The recently launched UK BEIS Corporate Governance Reform report garnered much attention from the revisions and legislation it proposed to executive pay. However, the proposed reforms and secondary legislation on stakeholder engagement deserve a closer look because some changes to your stakeholder engagement practice may be needed.
Stakeholder engagement reforms
In brief, the Reform paper (which was first published as a Green Paper in November 2016, received a Government response following consultation on 29 August and is expected to be presented to Parliament in March 2018) proposes to:
- Introduce secondary legislation which (tied to the 2016 Companies Act, Section 172 Directors Duties) will force directors of any company with over 1,000 employees to disclose how they are fulfilling their responsibilities to properly engage with, have regard for, and represent stakeholders views in the board room.
- Section 172 breaks out these responsibilities as having regard for: long-term consequences; employees interests; business relationships with suppliers, customers and others; impact of business activities on community and environment; maintaining a reputation for high standards of business conduct; and, acting fairly between members of the company. Whereas the 172 Directors Duties are not new, the directive to disclose this level of detail on how responsibilities are being enacted is new.
- Disclosure is specifically detailed to the aforementioned responsibilities as to 1) how views of stakeholders are being sought, 2) why particular engagement mechanisms were chosen as appropriate, and 3) how the information gained influenced board decision-making.
“There is a wide consensus that employee engagement is associated with greater firm performance, higher customer loyalty, better retention levels and higher productivity … strong support for strengthening the stakeholder voice in the boardroom in order to deliver long-term sustainability and greater board effectiveness.” (BEIS Corporate Governance Reform paper)
In other words, if you don’t have effective stakeholder engagement mechanisms in place, you will need to create these and report on them. Even if you do have good stakeholder mechanisms in place which allow you to report on how you identify your key stakeholders and gathers their views – and most sustainable & responsible organisations do – can you show why your engagement mechanisms were used and how specific views influenced board decision-making? Can you track stakeholder consultation all the way from a survey response or interview with a particular stakeholder through to the board room?
The reform paper further proposes 3 possible stakeholder engagement mechanisms, which you may need to “comply or explain” and then report on:
- Assigning the responsibility of stakeholder engagement and representation at board decision-making to a non-executive director; which could require revision of agreed R&R, training, and support for the NED.
- Creating a stakeholder advisory panel (or if you have one, ensuring it includes the stakeholders especially mentioned such as employees, and developing mechanisms to track any influence on board decision-making).
- Stakeholder representatives appointed to the board, similar to mechanisms that co-ops and employee-owned organisations utilise. This has created the most resistance so far as it could lead to significant changes in what is discussed at board meetings and therefore board meeting effectiveness, how to select appropriate individuals, how confidentiality is protected, and how interests are balanced.
Further advice will be forthcoming from ICSA (the Governance Institute), the Investment Association, FTSE100 General Council, and the FRC as they consider how to amend the practice and code on Corporate Governance to reflect best practice stakeholder engagement mechanisms. However, if the reforms do meet the June 2018 target for coming into effect, it may be wise to look now at your stakeholder engagement, management, reporting, and influence practice.
When Corporate Citizenship worked with Telecity, a data centre provider, on their stakeholder engagement it was crucial to identify, engage, and capture insights and views from both internal and external stakeholders. A proportion of internal employees were consulted, via one-to-one interviews, survey and focus groups, to identify issues they felt were most material. This exercise identified areas of best practice and areas needing improvement, feeding into a subsequent report and action plan for managing impacts and responsibilities that was signed off by the Board. Thus, the ‘line of sight’ from employee insight to Board action was clear and reportable. Next, Corporate Citizenship identified, recruited and engaged key external stakeholders to understand their insights on material issues. This strengthened Telecity’s annual reporting and influenced decision-making; since taking a more strategic lens of the business that the engagement process provided, Telecity listed on FTSE4Good.
