by Joyce Khoh
In Practice 11.2, Principle C (Integrity in Corporate Reporting and Meaningful Relationship with Stakeholders) of the Malaysian Code on Corporate Governance, large companies are encouraged to adopt integrated reporting which lists stakeholder relationships as one of its guiding principles. Specifically, dialogue with stakeholders is encouraged as a necessary and beneficial process to enable companies to understand and take stakeholders’ concerns into account when making decisions, and communication can be achieved through various means – publishing information in annual reports and the corporate website, forums, briefings and more.
The 2019 Black Sun Group’s research on KLCI30 companies indicated that approximately three quarters have shown their commitment and discussed their stakeholder engagement plans and processes. However, less than 45% indicated clearly in their annual reports how the expectations of stakeholders have been taken into account in establishing the company’s strategy. And just about half go on to deliberate how they plan to respond to the feedback gathered from their engagement activities.
The research appears to indicate that stakeholder engagement is seen as a means to an end – the endpoint being that of accountability and reporting. Armed with a ‘tick-the-box’ mindset, stakeholder engagement is typically not viewed as a strategic exercise or one which directly impacts a company’s profitability and ability to generate sustainable value.
What then is stakeholder engagement? It is the strategic process of consulting with key stakeholders on matters important to them and the company. What is often overlooked is the linkage between stakeholder engagement as the starting point of corporate strategy, and the essential first step needed for a company to formulate its strategic priorities and business plans. Simply put, it is to have discussions with the right people before committing to a course of action – Consult, Commit and Communicate.
The Writing is On the Wall
With hot button issues such as corruption and responsible capitalism dominating the global business and political agenda in recent years, the regulatory landscape surrounding corporate governance has also witnessed visible changes, with a growing emphasis on the importance of stakeholder relationships and engagement.
In Principle 13 of the Singapore Code of Corporate Governance – Engagement with Stakeholders, the Board is encouraged to adopt an inclusive approach by considering and balancing the needs of material stakeholders, as part of its overall responsibility to ensure that the best interests of the company are served. Specifically, listed companies are to disclose in their annual reports how they are managing stakeholder relationships.
In the UK, revisions to the Corporate Governance Code in 2018 emphasised the responsibility of the Board to consider the company’s key stakeholders in discussions and decision-making (required under section 172 of the UK Companies Act 2006). The UK Code has also extended its focus to specifically include active engagement with stakeholders – other than shareholders – as being central to the long-term prospects of the business. In addition, the Financial Reporting Council reviewed early adopters of the 2018 UK Code and concluded that companies must do more to “cover the concerns raised by stakeholders, how companies have understood the issues, and how they have thought carefully about how these impact on the long-term success of the company”.
In the US, the Securities and Exchange Commission has also proposed to modernise disclosures by requiring information on human capital resources as an important stakeholder group. This includes any human capital measures or objectives that the management focuses on in managing the business.
Purpose Beyond Profit
Globally, there has also been a prominent shift away from the long-held view of shareholder primacy towards a stakeholder-centric model, with the Business Roundtable in the US recently redefining the purpose of companies through the lens of five stakeholder groups – delivering value to customers, investing in employees, dealing ethically with suppliers, supporting communities and generating long-term value for shareholders.
The Black Sun Group’s research on purpose and profit, whereby global business executives in various industries were interviewed, reveals that there is a consensus among business leaders that considering stakeholder interests is central to building trust. The 2019 research showed that the stakeholder group that executives feel the value creation discussion is most useful for is Employees, followed by Customers and Investors.
In his January 2020 letter to all CEOs, BlackRock’s CEO, Larry Fink, also addressed the importance of companies operating sustainably, serving stakeholders and embracing purpose, in their quest to understand their role in society and achieve long-term profits. Pointing to a strong sense of purpose and commitment to stakeholders as crucial elements to help companies connect more deeply with customers and adjust to the changing demands of society, he concluded that “purpose is the engine of long-term profitability.”
How Companies can Effectively Engage with Stakeholders
Get the process on the Board’s agenda – For many companies, a mind-set change is imperative. Stakeholder engagement has to be seen as a strategic process, with financial impact and implications. For effective engagement, there should be Board ownership, with the tone at the top leading the process in an open and transparent manner. Under the UK Code, the Board should engage with the workforce using a director appointed from the workforce, a formal workforce advisory panel and/or a designated non-executive director.
Identify key stakeholders and their areas of concern – The starting point of any effective engagement process is the identification of key stakeholder groups and the issues important to them. Different groups are bound to have different concerns; for example, customers would be interested to know about product/service quality and value, employees about employment security and growth opportunities, and investors about financial returns. Conducting timely stakeholder mapping and analyses will help companies to react and tailor their strategies opportunely.
Craft systematic, holistic and tailored engagement strategies – With a plethora of engagement platforms and strategies available, it can be difficult for companies to find a ‘one-size-fits-all’ approach for their key stakeholders. Crafting methodical, comprehensive and bespoke strategies suited for each stakeholder group based on factors such as profile, demographic and behaviour, will thus increase effectiveness and reach. This can be done via: focus groups, peer reviews, social media, email, surveys and more. After collating the data and determining actionable steps, companies should strategically communicate their plans through a variety of channels such as the annual report, the stakeholder engagement section on their corporate website, the Annual General Meeting (AGM) and social media platforms.
The Time is Now
Stakeholder demands and needs are getting more complex and companies that fail to recognise the strategic and cardinal nature of stakeholder engagement are at risk of short-sightedness and strategic misalignment. Effective engagement should be the starting point of corporate strategy, with the Board taking ownership.
With stakeholder trust being a vital ingredient for sustainable long-term growth, companies who effectively engage with their stakeholders will stand to gain from strengthened stakeholder relationships, healthier and better aligned corporate culture and enhanced brand equity and reputation. In the long run, this translates to long-term prosperity and financial health.
This article was penned by Joyce Khoh, Research Consultant and Erika Susanto, Research Manager, Black Sun Group