With the upcoming reform of the UK Corporate Governance Code being prepared by the Financial Reporting Council, it has emerged that stakeholder engagement will be a central issue. All private and public companies of significant size will be required to explain how their directors comply with the requirements of Section 172 of the Companies Act 2006 to have regard to employee, supplier, customer, shareholder and other interests. Boards must take action to list stakeholders and arrange to take their interests into account.
UK Boards Must Comply with Stakeholder Engagement Governance
Reform of the UK Corporate Governance Code is taking place both in Parliament, where a draft bill is being prepared for certain aspects, and by the Financial Reporting Council, which is responsible for publication of the regulations. Under the terms of the reform, stakeholder engagement will become an essential activity for listed companies, and for private companies covered by the governance.
In October, the UK Institute of Chartered Secretaries issued new guidelines for how boards should achieve compliance under the new Code.
According to ICSA, boards must consider all stakeholders when making decisions, 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, stakeholder engagement will strengthen the business and promote its long-term success to the benefit of stakeholders and shareholders alike.
UK Business Minister Margot James commented: “We have long been admired as one of the best places in the world to work, invest and do business, and last month’s corporate governance reforms will continue to enhance that reputation.”
“A crucial part of those reforms is making sure companies listen to their workers and customers. This new industry-led guidance will help companies to choose how best to ensure those voices are heard in boardrooms up and down the country.”
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Stephen Haddrill, CEO of the Financial Reporting Council (FRC), explained: “Businesses which are successful in the long term support our economy and society by providing employment and contributing to economic growth and prosperity. In doing so, it’s increasingly important that companies develop and sustain meaningful relationships with a wider range of stakeholders. This clear and practical guide will be of great help to companies and promote good strategic and governance reporting.”
The FRC, ahead of the development of the new Code principles, has provided clarity about how boards should establish the voice of employees and other stakeholders as an important element in running a sustainable business. Operating under the ‘comply or explain’ basis, companies will have to either assign a non-executive director to represent employees, create an employee advisory council or nominate a director from the workforce, according to corporate governance experts at the Quoted Companies Alliance.
Although almost all companies will have some key stakeholders in common, such as employees and consumers, each company’s size, location and sector will influence the precise list, as well as the methods boards use to understand their stakeholders’ views.
Core Principles for Boards
The ICSA guidance indicates the critical direction in which boards should move to achieve compliance. The guidance covers a variety of approaches – there will be, for example, no obligation to appoint a workers’ representative to the board, but boards may choose to do so. But the guidance deliberately does not express a preference for a particular choice. 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.
To achieve this, the key steps to take include:
- Boards should identify, and keep under regular review, who they consider their key stakeholders to be and why. This includes employees, suppliers, customers, etc
- 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 recruitment process and the selection criteria
- The chairman – 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 chairman – supported by the board, management and the company secretary – should determine how best to ensure that the board’s decision-making processes give sufficient consideration to key stakeholders
- Boards should ensure that appropriate engagement with key stakeholders is taking place and that this 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 board should provide feedback to those stakeholders with whom it has engaged, which should be tailored to the different stakeholder groups
The first step is, perhaps, for boards to identify the groups which have a positive or negative impact on the company’s ability to operate or which are potentially impacted by the company’s activities, as the expert at the Quoted Companies Alliance pointed out.
In order to prioritise these stakeholders for the purpose of engagement, the board could lead a mapping exercise such that they are able to identify the key stakeholders and/or the issues or activities with the most material impact on a range of stakeholders.
The mix of groups identified as key stakeholders will vary from company to company. The workforce is clearly an essential stakeholder for all companies, and for most companies, the same will be true of customers, suppliers and providers of financial capital (including lenders and bondholders as well as shareholders), and the communities in which they operate.
Diligent Board Portal Enables Communication, Provides Information
Managing stakeholder engagement is clearly a complex challenge. To simplify the communication and documentation needs of directors, Diligent Boards is the most viable support.
With Diligent Boards, on-the-go directors will have more than a board portal at their fingertips. From a single sign-on (even for multiple boards), they’ll be able to work across devices (with real-time synchronisation) to: stay current, keeping up with efforts on stakeholder engagement and on the related materials; communicate, by annotating documents in tandem with other users and getting notifications of updates; and search archives and board resources easily.
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