The Year of the Stakeholder
20 February 2017
BEIS’s consultation on its Green Paper on Corporate Governance closed on Friday. Whilst we’re a long way from knowing the final outcome, it’s clear that how companies take wider stakeholder interests into account is becoming increasingly important to government, regulators and investors alike.
With this Green Paper, the announcement of a review of the UK Governance Code, publication of the non-financial reporting regulations, and growing investor pressure, the importance of stakeholder accountability is being placed at the heart of the debate around long-termism and rebuilding trust in business.
Now, this blog’s role is not to extol the virtues of a stakeholder value model over a traditional shareholder-based one. But what’s clear to me is that any company that routinely ignores its key stakeholders is unlikely to be a sustainable one!
And not surprisingly, businesses tend to agree. The vast majority of companies engage with stakeholders as part of the ordinary course of business. And through regulation, guidance (such as the FRC’s strategic report guidance), and initiatives such as Integrated Reporting, a growing number of companies are reflecting this stakeholder engagement in their reporting today.
Stakeholders are important
In our annual review of reporting practices in the FTSE 350 published last year, we found that over 60% of companies acknowledged the importance of human or social capital in their business model, while the average number of non-financial KPIs reported was 3 with the top ones relating to people, environmental and health/safety.
But where’s the proof?
Although there’s growing recognition of stakeholders in the information companies report, we found much of what was presented remained high level, qualitative and siloed, with the link to strategy just not there.
We identified this discrepancy as one of the 3 fundamental challenges companies face in corporate reporting - ‘Being relevant’ - the need for reporting to evolve and reflect the importance of stakeholders to a company, their expectations, and the impact on them.
Sound business practices, supported by a supportive regulatory framework, already encourage stakeholder engagement. But on the evidence of what we see in today’s reporting there is little evidence of how companies are listening to what stakeholders have to say and responding both strategically and operationally.
I strongly believe that one of the most effective ways companies can help to rebuild trust is through clear, candid and comprehensive communication. But this needs to be built upon genuine commitment and action.
On the face of it, this focus on stakeholders could easily be dismissed as nothing new - adding to businesses’ increasing regulatory burden rather than adding value. But I believe there’s mileage in management teams and boards challenging themselves on these issues. It’s surprising what more debate can achieve - if recent changes to risk and viability are anything to go by - and reporting often changes as a result.
How boards take account of stakeholder views and what impact this will ultimately have on the way companies think, act, operate and report remains to be seen. But companies would be wise to anticipate the change now.