This week, I began a two-part series based upon recent Research Report (Report) issued by BSR entitled “The Future of Stakeholder Engagement”, authored by Sara Enright and Alison Taylor, with additional guidance and insights provided by Guy Morgan, Roger McElrath, Dunstan Allison-Hope, and Emilie Prattico. In Part I, I considered some of the problems the authors raised around the current model of stakeholder engagement. Today, 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.