Everyone is talking about them, but who or what are they? The term “stakeholder” is a catch-all shorthand for all those who can in any way affect, or be affected by, the fortunes and actions of a company or organisation.
It is a term used to show that it is not all about shareholders; a company has responsibilities that reach far wider than its investors. Yes, shareholders are included in this wider population, but this wider group also includes employees, customers, suppliers, regulators—even journalists.
The term also covers “wider society”, recognising that the effect a company has can spread far and wide—it can have an impact on the environment, the local and national economy, tax policy and the local community.
Boardroom discussion may focus on these constituencies, but can directors really influence the impact their business may have on them?
Revisions to the code
It’s a question with which the Financial Reporting Council (FRC) is currently grappling in its proposed revisions to the UK Corporate Governance Code, a boardroom code that has been in existence since 1992, long before the notion of the stakeholder had taken hold. It will also inform the regulator’s work as it updates its Guidance on Board Effectiveness, which was originally published in 2011.
To quote the FRC’s report: “The revised Code acknowledges that the activities of companies have a wide-ranging impact and it is important that boards consider the way their companies interact with the workforce, customers, suppliers and wider stakeholders.”
The proposed revisions, which are up for consultation until the end of February 2018, include references to the board’s responsibility for considering the needs and views of a wider range of stakeholders.
This was also part of the FRC’s Culture Report, published in 2016, which highlighted the need for companies to take into account the views of wider stakeholders, including the workforce. The findings of the report demonstrated the importance of aligning company purpose, strategy and values in order to achieve long-term success.
And FRC chairman Sir Win Bischoff warns: “Engaging with and contributing to wider society must not been seen as a tick-box exercise but imperative to building confidence among stakeholders and in turn the long-term success of a company.”
David Herbinet, global audit leader at Mazars, agrees. He says: “Ultimately, businesses create value, but that value has to be shared across a range of stakeholders. Companies need to make a strategic allocation of that value across this range of stakeholders, and if you allocate it properly, then tomorrow you will have more value to distribute.”
Herbinet contrasts the attitude that has been prevalent recently in certain countries of the primacy of the shareholder, with that of some European states, where the concept of wider stakeholder interests has been there “forever”.
In particular, he observes how the imbalance between shareholders and stakeholders revealed during the 2008 financial crisis has transformed the narrative. “People were saying that the existing strategy of value allocation must have been wrong because it can’t be right for all of the value to have gone to shareholders, while the subsequent costs of the crisis came to wider society.
“This was a tipping point for change, culminating in the beginning of a new way of thinking, as set out in the FRC’s proposals.”
Mazars itself sets out in its own Board Charter how companies, and especially their board of directors, can target groups of stakeholders to ensure that its purpose and strategy is understood and so create a shared determination to deliver the goals of the business.
The firm’s ten principles (see below) detail how areas such as culture, communication and collaboration can combine to ensure that purpose and long-term strategy are aligned with stakeholders, and therefore ensure the long-term sustainability of the organisation.
Mazars’ Board Charter: Ten principles
In the business
1. An inspiring purpose aligned with long-term strategy.
2. A supportive business culture.
3. Fair treatment of, and quality engagement with, stakeholders.
4. Fair and transparent taxation policies.
5. Focus on innovation and its benefit to society.
6. Emphasis on reputation and the “licence to operate”.
In the boardroom
7. The right “tone from the top”.
8. The necessary skills and experience.
9. An engaged board culture.
10. Appropriate board and management structures.
There are of course a number of different ways in which boards can approach their stakeholders, and it is down to the board and the leadership team to identify how and when they engage with each section of the stakeholder community.
Mazars believes that the board should place a strong emphasis on engaging with its stakeholders and treating them fairly, including in financial terms. The board needs to set out, in a clear statement, the nature of the relationship it will seek to develop with each of the principal stakeholders in the business.
For instance, on employee matters, the board should develop clear policies and targets with regard to diversity and inclusion, including gender and ethnic diversity in senior roles, monitor them and report on progress being made towards meeting its goals. The values of a business will be crucial here.
As Mazars explains in its Board Charter: “If the values are to be seen by members of staff, in particular, as being at the heart of the business, it is essential that they are visibly ‘lived’ by board members and those in senior management positions and that the values also are observed to have a pivotal role in all key business decisions especially those concerning recruitment, retention, pay and promotion, including the awarding of bonuses.”
Herbinet says: “It takes strong leaders to lead a business that will attract the right investors, customers and suppliers. There will either be a virtuous or a vicious circle. If you get it wrong, it will destroy the business.”
Boards should not ignore the power of social media in this respect—a reputation carefully built over a number of years can be destroyed in a stroke by a careless message online.
Likewise, poor customer relations will be highlighted quickly through social media. Customers are stakeholders in a number of ways: they can buy the company’s products and services, but they can also be employees, even investors.
Herbinet illustrates this with a story about a successful company in the north east of England that produced locally and sold locally. However, under pressure from its shareholders, it relocated production away from its original base. The company soon realised that those who lost their jobs as a result of the redeployment were also the company’s customers.
The company went out of business.
The company’s supply chain is also critical, and although companies may not have direct control of their suppliers, systems of audit and investigation will reveal any inconsistencies and abuses in the chain. And if the company doesn’t do it, then they risk a campaigning organisation exposing the deficiencies in the chain. Turning a blind eye is not an option.
Close attention to these various stakeholders and wider society will ensure the success of the enterprise, which in turn will make it attractive to investors—the very shareholders who stand to benefit as well from this increase in value.
As Herbinet says: “There is increasing interdependency in the way we behave, and it can tip one way or another very quickly. The culture of the business is the glue that holds it together.”
Employees: what the FRC is saying on just one group of stakeholders
Principle C of the FRC’s Code incorporates responsibilities to wider stakeholders as well as shareholders. Provision 3 includes the government’s three options for ensuring the employee voice is heard in the boardroom; namely: a director appointed from the workforce, a formal workforce advisory council, or a designated non-executive director.
The FRC has included all three options, as the government found that respondents to its Green Paper Consultation on Corporate Governance Reform “agreed that companies should seek to strengthen the voice of stakeholders, but there was no consensus on which of the three proposed options would work best… Many responses emphasised that there should be flexibility for individual companies to choose the right mechanism or combination of mechanisms for them, because no single approach would be suitable for all.”
This article has been prepared in collaboration with Mazars, a supporter of Board Agenda.