of those questions and more when I read a recent Research Report (Report) issued by BSR entitled “The Future of Stakeholder Engagement”. I was equally intrigued by the subtitle of Business Leadership for an Inclusive Economy. The report was authored by Sara Enright and, with additional guidance and insights provided by Guy Morgan, Roger McElrath, Dunstan Allison-Hope, and Emilie Prattico.
Part I-the Problem
I was intrigued largely because the Report speaks to how corporations operate in the 21st century, particularly in the arena of hyper-transparency. The authors believe “There are growing calls from government and civil society for corporations to become partners in supporting a more inclusive economy and sustainable environment—and these expectations will only increase.” From the perspective of the Foreign Corrupt Practices Act (FCPA) and compliance practitioner role that means closer and more in-depth work with third parties. Obviously this presents a FCPA risk but it certainly can be managed if handled properly. Over the next couple of blog posts I will review the author’s discussion of stakeholder engagement theory and then consider their proposals to transform stakeholder “engagement approach across three dimensions: the purpose of stakeholder engagement, the type of stakeholder, and the depth of engagement.”
The authors identify five drivers of change in stakeholder engagement. The authors opine that “These are unprecedented social, economic, environmental, and political developments, over which individual companies have limited influence. These developments offer both risks and opportunities for companies willing to reframe their relationships with stakeholders.” From the FCPA compliance perspective these goals are certainly consistent with the US government stated goal of combating bribery and corruption across the globe. By partnering with stakeholders who do business ethically and in compliance with anti-corruption laws such as the FCPA, companies further this greater goal. However, companies also become more efficiently run and at the end of the day more profitable by engaging with stakeholders on such initiatives as anti-bribery/anti-corruption.
1. Communication, Connectivity and Hyper-Transparency
There can be no doubt about the speed at which communications move. Even the 24-hour news cycle is becoming a thing of the past. The authors state “In this environment, disputes about company operations can be adopted and amplified by international civil society organizations, or even individual citizens, raising the visibility and impact of those issues.” Yet, it is not simply the speed of these communications but that “poor operational performance at any level of a firm can resonate” with the market and lead to a precipitous drop in stock price. Additionally, there has been an increase in demand for corporate disclosure via government initiatives “by regulations such as Dodd-Frank and the Modern Slavery Act and multi-stakeholder frameworks such as the Extractives Industries Transparency Initiative.”
The authors correctly note that all of these changes have significant implications for “how companies engage with stakeholders. Business leaders can no longer control the timing, content, or interpretation of the information that is disclosed about their companies. Transparency, timeliness, and accountability are increasingly emerging as fundamental characteristics of effective stakeholder engagement.” Yet, I see this as an opportunity for a business solution to these issues.
2. Individual Empowerment and the Rise of the Middle Class
While the authors believe this prong turns on increased education and awareness across the globe, I see it in a bit of a different light. Professor Andy Spalding is one of the leading commentators on the freedom from corruption as a human right. BSR notes while “Corruption has often been portrayed as a problem limited to developing countries, but it is now clear that this is a misconception. Offshore havens and financial centers such as New York and London clearly play a critical role in the movement of illicit funds across the globe.” One only need consider the US Department of Justice’s (DOJ) forfeiture actions against the Malaysian sovereign wealth fund 1MDB, involving real estate properties in NYC and Los Angeles to see the risk involved.
Citizens of both the US and outside this country will demand the dismantling of structures supporting corruption. This will certainly continue with even US Secretary of State John Kerry speaking out on this point. As these expectations increase it will place greater requirements for companies to work in this area through stakeholder engagement.
3. The Demographic Shift and the Automation of Work
I found this next section of the Report quite provocative. It was noted that with the aging of the population, coupled with the increase in technology and automation, “business will face intense pressure to move beyond an exclusive focus on shareholder value and provide wider societal benefits…These developments will place a premium on the ability of businesses to demonstrate the value of their support to local communities via investments, local contracting, and tax payments.” Given the uniqueness of this insight, the authors advise companies “To prepare for emerging demands, businesses should begin to assess their evolving roles, market demands, and stakeholder expectations as early as possible.”
4. The Primacy of Climate Change and Water Resources
Unlike the US Senate, the authors are able to draw a connection between climate change and human activity. The conclusion they draw is that constituencies are seeking “accountability for climate impacts that endanger peoples’ lives and livelihood.” Further, “This may set a precedent for regulatory scrutiny of companies that have contributed to climate emissions and resulting human rights impacts worldwide. From a legal liability standpoint, such cases are difficult to prosecute, but they have enormous potential to affect the companies’ social and political license to operate.”
Here the authors articulate that businesses should “engage with communities in a substantive way, creating a form of partnership by providing communities with a voice in business decision-making. Similar types of engagement should become the norm as companies work with communities on issues related to climate change. As these issues become more pronounced, it will serve business well to establish mechanisms for engaging communities and other stakeholders. Investment in natural resources and ecosystems is one clear avenue for companies to demonstrate value and reduce risk.” Using third party platforms created by FCPA-type compliance programs could certainly be the basis for such engagement.
5. Supply Chain Oversight Ramps Up
Any person in the FCPA space recognizes the increased emphasis on supply chain as a key part of any best practices compliance program. The increase in complex global supply chains has created greater efficiencies but, as the authors note, “it has also resulted in severe problems with working conditions and environmental degradation in many supplier operations.” The authors currently see the leading approaches as what they term the “audit approach” but believe this “Self-regulation of supply chains will come under pressure as regulatory reach expands and examples of poor governance are increasingly highlighted.”
However, here they believe it will be through engagement with supply chain entities that the greatest efficiencies will be achieved. They urge “a structured approach to identifying, managing, and mitigating supply chain risk will not entirely protect companies from reputational risk.” By balancing “proactive and transparent approaches” stakeholder engagement in the supply chain arena will allow the development of “collaborative solutions to tackle systemic change.”
The bottom line is that change is coming. As a business you can either get ahead of it and use it to your advantage or fall behind your competitors. The authors believe “A more integrated approach to stakeholder engagement is needed. This approach should incorporate consideration of political risk, societal transformation, and dramatic shifts in perception, and focus on building social license at all levels. A deep understanding of stakeholders and a proactive response to their emerging needs is now required. Stakeholder engagement is one of the primary tools companies have to ensure that their activities are inclusive and benefit society. While engaging external actors on risk and reputation will remain important going forward, companies can use meaningful stakeholder engagement to achieve much, much more.”
Part II-the Solutions
Next, I want to consider some of the solutions. The authors begin by making the business case for stakeholder engagement. They believe that stakeholder “engagement done well is like a savings fund: The value adds up over time and acts as a cushion in times of reputational or fiscal distress. Companies that are more aware of stakeholder interests are more likely to avoid crises because they are better able to anticipate risks and opportunities. A number of compelling studies on the impacts of good community and stakeholder relations across industries and countries conclude that companies that intentionally build stakeholder trust are more financially resilient over time across multiple indicators of value.” To my mind this advocates a business solution to the issue. They raise five primary business reasons.
Financial resilience - The authors state, “The value of many years of good stakeholder relations often proves itself during times of crisis.” They cite to a study in the Strategic Management Journal which “found that companies that had good stakeholder relations prior to entering a cycle of bad financial performance tended to recover more readily and were able to sustain superior financial performance over the long term than firms with poor stakeholder relations.”
Valuation - Andre Agassi was right, perception is reality and this is most particularly true when it comes to the fact that “stakeholder perception has a significant impact on corporate valuation.” The authors cite to a McKinsey study which “determined that 30 percent of corporate earnings are affected by the company’s reputation with external stakeholders.”
Return on equity - The authors believe it is clear that “Better stakeholder relationships help firms develop assets such as customer or supplier loyalty, reduced employee turnover, or an improved reputation, which are sources of competitive advantage and corporate value”; largely because such “decisions at the board level are more likely to consider the interests of multiple stakeholders, resulting in better engagement with customers, employees, and external stakeholders.”
Reduction in costs - The authors state, “Poor stakeholder engagement can lead to a variety of direct and indirect costs to the company” most primarily project delays or even shutdowns.
Sales - The authors note, “Consumers vote with their dollars.” I would add that, as noted above, shareholders value a company in this manner as well.
The purpose for increased stakeholder engagement is to move simply beyond consultation “and purse opportunities to drive impact by engaging on challenges of mutual concern.” I think that the authors are on to something, particularly in the area of systemic issues such as bribery and corruption when they note, “the purpose of stakeholder engagement must broaden from risk management and reputation-building to include partnership. Companies would also benefit from a more structured incorporation of stakeholder perspectives into the management of strategic challenges such as political risk, the competitive environment, and the cumulative impact of foreign direct investors in a new region.”
For each US company operating overseas there will be opportunities and attendant risks in doing so. But this will come through greater collaboration. It may not be a partnership in the legal sense as there will be more alliances to move forward with a number of initiatives. The report states, “Companies seeking to manage their most material sustainability risks often must do so in partnership with a range of groups that can add new capabilities to the effort, including governments, NGOs, local communities, international development organizations, suppliers, customers, and competitors. In doing so, they can evolve their stakeholder engagement approaches from defensive risk management to opportunity identification, becoming nimbler and more responsive in the process.”
The authors also point towards the definition of stakeholder or perhaps widening the groups of stakeholders a company may work with going forward. This will require a change towards “systems thinking” which will require companies to move “beyond the dominant approach of conducting focused, time-bound consultations with a representative group of investors, suppliers, business partners, and vocal NGOs that represent the company’s most direct and visible stakeholders. Shifting to systems thinking involves purposefully analyzing the broader environment in which the company operates, and gathering diverse and sometimes conflicting perspectives from a wider range of stakeholders who influence the industry through their actions, opinions, and decisions.”
Interestingly, the authors point to the extractive industry of mining where “Systems thinking is a way to help companies understand and anticipate project-level risk and potential conflict, particularly in terms of the relationships between political actors and communities. However, it is also a way to ensure that communities derive value from social impact, and that community investments (which can be substantial and are often disclosed, monitored, and regulated) reach beyond the loudest and most powerful community members and provide genuine, lasting benefit and meaningful community ownership.” The Report goes on to note this approach is being tried in a wider variety of industries, including “pharmaceuticals, infrastructure, and in the food, beverage, and agriculture sector.”
The authors conclude with a section entitled ‘The Depth of Engagement’ which discusses how companies can create the internal infrastructure to move to a systems approach for stakeholder engagement. The authors suggest such actions as enrolling “key employees in training programs to ensure that all business units are aware of their responsibilities in communicating with and responding to external stakeholders, including setting up a clear internal hierarchy to turn to for help”; investing “in improved internal communications systems so that teams can share information from external discussions via the same database”; “assigning relationship managers to cultivate relations with key stakeholders” and, finally, breaking “down barriers among business units to share information and insights from stakeholder discussions.”
The next step is to tie the stakeholder engagement to your corporate development strategy. Here the authors suggest such practical steps as having workshops to “help executives from headquarters and local teams build stronger internal relationships and co-develop global/local solutions to common sustainability challenges”; “integrating a stakeholder engagement work stream into all large, strategic projects” and “incentivizing teams to integrate stakeholder input into business priorities and planning to drive greater value.”
The next step is to develop a corporate institutional strategy to keep your momentum going forward in this area. Steps here include undertaking “a structured exercise to learn from stakeholder engagement successes and failures, helping build institutional knowledge and capacity”; standardizing “successful stakeholder engagement approaches and build these into project design methodologies” and broadening and deepening “internal awareness of the strategic benefits of stakeholder engagement undertaken with rigor and good faith.”
The final step is integrating the relevant feedback into your corporate strategy going forward. Here, “After an engagement, it is imperative that companies demonstrate that the feedback has been heard, respected, and—when appropriate—integrated into business activities and policies.” The authors cited to a case study involving the UK pharmaceutical firm GlaxoSmithKline PLC (GSK) which went through a corruption scandal in China where one of the leading factors was its performance based incentive structure. This gave the company the incentive to make a change to better align its sales strategy to encourage ethical behavior with a strategy which “puts patients’ interest first.” Also, “In 2015, GSK introduced an Ethics and Compliance Academy to support its compliance officers, who are working to build a more values-based culture. The goal is to help compliance specialists partner with senior leaders across the business to navigate ethical gray areas more confidently.”
The Chief Compliance Officer (CCO) or corporate compliance function is uniquely situated to lead this corporate effort. They will require a radical rethinking in many businesses. However, the benefit can be substantial. I would suggest you go to the BSR website and check many of the tools and information they have available on stakeholder engagement.