ICSA and Investment Association publish guidance on board engagement with stakeholders
ICSA: The Governance Institute (ICSA) and the Investment Association (IA) have jointly published guidance on board engagement with stakeholders. The guidance is intended to help company boards think about how they understand and weigh up the interests of their key stakeholders when making strategic decisions.
The guidance follows on from the government's response to the Green Paper consultation on corporate governance reform published in August 2017. The government's response included proposals to strengthen the employee, customer and wider stakeholder voice. The government requested ICSA and the IA to complete their joint guidance on practical ways in which companies can engage with their employees and other stakeholders at board level (an exercise which they began in January 2017).
Importance of stakeholder engagement
The guidance states that stakeholder engagement is an essential activity for all organisations. It should be used to inform the decisions that the board takes, whether about the products or services it provides or about its strategic direction, its long-term health, and its relationship with its workforce and the society in which it operates.
If taken seriously, ICSA and the IA believe that stakeholder engagement will strengthen the business and promote its long-term success to the benefit of stakeholders and shareholders alike.
In the foreword to the guidance, Margot James, Business Minister, commented "It is a practical, industry-led initiative that should help companies - even those who believe that they are doing things well already - to reflect on their current engagement practices and consider further improvements. I encourage companies to draw on this guidance, to help them ensure that they are fully meeting their directors’ duties, and to strengthen their corporate governance framework, for their own long-term benefit and that of the economy overall."
Approach to stakeholder engagement
The guidance states that an organisation’s key stakeholders will depend on factors such as their size, location and the nature of their activities and business relationships. Each organisation’s approach to identifying key stakeholders needs to be informed by its purpose, culture and values.
The guidance does not, therefore, attempt to set out a comprehensive range of different approaches that should be considered. There are, however, some core principles that should guide the way boards approach the issue.
The guidance identifies ten principles to guide the way boards approach the issue:
Boards should identify, and keep under regular review, who they consider their key stakeholders to be and why. Stakeholders are those groups likely to be affected by the actions of a company, or whose actions can affect the operation or business model of the company. Key stakeholders will vary from company to company, but there are some key stakeholders that almost all companies will have in common - these include the workforce, customers, suppliers and providers of financial capital (including shareholders, lenders and bondholders), and the communities in which they operate.
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 process and the selection criteria.
The chair, 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 chair, supported by the board, management and company secretary, should determine how best to ensure that the board’s decision-making processes give sufficient consideration to key stakeholders. This particularly applies to the management of the board's agenda; the form and frequency of the information the board wishes to receive; and whether any board committees or individual directors should have specific responsibilities for some stakeholder-related issues.
Boards should ensure that appropriate engagement with key stakeholders is taking place and is kept under regular review.
In designing engagement mechanisms, companies should consider what would be most effective and convenient for the stakeholders, not just 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 reporting should cover who the key stakeholders are; how the board hears from them; outcomes of engagement; and the impact on the board’s decisions.
The board should provide feedback to stakeholders with whom it has engaged, which should be tailored to the different stakeholder groups
Organisations that can apply the core principles
ICSA and the IA hope that the guidance will be of use to boards of all companies, whether listed or privately owned and irrespective of their size or sector. While it has been written primarily from a corporate perspective, they believe that the core principles are also capable of being applied by a far wider range of organisations and their governing bodies.
Review of the guidance
ICSA and the IA state that, if necessary, the guidance will be updated following the government's corporate governance reforms expected to come into effect in June 2018, to reflect the new reporting requirements and potential UK Corporate Governance Code changes. In any event, they will review it in the second half of 2019 to reflect companies' experience of applying the guidance.
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