Investor Engagement

Embracing the voice of stakeholders

What action can boards take to improve stakeholder engagement?

Well, an explicit stakeholder engagement policy is a good start. And it is important that there is clear ownership of this engagement policy at board level – driven by a non-executive with relevant experience and much more than a passing interest in the topic. To that end, it is welcome that ICSA: The Governance Institute and the Investment Association have issued guidance to help boards engage with both employees and wider stakeholders.

Divided into seven sections, the core principles cover the following: 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 for 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.

Simon Osborne, Chief Executive of ICSA, said: ‘If taken seriously, stakeholder engagement will strengthen the business and promote its long-term success, to the benefit of stakeholders and shareholders alike.’ Chris Cummings, Chief Executive of the Investment Association, stressed the importance of reporting stakeholder engagement: ‘The guidance launched today provides practical steps for UK companies to consider how they ensure their stakeholder voice is represented in the boardroom.’

The Luminous view

Luminous welcomes the changing landscape as we believe it offers far more potential for long-term growth and a more exhaustive look at the drivers of value. But there is a long way to go. Our research indicates that only 15% of companies outline the specific expectations of their stakeholder groups. Stakeholders have interests in a company because they provide their contribution to the life of the company itself. They expect that contribution to be rewarded (just as investors/owners expect a return on their invested capital). Experience has taught us that organisations that treat stakeholder engagement as a priority are far better equipped to respond to long- term challenges and opportunities. The companies we work for with open and transparent engagement programmes can clearly be seen to benefit from increased levels of trust and stakeholder loyalty.

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