A proposal: Board engagement with stakeholders
18 February 2017
The BEIS Green Paper Consultation on Corporate Governance Reform has now closed, and it’s clear from recent press coverage that views, not only the solution, but also on the problem that’s being resolved, vary enormously. Even when leaving Executive Pay to one side (although do read Tom’s Gosling’s report on that subject here, the Green paper focusses on the need to build trust in business within society and address concerns about fairness and inequality, including the treatment of stakeholders in the Boardroom.
The UK has a vibrant, effective and attractive corporate environment and, in the main, the comply or explain corporate governance regime we operate within has made a significant contribution to the operation and accountability of Boards of directors, and has greatly enhanced the quality of discussion and decision making within publicly-listed companies. However, it has become apparent that there is a lack of awareness and transparency about how Boards operate and take decisions.
All Boards are required by section 172 of the Companies Act 2006 to consider stakeholders as part of their decision making, and the vast majority of (if not all) businesses already engage with stakeholders as part of the ordinary course of business – it simply makes good business sense to do so. Companies are also required to report to their shareholders in such a way that readers can assess how the interests of stakeholders have been considered during decision making.
So, the legislative framework already requires stakeholder consideration at Board level, as well as related disclosures. The question therefore becomes how can section 172 be enforced and what more can be done to promote awareness and understanding of this area of law. One answer is a more consistent and transparent approach to how companies balance shareholder and stakeholder needs, what constitutes the long-term success of the company, and how a company should report on such matters.
This could be achieved by enhancing the FRC’s existing Guidance on the Strategic Report to include guidance regarding the disclosures large companies (private and public) should make about the identification of key stakeholders; the mechanisms used to engage in a two way dialogue; and the outcome of that engagement on strategy and key decisions. This would leave the vast range of companies, in terms of size, geographic footprint, environmental impact, and employee base free to choose an engagement mechanism that works for them. Mandating a particular form of engagement is difficult to reconcile with that vast range of company.
To encourage meaningful reporting and to enable the key messages to reach stakeholders, the use of digital reporting and social media, is recommended. This is an approach we have taken ourselves. Social media is providing an increasingly effective challenge to corporate behaviour, and companies are devoting a growing amount of energy and resources in communicating with a wide range of stakeholders, including customers and employees, and are quickly aware of any social media criticism of their behaviour. Harnessing digital reporting and empowering stakeholders to engage with companies will enable and encourage efficient market principles to regulate corporate behaviour.
When considering the implementation of any corporate governance reforms, there must be clarity as to what problem is being addressed. If piecemeal updates are continually made to legislation and Corporate Governance guidance, in reaction to specific and isolated incidents of poor governance, there is a risk that the essence of the UK’s principles based approach to corporate governance may be eroded. Rather than focussing on individual perceived issues, perhaps the focus is better turned to encouraging long-termism more generally, which will naturally lead to improvements in other areas.