Trust in business and, in particular, trust in those who manage business, is at a very low ebb. Politicians and the press have cast doubt on the degree to which directors actually regard the interests of those other than shareholders—employees, suppliers, customers and others—who can collectively be described as “stakeholders”. With the recent BHS debacle, we can now see pensioners added to that list.
Section 172 of the Companies Act 2006 requires that a company director “must act in the way he considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole, and in doing so have regard (amongst other matters) to: (a) the likely consequences of any decision in the long term, (b) the interests of the company’s employees, (c) the need to foster the company’s business relationships with suppliers, customers and others, (d) the impact of the company’s operations on the community and the environment, (e) the desirability of the company maintaining a reputation for high standards of business conduct, and (f) the need to act fairly as between members of the company”.
It could also be argued that the overwhelming majority of company boards do take stakeholder interests into account. But how do they do so, and might they be able to do so more effectively?
Answering these questions is the objective of a new initiative from ICSA: The Governance Institute and the Investment Association, through which both companies and investors will work together to identify existing good practice and produce practical guidance to help those companies that need support to understand the views of their employees and other stakeholders and to factor these into their decision-making. These companies will be able to benefit from the experience and example of those companies that have been more successful in this area.
There are a variety of different approaches to stakeholder engagement for companies to consider, and there will be no “one size fits all” solution, since every company is different, as is every company’s stakeholder demography.
What is important and what works well for one company may be unimportant or not work well for another, but this guidance will consider a variety of approaches, summarising the issues to be addressed and the practical steps to be taken.
These will include the different approaches acknowledged in the government’s Green Paper on corporate governance reform, but will also include the ways in which companies can identify non-executive directors with relevant stakeholder experience, and the way in which training and induction can be used to enhance directors’ understanding of their duties and the interests of, and impact on, different stakeholders.
We will also look at the processes by which boards can receive the views of their key stakeholders. Options identified in the Green Paper, which the guidance will discuss in more detail, include setting up “stakeholder committees” and giving individual directors and/or board committees designated responsibility for engaging with key stakeholders.
Finally, we will look at how companies can effectively demonstrate that they do take appropriate account of stakeholder views through the reporting process.
We agree with the government that the views of stakeholders need to be heard by boards. Companies benefit from having constructive engagement with their employees, customers and other stakeholders, and from having a broad range of perspectives around the boardroom table.
Capitalising on that benefit cannot begin too soon. Indeed, many companies already do this effectively, but our guidance is intended to assist those boards that want to improve their engagement with and understanding of the views of their stakeholders, rather than waiting for the government or the Financial Reporting Council to complete any actions they might take as a result of the current consultation process. That is why we have decided to commence this work now.
Market-led reform is more likely to create effective solutions and, by bringing together the perspectives of company secretaries and investors, with input from stakeholders and other experts, we will be able to draw on existing best practice and develop new guidance which will be practical to implement for companies.
We welcome the views of those who have experience in this area and contributions would be welcome at email@example.com
Peter Swabey is policy and research director at ICSA.