ICSA: Stakeholder Engagement for Long Term Success
The ICSA recently released guidance titled The Stakeholder Voice in Board Decision Making, with the aim of helping businesses understand their impact on key stakeholders when making strategic decisions. The guidance is less about compliance and more about promoting long term business success, with practical advice for implementing the core principles.
The Core Principals:
- Boards should identify, and keep under regular review, who they consider their key stakeholders to be and why.
- Boards should determine which stakeholders they need to engage with directly, as opposed to relying solely on information from management.
- 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.
- When recruiting any director, the nomination committee should take the stakeholder perspective into account when deciding on the recruitment process and the selection criteria.
- 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.
- 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.
- Boards should ensure that appropriate engagement with key stakeholders is taking place and that this is kept under regular review.
- In designing engagement mechanisms, companies should consider what would be most effective and convenient for the stakeholders, not just the company.
- The board should report to its shareholders on how it has taken the impact on key stakeholders into account when making decisions.
- The board should provide feedback to those stakeholders with whom it has engaged, which should be tailored to the different stakeholder groups.
All companies should look to improve and promote stakeholder engagement to strengthen the business and benefit the organisation as a whole. It can be effective in informing business strategy, products and services and relationships with employees and society.
Stakeholders can be affected by your company’s actions or they can affect your company’s business model and operations, so it is wise to treat them appropriately. You will have different responsibilities to different groups, which will vary depending on many factors including your size, industry and location, but you should prioritise stakeholders in order to determine how extensively to engage with them. Once prioritised, you should decide which stakeholders are of sufficient importance to engage with directly rather than relying on management.
The Board and Directors
Directors are legally obliged to take into account the impact on stakeholders. They must bear in mind long term consequences of decisions, the interests of employees, relationships with customers and suppliers, the impact on the community and environment, and business reputation.
The most effective board is a diverse one, made up of skills and expertise most needed to understand the business and the environment in which it operates. In addition, knowledge and understanding of stakeholders’ interests should be a factor when bringing balance to the board and you may decide to recruit new directors to cover this.
The guidance suggests two approaches to this:
- reserving one or more board positions for directors drawn from a stakeholder group, such as the workforce; and
- extending the selection criteria and search methods for non-executive directors to identify individuals with relevant experience or understanding of one or more stakeholder groups.
To help them understand stakeholders’ interests, it is wise to train directors, particularly those without board experience, on stakeholder-related matters. Therefore, the chairman, supported by the company secretary, should keep under review an induction programme to help directors:
- build an understanding of the nature of the company, its business and its markets;
- build a link with the company’s people; and
- build an understanding of the company’s main relationships.
Engaging with stakeholders is one thing, but for it to mean anything and have any positive impact on them, the results of the engagement must be used to inform the board’s decisions.
When considering engagement mechanisms, you should be flexible, with the convenience of the stakeholders in mind, not just the company. Engagement mechanisms could include:
- Forums and panels
- Social media
- On-site visits
- Employee AGMs
- Newsletters and other publications
You will primarily report to shareholders through the annual report, account and at the AGM and investors will want to understand the processes of stakeholder engagement. The annual report should answer these questions:
- Who are the key stakeholders?
- How does the board hear from its key stakeholders?
- What were the outcomes of the company’s engagements with its key stakeholders, and what impact did that have on the board’s decisions?
When considering stakeholder engagement there will be many factors to take into account. No two organisations are the same and depending on your size, location, business activities and relationships, the list of stakeholders will differ. Each of the core principals should be considered carefully, for neglecting one could undermine any benefits gained from effectively implementing the others. While the guidance suggests ways in which to approach the core principles, it is entirely up to your board to approach them in ways that will benefit your organisation the most, leading to the most effective engagement and a better understanding of your board’s impact on stakeholders.
The full guidance can be viewed here.