On September 26, 2017 the Governance Institute of the Institute of Chartered Secretaries and Administrators (ICSA) and the Investment Association issued joint guidance on stakeholder engagement which is aimed at helping company boards think about how to ensure they understand and weigh up interests of their key stakeholders when taking strategic decisions (Guidance).
In the Government’s response to its Green Paper consultation on corporate governance reform published in August 2017, in the context of its proposals for strengthening the employee, customer and wider stakeholder voice, the Government said that it would be encouraging industry-led solutions in this area by asking ICSA and the Investment Association to complete the joint guidance they announced in January 2017 on practical ways on which companies can engage with their employees and other stakeholders. This is the Guidance which has now been published.
The Guidance is designed to take boards through the different elements involved in understanding and assessing the company’s impact on key stakeholders, noting that while almost all companies will have common key stakeholders such as workers and customers, for each company the list will be different depending on factors such as their size, location and the nature of their activities and business relationships. As a result, the mechanisms used by boards to gain an understanding of the views of their key stakeholders will vary and each company’s approach needs to be informed by its purpose, culture and value.
In light of this, the Guidance does not attempt to set out a comprehensive range of different approaches that should be considered but it includes a list of ten core principles that should guide the way boards approach the issue and the Guidance also contains illustrative examples of how some companies have gone about the process. In addition, the Guidance considers a potential change to the UK Corporate Governance Code, as announced by the Government in its August 2017 response document, which would require listed companies to have either a designated non-executive director, a formal employee advisory council or a director from the workforce, or to explain why they do not have one. The Guidance covers these approaches, among others, but states that companies should choose whichever approach or approaches are, in the opinion of the board, most likely to lead to effective engagement and an enhanced understanding of the impact of their decisions on their key stakeholders.
The Guidance is divided into seven sections as follows:
The Guidance notes the general statutory duties of directors set out in sections 171-181 Companies Act 2006, noting in particular the duty to promote the success of the company set out in section 172.
The Guidance points out that boards should identify and prioritise their stakeholders. They should identify the groups which have a positive or negative impact on the company’s ability to operate or are potentially impacted by the company’s activities. They could then conduct a mapping exercise to prioritise these stakeholders for the purposes of engagement by identifying the key stakeholders and/or the issues or activities with the most material impact on a range of stakeholders. The Guidance notes that once the prioritisation exercise has been completed, it should lead to a discussion of the extent to which the board needs information on and from those stakeholders, how extensively the company should engage with them, and how best to do so. It includes, as an example, a matrix developed by the Royal Bank of Scotland Group to identify the significant issues that impact on its different stakeholder groups.
The Guidance also points out that boards should consider in the identification process the types of individuals or groups that they will use as points of contact for a particular stakeholder group. The board should also have a process in place for reviewing the groups identified as key stakeholders to make sure that engagement remains appropriate for the relevant audience. It notes the manner in which Intu Properties conducted a review of its stakeholder programme in 2016.
The Guidance notes that the board’s knowledge and understanding of the interests of the company’s key stakeholders should be among the factors considered when assessing the overall composition of the balance of the board and whether there is a need to recruit new directors. In relation to the approach to acquiring expertise, it suggests that one broad approach would be to reserve one or more board positions for directors drawn from a stakeholder group, such as the workforce. Another approach would be to extend the selection criteria and search methods for non-executive directors to identify individuals with relevant experience or understanding of one or more stakeholder groups. It considers the merits of both of these approaches and points out that they need not be mutually exclusive.
Given that directors share collective responsibility for the board’s actions and have the same legal responsibilities and liabilities, the Guidance recommends that unless there are exceptional considerations, the terms of appointment for these directors should be the same as for other directors.
The Guidance looks at the selection and search procedures in relation to finding a new director and sets out a number of questions to be considered if it is decided that one or more new directors are needed to bring an understanding of particular stakeholders. It also sets out particular questions to be considered by a board if it is decided that one or more directors should be appointed to represent the views of the workforce and it suggests companies may also wish to consider whether there is a case for appointing one or more non-executive directors with specific responsibility for other key stakeholders.
Induction and training
The Guidance notes that directors will be more effective in their role if they have benefited from a well-thought-out and effective induction programme which enables them to build an understanding of the nature of the company, its business and its markets, build a link with the workforce and build an understanding of the company’s main relationships.
The Guidance looks at designing a directors’ induction programme and it suggests a non-exhaustive list of activities that could be considered to give the new director an understanding of the role and nature of the company’s principal stakeholders. The Guidance also stresses the need for ongoing director training.
The Guidance points out that having relevant expertise on the board is only of limited use if that expertise is deployed and engaging with important stakeholders is only of limited value unless the results of that engagement are used to inform the board’s decisions. It notes that many boards suffer from a shortage of time and an excess of information so it looks at the following:
- the management of the board’s agenda;
- the form and frequency of the information the board wishes to receive, including any relevant performance measures; and
- whether any board committees or individual directors should have specific responsibilities for some stakeholder-related issues.
The Guidance also looks at the approach of designating to one or more individual directors the task of understanding the views of, and impact on, key stakeholders in ensuring these are fed into the board’s discussions. It considers issues that will arise if this approach is adopted and sets out a list of points for boards to consider if they do decide to designate one or more non-executive directors.
This section of the Guidance gives some illustrative examples of approaches already being used by companies to engage with their important stakeholders, with the aim of prompting companies to review their own existing mechanisms and to consider whether there would be value in adopting alternative or additional ways of engaging with the stakeholders concerned. In assessing the overall engagement carried out by the company, the Guidance sets out a number of key questions boards should consider.
In terms of engagement mechanisms, it looks at forums and advisory panels, as well as at other engagement mechanisms such as surveys and social media. It also considers staff engagement mechanisms and includes examples in each case.
Reporting and feedback
This section of the Guidance considers both how companies should report to shareholders and to their other stakeholders. It notes that reporting to shareholders will primarily be done through the annual report and accounts and through subsequent ongoing or specific engagement, such as meetings or discussions at and before the annual general meeting. It notes that reporting should cover the following three questions:
- Who are the key stakeholders?
- How does the board hear from its key stakeholders?
- What were the outcomes of the company’s engagements with its key stakeholders, and what impact did that all have on the board’s decisions?
The Guidance notes that one approach would be for the board to disclose its key stakeholders and explain concisely the processes that the board has in place to receive input and information from stakeholders. It could then demonstrate how the directors have fulfilled their duties under section 172 by explaining how information gathered through engagement with stakeholders has informed the board’s decisions during the year.
The Guidance also considers reporting to other stakeholders and notes that companies should consider what other reporting and feedback mechanisms might be necessary. It considers publications and online resources as well as other forms of reporting and feedback. It also points out that different stakeholders may want or require reporting on different timescales so while annual reports may be appropriate for groups such as shareholders, social media and other forms of communication could be used to update other stakeholders on a more regular basis.
The Guidance notes that the Government’s intention is that the various reforms to corporate governance that it announced in August 2017 will come into effect by June 2018. ICSA and the Investment Association will update the Guidance if necessary to reflect the new reporting requirements and potential changes to the UK Corporate Governance Code. They state that in any event, they will review the Guidance in the second half of 2019 to learn from companies’ experience of applying it.
(ICSA and Investment Association, The stakeholder voice in board decision making, 26.09.17)