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Stakeholder Engagement
and the Board: Integrating Best
Governance Practices
Foreword by Peter Zollinger
Focus8
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Copyright 2009.
International Finance Corporation
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OUR MISSION:
The Global Corporate Governance Forum is an International Finance Corporation
(IFC) multi-donor trust und acility located within IFC Advisory Services. The Forum
was co-ounded by the World Bank and the Organisation or Economic Co-operation
and Development (OECD) in 1999. Through i ts activities the Forum aims to promote
the private sector as an engine o growth, reduce the vulnerability o developing and
transition economies to fnancial crisis, and provide i ncentives or corporations to invest
and perorm efciently in a socially responsible manner.
The Forum sponsors regional and local initiatives that address the corporate governance
weaknesses o middle- and low-income countries in the context o broader national or
regional economic reorm programs.
OUR FOCUS:
Raisingawareness,buildingconsensus
Disseminatingbestpractices
Sponsoringresearch
Fundingtechnicalassistanceandcapacity-building
OUR DONORS:
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Stkehde Eggemet
d the Bd: Itegtig Best
Gece Pctices
Fewd b Pete Zige
Gb Cpte Gece Fm
Fcs 8
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TaBlE oF ConTEnTS
Acknowledgments ................................................................................................. iv
Foreword by Pt Z.................................................................................v
I. Introduction ......................................................................................................1
II. Stakeholder Engagement and Corporate Governance ....................................4
A. Denitions o Stakeholder Engagement ....................................................5
B. Stakeholder Engagement and Sustainability .............................................8
C. The Shareowner Model versus the Stakeholder Model ........................... 11
D. Boards o Directors and Stakeholder Engagement .................................16
E. Roles and Responsibilities o Stakeholders .............................................18
III. The Business Case or Stakeholder Engagement ..........................................20
A. Creating Value and Wealth ......................................................................20
B. Reducing Risk .........................................................................................24
C. Tapping Opportunities or Innovation ...................................................... 24
D. The Case or Engaging Early, Oten and Interactively ..............................25
IV. Best Practices or Proactive and Eective Stakeholder Engagement .............32
A. Identiying and Prioritizing Stakeholders and Their Issues .......................33
B. Deciding Which Issues are Material to Stakeholder Engagement............37
C. Ways to Engage: Methods and Channels ...............................................37
D. Developing a Structure or Success ........................................................40
E. Using Inormation rom Stakeholder Engagement ...................................40
F. Communication with Stakeholders..........................................................42
G. Best Practices or Boards o Directors ....................................................48
H. Best Practices or Stakeholders ..............................................................49
I. Looking Forward: Emerging Trends in Stakeholder Engagement ............50
Useul Resources o Selected Organizations and Inormation Sources ................55
Literature and Sites o Interest ...............................................................................62
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aCKnoWlEDGMEnTS
The completion o this publication is the result o a co-operative eort that has
beneted rom the expertise and dedication o various individuals. The GlobalCorporate Governance Forum would like to express its sincere gratitude to Susan
Blesener, Director o Corporate Accountability at Novo Nordisk, or her initial drat,
which ormed the basis or this FOCUS publication, and to Jose Cruz-Osorio, Louise
Gardiner, and Ralitza Germanova or their detailed review and useul inputs that
helped nalize it.
We also wish to provide special thanks to Peter Zollinger, Senior Vice President,
SustainAbility, or writing the Foreword, and to Mervyn King, Michael OSullivan,Bonny Thebenyane, and Alan Knight or their insightul comments.
DISClaIMEr
This publication is an attempt to assess and explain the universe o issues and
challenges acing boards and companies in the area o stakeholder engagement. It
is not a ormal position or expert opinion on this topic. A list o resources and expert
sources is oered. However, readers are advised to seek proessional expertise or
guidance to design or implement stakeholder engagement initiatives.
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ForEWorD
Three oten ound misconceptions in business can be summarized as ollows (and, I
admit, somewhat provocatively): First, the term stakeholder is seen as a euphemismor polarizing, anti-business campaigners (read troublemakers). Second,
stakeholder engagement is or companies that are aspiring or political correctness
(at best) and risk to hand the steering wheel to groups that have little legitimate
voice (at worst). And third, there are no real-lie connections between best practice
corporate governance and stakeholder engagement.
This FOCUS Publication eectively dispels these misconceptions and presents a
structured and practical case or stakeholder engagement as a means to businesssuccess and societal trust.
More and more business leaders recognize that their traditional management
recipes are providing insucient guidance on how to handle changing societal
expectations around the globe. Frequently, reputable companies are caught in what
appears to them to be a surprise controversy, despite proessional public relations
work and elaborate mechanisms o internal control. It should raise an alarm bell
i company executives have to admit ever that they were surprised by the level o
negative publicity. Have their internal radar systems been insuciently tuned? Or
has the internal escalation o warning signals ailed?
No surprises is one o the most important principles o good corporate
governance. This report explains how systematic stakeholder engagement enables
both the supervisory body and the executives in any corporation to be prepared
to detect, assess and manage any change in their global societal environment that
may prove to be critical or strategy and their capacity to implement it. The report
does not call or additional unctions to be taken over by boards. Rather, eective
corporate leadership involves the integration o stakeholder engagement wh h
cc cor ucos o boards as part o best practice corporate governance.
Such core unctions include policy setting, accountability and control, and the
selection o executive management.
But beyond managing risk, the champions league o stakeholder engagement
is to embed openness and collaboration in a companys approach or innovation.
More and more new business models live o what some call strange bedellows,
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novel partnerships between business, NGOs or governments to deliver new
services or come up with new products.
At the beginning o any company successully embracing stakeholder engagementas a ormula to increase diversity o thought and secure a licence to operate based
on societys trust stands a recognition by the owners (investors) and their agents
(boards) that engagement needs to be established as a core corporate value.
People up and down the corporate hierarchy have to be empowered and instructed
to engage (a word whose essence o being prepared to being infuenced by
what others have to say is not easily translated beyond English). This new brieng
publication provides change agents at all levels with the structure and arguments
they need.
The correct conceptions o stakeholder engagement would thereore be: First,
stakeholders include those who have a legitimate interest in a companys work
and are open to constructive engagement. Second, stakeholder engagement is or
leading companies who accept to be stronger in partnership based on mutual trust.
And third, stakeholder engagement enables companies to go beyond compliance
and to live up to the spirit (rather than the letter) o the principles o good corporate
governance.
Pt Z
Senior Vice President
SustainAbility
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I . InTroDuCTIon
Companies have always had relationships with their stakeholders, which include
shareowners, customers, suppliers, employees, regulators, and local communities.In act, it would be dicult or a company to stay in business i it did not operate
with the interests o these key groups in mind. When engaging with its stakeholders,
a business is acknowledging that it
is an interdependent entity, which
is impacted by and has an impact
on many dierent groups. For many
companies, however, nding the right
approach to stakeholder engagement
and tapping the wider benets it oers
to their business is still uncharted
territory. This FOCUS Publication provides an introduction to stakeholder
engagement rom the perspective o internationally recognized, good corporate
governance practices. It is aimed at senior executives and company directors and
explains how stakeholder concerns can inorm and enhance the risk management
and wealth creation responsibilities o boards o directors. It provides practical tips
and tools to help navigate stakeholder engagement in a way that strengthens the
long-term sustainability o companies and enhances trust and reputation among
stakeholders.
Taking stakeholder concerns and interests into account can improve relationships,
which may make it easier or a company to operate, lead to ideas or products or
services that will address stakeholder needs, and allow the company to reduce
costs and maximize value. Researchers have also ound correlations between
stakeholder perormance indicators and conventional measures o corporate
protability and growth. The reasons may vary. For instance, companies that takea stakeholder view may have a more responsible approach to risk-taking, which
can deliver higher returns by not unreasonably pursuing competitive advantage.
Stakeholder-oriented companies are also welcomed more readily into new markets,
as existing companies embedded in those markets perceive them as less hostile to
local values and ways o operating (Fauver and Fuerst. 2006). Overall, stakeholder-
responsive corporate governance results in a more comprehensive understanding
o corporate risk and opportunity while contributing to a strong reputation over time.
o stkehdes e
bsiess.
Stdd Bk 2005 a rept
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Most companies communicate with stakeholders, providing inormation about
the organization and its products, services, and operations to shareowners,
customers, sta, business partners, and suppliers. The process o
communicating with these groups is one type o stakeholder engagement andthe strategic importance o engagement
is immediately obvious. There are also
many good strategic and operational
reasons to engage with less-traditional
groups and on less-traditional issues.
Stakeholders can have economic,
technological, political, social or even
managerial eects on a company and
engagement is thereore an important
part o anticipating business opportunities and risks, which, in turn, is undamental
to proactive, strategic management. Over time, as economies, labor markets,
and supply chains have become increasingly globalized, the number and variety
o stakeholders impacted by individual companies has grown and the need or
stakeholder engagement has become an essential part o doing business.
Moving toward a stakeholder-conscious governance model, with broader input and
ongoing engagement, is an important aspect o corporate accountability. Terms
describing the business-society relationship corporate social responsibility,
corporate citizenship, corporate environmental and social perormance, and
sustainability all speak to the role o business as providing some good to
society. Because the emphasis is on relations with society, the stakeholder view o
the company is central to most o these concepts. Stakeholder engagement is not,
however, the same thing as sustainability or corporate responsibility. It is certainly
possible or a company to engage with stakeholders and yet operate in ways thatabuse natural resources or human rights.
Eective engagement is also characterized by dialogue a two-way process
where stakeholders are not merely consulted or listened to, but the company
makes a sincere attempt to respond to stakeholder concerns. O course, i a
company is to avoid paralysis, it must prioritize stakeholder interests.
Ee decisi the Bd mkes
tkes it cct the eeds
d expecttis
stkehdes.
BHP Biit
2007 a rept
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Experience shows that trust and relationships take time to build but are valuable
assets. To build trust, the company must show it has listened and acted in response
to stakeholder concerns. This is why ongoing communication with and reporting
back to stakeholders is such an important component in any engagement strategy.
Ultimately, stakeholder engagement should become a core value or the
business and be managed as a business unction with clear objectives and lines
o responsibility. The ollowing chapters show how this approach ts with the
leadership responsibilities o boards. In particular, chapter IV provides practical
tips or prioritizing stakeholder interests and successully managing stakeholder
engagement.
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I I . STaKEHolDEr EnGaGEMEnT anD CorPoraTE
GovErnanCE
Corporate governance reers to the systems by which companies are directedand controlled. The structure and operation o the board o directors, nancial
reporting, transparency and audit, separation o powers and minority shareowners
rights are integral to the corporate governance system. Corporate governance is
also increasingly recognized as a means to address the converging interests o
competitiveness, corporate citizenship, and social and environmental responsibility,
and as a mechanism or encouraging eciency and combating corruption (King
Report, 2002).
Weak corporate governance systems that lack transparency and protection or
minority shareowner rights have been shown to reduce oreign investment and
capital fows to developing economies. At the company level, good governance
practices have been ound to be associated with creditworthiness and higher
average annual total returns (Brown, Muchin and Rosenman, 2004).
There are a number o dierent codes or sets o principles or good corporate
governance. Many highlight the importance o stakeholders to good governance.
One such example at the global level is the OECD Principles o Corporate
Governance, which is the dened international standard. The core values o the
OECD corporate governance principles are:
I. Rights o shareowners and their protection
II. Equitable treatment o all categories o shareowners
III. Role o employees and other stakeholders
IV. Timely disclosure and transparency o corporate structures and operations
VI. Responsibilities o the board towards the company, shareowners and other
stakeholders
These principles underpin the development o a strong governance ramework that,
in turn, supports the development o sound capital markets.
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Defini t ions of Stakeholder Engagement
The term stakeholder has been used since at least the 1930s, when a Harvard
Law Proessor, E. Merrick Dodd, publicly supported the identication o our major
groups o business stakeholders: shareowners, employees, customers and the
general public (Preston & Sapienza).
A 1963 internal memo at the Stanord
Research Institute used the term to reer
to those groups without whose support
the organization would cease to exist.
By denition, stakeholders have a stakein the company, and have the possibility
o gaining benets or experiencing
losses or harm as a result o company
operations. Some types o stakeholder
groups include employees, local
communities, local elected ocials
and local and central governments,
regulatory agencies, customers,
suppliers, nanciers, shareowners, and
non-governmental organizations. The
stakeholders o each organization are
dierent, and, in large organizations,
dierent divisions or operational entities
may have dierent stakeholder groups.
The more recent surge in interest
around corporate social responsibility
(CSR) has placed renewed attention on
the rights and interests o stakeholders
and the responsibilities o companies to respond to them. In The Stakeholder
Fiduciary: CSR, Governance and the Future o Boards, Allen White o the US-based
organization Business or Social Responsibility (BSR) describes the ollowing three
phases in the evolution o corporate stakeholder engagement over the last three
decades:
Cpte Gece is
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SIr aDrIan CaDBury i Corporate Governance andDevelopment, Gb Cpte Gece Fm,
Wd Bk, 2003.
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1. The concept o stakeholder management emerged in the 1980s as a
practice whereby companies recognized the interests o signicant, non-
nancial stakeholders those with sucient infuence and visibility to gain
the companys attention and took steps to communicate with thesegroups and address their concerns, usually related to specic issues.
2. The broader practice o stakeholder engagement emerged in the 1990s
as it became clear that companies needed to be aware o a wide variety o
stakeholders aected by or aecting
their operations and to build long-term
relationships o constructive engagement.
Besides shoring up corporate reputation,
this approach has been shown to help
companies anticipate and manage risk
more eectively as well as to identiy new
business opportunities by tapping unique
stakeholder perspectives. Engagement,
as opposed to top-down management,
is oten characterized by dialogue a
two-way process in which stakeholders
are not merely consulted or listened
to, but the company makes a sincere
attempt to respond to stakeholder
concerns in seeking to determine shared
values around areas or issues o mutual
interest or common concern.
3. Finally, White argues that a concept o stakeholder governance is now
emerging, which shits the ocus to how boards themselves operate and the
extent to which stakeholder interests are integrated into core unctions so
that board decisions airly balance the claims o all key stakeholders. This
in turn highlights one o the central challenges o stakeholder engagement,
which is to prioritize stakeholder interests and avoid paralysis.
The approach adopted by a company may vary between these three concepts
depending on the nature o its business, national corporate governance regulations
or best practices, types o issues the company aces, and the level o attention
given to these issues by stakeholders. However the underlying principles and
benets o stakeholder-responsive corporate governance are likely to apply to most
Eggig with stkehdes hs
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businesses. In the ollowing sections, we explain some o the common elements
o and eective strategies to tackle stakeholder dimensions within the corporate
governance context.
Defining Commonly UseD Terms: The role of sTakeholDers in
CorPoraTe sUsTainabiliTy anD resPonsibiliTy
The terminology describing the business-society relationship has seen a slow
evolution since the 1950s with terms such as corporate social responsibility,
corporate citizenship, environmental and social perormance, and sustainability
avored at dierent times. All terms speak to the role o business as providingsome good to society, which may include jobs, law abidance, or environmental
stewardship. Because the emphasis is on relations with society, the stakeholder
view o the company is central to most o these concepts. Companies committed
to operating responsibly and sustainably need to manage social contracts and ace
inevitable tradeos. In this context, corporate governance can provide a ramework
to help with decision-making.
Cpt ctzp is the expectation that drives companies to interact withtheir wider communities in an ethical and socially responsible manner. Increasingly,
organizations are reconciling their corporate goals with those o their stakeholders,
including local communities and their customers values. Good corporate
citizenship involves legal compliance, employee relations, good environmental
perormance, transparency, human rights, product stewardship, communication
with stakeholders, protability, strategy integration, and community involvement.
Cpt c ptor cpt ptis a systems
approach to the relationship between business and society, which acknowledges
responsibilities to both internal and external stakeholders, as well as local and
international communities and the natural environment. Corporate responsibility is
generally understood to be voluntary behavior that goes beyond legal compliance.
Laws, regulations, and norms are absolutely necessary or good corporate
governance and serve as saeguards against arbitrariness in practice. Yet, by
themselves, they are insucient to achieve sustainability.
(COntinUed next page)
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DEFINING COMMONLY USED TERMS: THE ROLE OF STAKEHOLDERS IN CORPORATE
SUSTAINABILITY AND RESPONSIBILITY (COntinUed)
suttimplies that a process or state such as a companys
operations should be managed in a way that it can be maintained at a certain
level indenitely. The most common denition out dpt is
development which meets the needs o the present without compromising the
ability o uture generations to meet their own needs and was created in 1987
by the World Commission on Environment and Development (the Brundtland
Commission). In Mrk Movrs: Lssos rom Fror o iovo, IFC and
Sustainability describe sustainability as a business approach embodying open
and transparent business practices, ethical behavior, respect or stakeholders
and a commitment to add economic, social and environmental value. To assessthe sustainability o products, services, and other activities, companies need to
use social and environmental criteria as well as nancial judgment. Stakeholders
are likely to have varying opinions about how such criteria are measured and
interpreted.
Stakeholder Engagement and Sustainabi l i ty
As the power o the private sector grows, it is now airly widely accepted that
businesses have responsibilities beyond making a prot and there are many good
business reasons why it is advantageous or companies to ensure that business
activities are ethical, responsible and environmentally and socially sustainable.
Experiences o leading companies have shown that a demonstrated commitment to
values and sustainability can help companies to achieve a variety o benets:
Gainandretainloyalcustomerswhileavoidingboycottsorotherundesirable
consumer actions;
Beperceivedasmoredesirableplacestoworkandhaveaneasiertimerecruiting
and retaining talented sta members;
Identifywaystoincreaseefciencyandreducecostsintheiroperations,such
as through more sustainable energy use and waste management, or reduced
employee absenteeism;
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Forestalllegislationorregulationbyadoptingvoluntaryprograms,allowingthem
to develop discretionary standards according to their particular circumstances
and challenges or to adopt industry agreed codes o practice; and
Winthesupportofthecommunitieswheretheyoperateandjointlysolve
problems that aect the company as well as the local population.
By adopting sustainable practices, businesses can create value not only or
themselves but also or the broader society in which they operate. A sustainable,
responsible business strategy seeks to ensure long-term business success while
at the same time contributing towards economic and social development, a healthy
environment, and a stable society. Importantly, such a company recognizes the
need to be accountable and transparent towards stakeholders regarding the way itmanages perormance.
Ultimately, it is a companys stakeholders that give it legitimacy as a responsible
enterprise. Even i a company believes it is acting responsibly, it will have little
credibility and may suer reputational damage i stakeholders do not perceive it
to be acting responsibly. A growing number o companies now publish annual
sustainability reports to communicate about their social, environmental and
economic perormance. These companies oten also obtain external assurance
or verication to increase the credibility o their reports. Sustainability reporting is
one amongst various communications methods that companies can use to build
stakeholder trust. This dimension is discussed urther in chapter IV.
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CoCa-Colas Use of groUnDwaTer in inDia
More than one out o every six people on Earth live in India, yet the nation has less
than our percent o the worlds reshwater resources. In the southern Indian village
o Plachimada, persistent droughts have dried up groundwater and local wells,
orcing many residents to rely on water supplies trucked in daily by the government.
Some villagers linked the groundwater depletion to the arrival o a Coca-Cola
bottling plant in the area.
In 2004, the High Court in the southern Indian state o Kerala ordered Coca-Cola to
stop extracting ground water or its bottling operations. Justice K. Balakrishnan Nair
told the company that it owned the 40 acres o land where its plant stood, but the
groundwater beneath the land is a national resource belonging to the entire society.
The complaint against the company alleged that the water table was being drawn
down by Coca Cola, which used deep bore wells.
At the time o the ruling, large Coca-
Cola customers in other parts o the
world demanded that the company
provide detailed explanations o its
activities in India. The University oMichigan, or instance, with annual
expenditures o approximately $1.3
million or Coca-Cola products in
2004, extended some contracts
on a short-term, conditional basis
while the company was given an
opportunity to agree to a third party,
independent audit to review the
complaints.
Following a year-long scientic study,
the High Court o Kerala determined
that the primary cause o the water
shortage in the local area was due to reduced rainall and that Coca-Cola had the
right to withdraw and use water rom the local aquier. Despite the ruling, Coca-Cola
decided not to reopen its plant in Kerala.
Thgh expeiece, wee
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stkehde cces. [] o
te sccess depeds
dig wkbe stis t the
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which we d bsiess.
THE CoCa-Cola CoMPany
www.thecc-ccmp.cm/citizeship/
stkehde_eggemet.htm
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In India, Coca-Cola had already begun to engage with stakeholders at the time
o the court case in Kerala, and their engagement steadily increased in the years
ollowing.
The company ormed an Indian stakeholder advisory board in 2003. Chaired
by a ormer cabinet secretary, the board provides guidance on operational,
environmental and corporate governance issues in India. In its 2006 Corporate
Responsibility Review, the company noted that it had increased engagement with
stakeholder groups in India, including critics o its water management practices.
The company has taken Indian stakeholder concerns about water seriously,
addressing them in two important ways. First, the company provides detailedreporting on its water consumption and actively works to reduce its water usage.
The company has also invited NGOs to provide objective assessments o its water
management practices. Secondly, the company has partnered with government
bodies and researchers, sponsoring hydrological studies to increase understanding
o how to protect watersheds.
The Shareowner Model versus the Stakeholder Model
In most countries, the law makes it clear shareowners are the owners o companies
and that boards o directors and managers have a duciary responsibility to act in
the interests o shareowners. Most academic literature on governance begins with
this perspective. In this ownership model, companies are seen as another orm o
personal property ownership.
Shareowners do own shares in a company and this ownership conveys certain
rights and privileges. These include the ability to vote in the election o company
directors, a claim to any distributions o income in the orm o dividends, and the
ability to sell their ownership stake.
In amily-owned or employee-owned companies, shareowners may be quite
involved in business operations. Shareowners owning a signicant percentage
o a company may also attempt to directly infuence business operations. These
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examples, however, are exceptions. While shareowners are entitled to a return on
their investment, they cannot actually do anything with any part o a company, nor
do they usually have any expectation o doing so (Post, Preston and Sachs, 2002).
Many other types o stakeholders also have interests that are protected by law.
A company may have legally binding contracts with suppliers or customers. In
countries where certain employee rights are protected legally, society has agreed
that companies have responsibilities to employees. While companies have legal
obligations to investors, most also have legal obligations to other stakeholder
groups.
Some companies are managed and it can be argued that all should bemanaged to create wealth or and avoid causing harm to multiple stakeholder
groups. Comprehensive stakeholder management and stakeholder governance
requires recognition o stakeholders who voluntarily associate themselves with a
company in pursuit o their own interests, such as supply chain vendors, and those
that are involuntarily impacted by corporate activity, such as communities living near
company operations.
This stakeholder model o the company is built on the idea that stakeholders
contribute, either voluntarily or involuntarily, to a companys wealth-building
capacity. Stakeholders are either potential beneciaries or risk bearers o company
activity, and their interests should thereore be considered by management and
boards o directors. The wealth-building capacity o stakeholders is considered
urther in chapter III, but Graphic 1 illustrates the multiple linkages between a
company and its diverse stakeholder groups.
Stakeholder engagement can help companies better understand the interests and
concerns o stakeholder groups so that they can make inormed decisions about
balancing the interests o all o the groups to which they may have some obligation.
Considering stakeholder concerns and interests can improve relationships with
stakeholder groups, which in turn makes it easier or a company to operate, may
lead to ideas or products or services that will address stakeholder needs, and may
allow the company to reduce costs and increase wealth.
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To some extent, the distinction between the shareowner and stakeholder models is
a alse dichotomy. Stakeholders and shareowners alike are searching or methods
o ensuring the long-term health and prosperity o companies.
Two broad notions have been used to make the case or stakeholder-oriented
governance. The rst, enlightened sel-interest, argues that shareowners will
ultimately be better o i they allow managers to pursue long-term objectives,
including objectives that are important to stakeholder groups. In this approach, the
supremacy o shareowners as owners o a company is not challenged. Because
the short-term term interests o stakeholders are still given priority, there is still clear
accountability o the board to shareowners.
Graphic 1
the corporation
Governments Employees
Investors:Shareownersand Lenders
Customersand Users
Unions
RegulatoryAuthorities
Joint VenturePartners and
Alliances
LocalCommunitiesand Citizens
PrivateOrganizations
Supply ChainAssociates
SOURCE: Post, Preston and Sachs (2002) R h Cororo: Skholr Mm Orzol Wlh
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The second interpretation is to make companies directly responsible to a broad
group o stakeholders. Sometimes reerred to as a pluralist approach, this requires
company boards to demonstrate that the business is operated in a way that takes
the interests and concerns o stakeholders into account (Cowe, 2001).
So, what does this look like in practice? Well, companies can capture and respond
to stakeholder concerns in three ways:
Thecorporationmakesbusinessdecisionsthattakeintoaccountits
understanding o stakeholder interests.
Thecorporationengageswithstakeholderstogettheirinputonwhatdecisions
should be made and then makes the decisions itsel.
Thecorporationinvolvesstakeholdersinthedecisionmakingprocess.
Regardless o process, one also needs to consider the principles behind the
decision making process. Will the corporation take stakeholder interests into
account only when they have a direct infuence on existing business perormance?
Will the corporation take stakeholder interests into account when the actions o the
corporation aects stakeholders but a change will either not improve perormance
or make perormance worse?
The disadvantage o the enlightened sel-interest approach to stakeholders is
that there are limits to the convergence between increasing prots and pursuing
stakeholder interests. In many cases, there may be conficts between these
objectives.
Enlightened shareowner value is a related concept commonly associated with
the UK Companies Act o 2006. In addition to acting in the best interest o all
shareowners, including uture shareowners, the Act includes in the general duties
o a company director the responsibility to consider other interests that may aect
a companys success. This implies that stakeholders directly impact the companys
ability to create wealth even though the interests o various stakeholders are
requently divergent. The Act places the onus on directors to balance and prioritize
these potentially competing interests in order to ensure business success.
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1. A director o a company must act in the way he considers, in good aith,
would be most likely to promote the success o the company or the benet
o its members as a whole, and in doing so have regard (amongst other
matters) to a. The likely consequences o any decision in the long term,
b. The interests o the companys employees,
c. The need to oster the companys business relationships with suppliers,
customers and others,
d. The impact o the companys operations on the community and the
environment,
e. The desirability o the company maintaining a reputation or highstandards o business conduct, and
. The need to act airly as between members o the company.1
Similarly, the 2002 King Report on Corporate Governance (King II) in South Arica
states that a key challenge or good corporate citizenship is to seek an appropriate
balance between enterprise (perormance) and constraints (conormance), so taking
into account the expectations o shareowners or reasonable capital growth and the
responsibility concerning the interests o other stakeholders o the company.
In Germany, corporate governance regulations oer an even stricter denition o
the responsibilities o the company to incorporate stakeholder interests. German
companies ollow a two-tiered governance model comprising a board o directors
and a supervisory board, which must include employee representatives. Similarly,
since 1995, European companies with at least 1,000 employees within the EU
and at least 150 employees in each o at least two Member States have been
required to establish Works Councils whereby employee representatives meetwith company management at least annually and are consulted on major business
decisions (AccountAbility and Utopies, 2007). French law requires that workers
representatives be able to attend board meetings and the Japanese governance
model emphasizes consensus among management and employees in decision-
making processes (Aoki, 1990).
1 United Kingdom, Companies Act 2006; 172: Duty to promote the success o the company
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These various approaches demonstrate a tension between leaving it to the
companys board and management to address stakeholder concerns versus
ensuring that stakeholders are represented in key decision-making processes.
All point to ethical as well as business reasons to balance stakeholder needswith those o shareowners, and that in act these have areas o commonality.
For instance, i customers, trading partners, and regulators avor stakeholder-
oriented companies, then this will reinorce the nancial return to shareowners and
contribute to the long-term success o the company.
Boards of Directors and Stakeholder Engagement
While board structures and responsibilities vary according to local norms, laws, andregulations, most boards are responsible or:
1. Setting general policies and strategic direction
2. Shaping the companys ramework or accountability, control, and risk
management
3. Selecting and overseeing compensation o key managers, including the CEO
The second area o responsibility is where stakeholder engagement, or bringing
opinions and inormation rom outside in, relates to board leadership. The board
o directors can play an important role in making sure that an outward looking
approach including transparency, integrity, and win-win relationships is valued
within a company and that these values are implemented. So what can the board
do to embed stakeholder engagement in the companys governance? The ollowing
are key steps:
I. Dene stakeholder engagement as a core value
II. Identiy, discuss and prioritize key risks associated with changing societal
expectations
III. Determine the boards nancial and nonnancial inormation needs or
decision-making, management oversight, and monitoring key stakeholder
relationships associated with generating value and wealth
IV. Discuss and approve key perormance indicators or social, environmental,
and nancial perormance
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V. Approve a policy or external reporting
VI. Integrate stakeholder issues into annual general meetings o shareowners
VII. Discuss the risks and impacts o projects and operations and provide
transparent disclosure inormation to shareowners and other key stakeholder
groups
VIII. Convene stakeholder orums and invite key stakeholder representatives to
address board meetings
In addition to being an important part o corporate accountability, stakeholder
engagement can be useul as a learning and inormation tool or company
leadership. While board members are oten tasked with maximizing shareowner
value, dierent blocks o shareowners may have dierent interests and ideas about
how value should be maximized. Engagement and dialogue can help the board
better represent these disparate interests.
Board members also have a responsibility to ensure that appropriate risk
management systems are in place. Just as the board should ensure that
nancial statements are properly audited, it is also responsible or ensuring that
management is aware o and properly manages nonnancial risks. In this regard,
stakeholder engagement provides a broader view o potential risks.
O course, many so-called nonnancial risks such as the impact o climate
change or global supply chain management may ultimately have nancial
consequences. Oten it is indirect consequences o nonnancial risks that are
hardest to oversee and manage. One example is the corporate governance ailures
at Enron. Despite its unwillingness to engage in other aspects o corporate oversight
such as intense monitoring o business results and nancial controls, Enrons
board approved a disclosure policy that ultimately contributed to a lack o nancial
transparency and approved a compensation strategy that made managerial
compensation highly sensitive to share price changes.
A key element o corporate governance is ensuring the accountability o boards
o directors. Shareowners have largely been let with the role o protesting
excessive pay or board compositions that do not comply with accepted guidelines.
The process o stakeholder engagement increases overall accountability and
encourages questions about operations. In the example o Enron, eedback romthe media and the nancial community about Enrons reporting could have served
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as an early warning to the board o directors. The companys stunning collapse was
at least partially blamed on the boards unwillingness to demand transparency and
accountability and to curb excessive arrogance.
Boards should consider that reputational and relationship issues are undamental
to business operations, so stakeholder engagement should be given as much
consideration as dialogue with nancial institutions. Just as discussions with major
shareowners help a company understand how it is viewed and what investors
want, engagement with other stakeholders can be crucial to helping companies
understand what society expects. Engagement may produce clear nancial benets
rom increased sta motivation or improved reputation.
Roles and Responsibi l i t ies of Stakeholders
Much has been said about the responsibilities o companies towards stakeholders.
More recently, as amiliar structures o cooperation and engagement have evolved,
the roles and responsibilities o stakeholders have in turn become more dened.
Stakeholders are characterized by their relationship to the company and their
arising needs, interests and concerns, which will be oremost in their minds at thestart o an engagement process. However, as the process unolds they will soon
take a particular role with related tasks and responsibilities. The ollowing are just
some o the dierent roles that stakeholders can play:
expt, such as academics, who have been invited to contribute knowledge
and strategic advice to the companys board;
Tcc d with expertise on the social and environmental risksassociated with particular technological and scientic developments invited to sit
on scientic and ethical panels in science-based industries;
rptt pc tt, such as employees, local communities
or the environment, commonly invited to participate in stakeholder panels to
review company perormance and/or reporting practices;
C-pt, such as NGOs, who have partnered with the company toimplement a joint solution or program to address a shared challenge; and
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C-t, such as impacted communities, that have entered into an
agreement with the company in which both parties will be responsible or
monitoring outcomes o the companys sustainability projects.
In each case, stakeholders engaging with companies have an obligation to
understand the companys objectives and to be well inormed so that dialogue
is constructive. Finding solutions that benet everyone is only possible when
stakeholders understand and appreciate the economic and legal objectives o a
business.
Stakeholders can only be well inormed and knowledgeable i companies are
transparent and report on issues that impact stakeholders. Both parties havean obligation to communicate sincerely and attempt to understand, not just be
understood.
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I I I . THE BuSInESS CaSE For STaKEHolDEr
EnGaGEMEnT
Companies that excel at stakeholder engagement excel in business. The skillsdeveloped through eective stakeholder engagement are invaluable in an increasingly
complex world where companies deal with many di erent relationships that all
potentially impact their business. For businesses with diverse geographical locations,
this can be particularly challenging.
Creat ing Value and Wealth
Organizational wealth is the cumulative result o corporate perormance over time,
including all o the assets, competencies, and revenue-generating capacities developed
by a company. Compared to less successul companies, wealthier ones can pay
higher wages and oer better career opportunities, take greater risks, provide greater
customer benets, respond better to adversity, provide more value or shareowners,
and maintain better relationships. They can also increase their capacity to generate
wealth in the uture by reinvesting in their businesses, launching new and innovative
ventures, buying other companies, and building their own internal enterprises.
One way o measuring organizational wealth combines the value o both tangible and
intangible assets. In this view, the main components o an enterprises wealth are
1) the market value o physical and nancial assets, 2) the value o distinct intangible
assets such as patents or licenses, and
3) the value o relational assets, including
stakeholder linkages and reputation (Post
& Carroll, 2006).
This view o organizational wealth, called
the stakeholder view, is more dynamic
and practical than competing systems o
measurement that ocus on resources or
a companys position within its industry. Companies that view wealth creation as a
unction o resources or market position are less likely to share inormation and be
collaborative. This behavior can, in act, be counterproductive, particularly in supply
chain relationships or alliances where companies can benet rom collaborative
product and process development.
The ie t estbish d
miti pdctie etiships
with stkehdes is ie t
eectie mge cmps
cpcit t geete weth.
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Every company has critical stakeholders in every dimension o its critical
environment resource base, industry structure, and social and political setting.
Favorable and mutually benecial relationships through negotiated shared valueswith these stakeholders allow companies to create wealth, while confict oten limits
or destroys wealth.
The sources o company wealth attributable to dierent stakeholder groups are
summarized in Table 1.
Researchers have ound that, at least or Fortune 500 companies, solid nancial
perormance is linked to good treatment o employees, customers, communitiesand other stakeholders. Companies that treat stakeholders well are also rated by
their peers as having superior management (Brown, Muchin and Rosenman).
Because stakeholder management or engagement and company growth and
protability are correlated, the idea that stakeholder objectives involve trade-os
or companies is questionable. Researchers have ound evidence that addressing
the concerns o customers, employees and community members also benets
shareowners in the long run (Preston and Sapienza).
Table 1: Dierent Concepts o Organizational Wealth
rs-Bs Vw is S Vw S Vw
SourceS
of Wealth
Physical assets
Human Resources
Knowledge
Technology
Financial resources
Intangibles
Bargaining power
Market power
Collusion
Relationships that increase revenue or reduce costs
Relational benets leading to increased wealth
MeanS to
preSerVeWealth
Barriers to imitation Barriers to entry,
including government regulation and sunk costs
Stakeholder linkages
SOURCE: Adapted rom: Post & Carroll (2006).
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Stakeholder engagement helps mobilize multiple stakeholder interests, enhancing
social capital. Social capital connects people or groups o people in social networks
that generate solidarity, goodwill, and mutual infuence, ultimately contributing to
both sustainable businesses and the common good (Maak, 2007). While there is
widespread agreement that stakeholder engagement creates social capital, there isnot an accepted measurement o the value o social capital.
Table 2: Stakeholder Contributions Associated with Company Wealth
Stakeholder Group contriButionS
Investors and lenders Capital, equity and/or debt
Financial market recognition (reducing borrowing costs and risks)
Employees Development o human capital
Collaborative workplace relations
Unions Workorce stability and confict resolution
Customers/users Brand loyalty and reputation
Repeated/related purchases
Collaborative design, development, and problem solving
Supply chain Network and value chain eciencies
Collaborative, cost-reducing processes and technologies
Joint venture partnersand alliances
Strategic resources and capabilities
Local communities License to operate
Mutual support and accommodation
Governments Macroeconomic and social policies
Regulatory authorities Validation o product/service characteristics or quality levels
SOURCE: Adapted rom: Post, Preston and Sachs (2002), p. 47.
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Westpac, an Australian bank, and Anglo American, a mining conglomerate, are two
companies that have attempted to understand and explain how they benet rom
better relations with stakeholders and increased social capital. Many companies nd
that strengthening societal relationships directly helps business operations. Healthysocieties are more likely to support strong economies with thriving companies.
Graphic 2: How Valuing Community Stakeholders Benefts an Australian Bank
SupportinG the
coMMunity
REGULATORY AND
OPERATIONAL RISK
PEOPLE VALUE
EMPLOYEE ENGAGEMENT
FINANCIAL VALUE
REPUTATION
SOURCE: Adapted rom Westpac 2006 Stakeholder Impact Report, pg 51
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Reduc ing Risk
Businesses can reduce nancial, reputational, and political risks by engaging
with stakeholders. This may be particularly true o companies with highly visible,prominent brands, which can be more
vulnerable to reputational risk.
Understanding the concerns and interests
o employees, customers, NGOs,
politicians and business partners helps
a company to manage environmental
and social expectations better, resultingin reduced risk o brand assassination,
improved access to capital and
insurance, cost savings and reduced
vulnerability to regulatory changes. Engagement helps companies understand
stakeholders changing expectations and needs and helps to identiy issues that
could become critical or simply lead to changes in the way a business operates.
Tapping Opportunit ies for Innovat ion
Where there is risk, there is also opportunity. Because engagement gives companies
a better understanding o the society in which they operate, it can provide a platorm
or better understanding o how to improve services and products to meet changing
consumer needs. It may also be a way to get a dierent point o view about
corporate operations, which could lead to ideas or improvement.
Moving beyond what are thought o as core stakeholders, to engage with ringestakeholders those who are disconnected rom or invisible to the company
can provide even more opportunities or innovation. Hewlett-Packards Living
Lab provides inormation technology to rural Indian villagers, but it also allows the
company to see how this ringe stakeholder group uses technology. In the long
run, the company believes the Lab will help it design products or consumers
in developing countries. In Bangladesh, Pro. Muhammad Yunus interactions
with poor Bangladeshis led him to reconsider some o the basic premises o
conventional banking in setting up Grameen Bank. As a result, he invented theconcept o micronance, or which he won the Nobel Peace Prize in 2006.
oe, e ct he
heth ecm d heth
d sstibe bsiesses i
cted sciet.
SIr MarK MooDy-STuarT,
Chim, ag ameic
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engaging wiTh sTakeholDers To revolUTioniZe a bUsiness
Beore privatization, piped water reached only about 60 percent o the households
in the Philippines capital city, Manila. Even worse, the public water utility lost about
two thirds o the water in its system to leaks and unauthorized connections, which
contributed to pressure and service problems or paying customers.
When Manila Water Company won the concession or water and wastewater
services or the eastern hal o Manila, it launched a Walk the Line in which all
company sta visited with customers. Consultations included residents o inormal
settlements (IFC, May 2007).
Stakeholder engagement and cooperation was integral to improving service across
the utilitys service territory. By working with and helping to organize residential
cooperative groups, Manila Water was able to install mother meters serving
an entire community. The whole community is now held accountable or water
consumption and individual amilies pay community representatives.
Manila Waters customer base grew rom 325,000 households in 2004 to more
than 1,000,000 in 2006. At the same time, losses to unauthorized connections
plummeted, and customer satisaction with service reached 96 percent in 2006rom only 3 percent in 2001 (Sutton, 2007).
The Case for Engaging Ear ly , Of ten and In terac t ive ly
Without engaging stakeholders in strategic conversations, management runs the
risk o developing a very management-centric, limited perspective o the company,
its capabilities and its potential. In his book, Why Smr ecuvs Fl, Sidney
Finkelstein, a proessor at the Tuck Business School at Dartmouth University,
describes this mentality as one o the most common triggers or catastrophic
management ailure.
Companies can become inward looking when directors are too closely aligned with
top management, top management only communicates with middle management
and middle management is rewarded or reinorcing what top management wants
to hear. Oten, opportunities or strategic innovation are only discovered through
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bypassing business level management and allowing inormation to fow between
top management and outside stakeholders.
Eective stakeholder engagement promotes corporate learning and innovation. Thisis possible when the engagement is transparent, inclusive and responsive, and is
undertaken with the intent that useul inormation will be applied. I companies think
about critical stakeholders as a strategic asset, a source o inormation and learning
that can be a competitive advantage in shaping and inorming the direction o the
company, then it makes sense to engage with stakeholders early and oten to build
trust and understanding through dening mutually understood shared values that
address their respective interests.
Reactive engagement, or engaging with stakeholders only when there is no other
alternative in a crisis situation, attempts to rebuild a corporate reputation with
stakeholders that was never very strong to begin with. In contrast, proactive and
interactive engagement reduces the possibility o a reputational crisis, and builds
goodwill and a sense o cooperation with stakeholders that can be an asset in a
crisis situation (Hemphill, 2006).
Table 3: Continuum o Stakeholder Engagement
dg eggm Mgm Bv
iv Unilateral decision-making, ignoring stakeholder concerns
rv Management only engages deensively when orced to
pv Management attempts to anticipate stakeholder concerns
iv Company has ongoing relationships o mutual respect,openness and trust with stakeholders
SOURCE: Adapted rom Hemphill (2006)
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shell TUrns Crisis siTUaTion inTo a sTakeholDer relaTions
viCTory
In August 1999, the Italian oil tanker Laura DAmato was discharging its crude oil
cargo at Shells Gore Bay Terminal in Sydney, Australia, when, or reasons unknown
at the time, 300 tonnes o oil was spilled into the harbour. Shells Gore Bay Terminal
in Sydney Harbour has been operated by Shell since it was opened in 1901 and
receives between 85 and 100 ships a year.
Gore Bay and other commercial activities in Sydney Harbour have been continually
targeted by pressure groups who believe commercial activity is a threat to the
harbours value as an international tourist destination. These groups argued that
commercial shipping should be removed and the harbor reserved or recreationaluse only. Shell and others maintained that Sydney Harbor has always operated as a
working harbor and should continue as such.
Aware that the risk o a spill or other environmental problem could threaten Gore
Bays licence to operate, Shells External Aairs team devised a stakeholders
communications plan in the late 1980s. This involved creating and maintaining a
community consultative committee with local residents and other interested groups.
The plan also involved Shell sta building dialogue channels with NSW politiciansand key public servants about company activities.
The spill seriously threatened Shells reputation and business. Mishandled, the crisis
could ruin stakeholder relations and encourage the government to stop commercial
shipping in Sydney Harbor. A halt on shipping would directly aect Shells Gore Bay
terminal and Clyde renery which supplies ty percent o New South Wales uel
requirements.
T p:
md Shell held a press conerence at the site only three hours ater the
spill was rst discovered. The rst media release was widely distributed shortly
aterwards. A series o six media releases ollowed over the next two days as
the crisis developed. Background inormation sheets on Gore Bay Terminal and
Shells shipping operations were also sent to all media. Shell spokespeople were
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pro-actively oered or radio and television interviews, media briengs, one-to-one
phone conversations and personal interviews throughout the crisis.
gt Shell sta contacted senior advisers or the relevant ministers and
government departments on the night o the spill. The next day, personal briengs
by Shell senior management were instigated, including a brieng or the NSW
Premier by Shells CEO. Follow-up letters with additional background inormation
were sent to all government contacted. Shell also initiated the oer to co-operate
ully with a government inquiry.
std A personal letter rom the Gore Bay Terminal manager was hand-
delivered to local residents beore dawn on August 4. Three ollow-up letterbox
drops were organised over the next week. Non-government organizations (NGOs)
were contacted by phone to discuss the spill.
ep An e-mail to all Shell Australia sta was distributed at 3am on the
night o the spill so employees were updated as soon as they arrived at work the
next day. Follow-up voice mail messages and e-mails were sent to all sta inorming
them o developments over the next week. Ater the oil spill clean up, a letter o
appreciation was sent to all employees and contractors involved.
g puc d cut Additional sta were employed at Shells
Clyde renery to handle the increased number o switchboard calls rom the general
public. Shells customer service centre was ully brieed on how to respond to oil
spill queries rom customers. All media releases were posted on Shells Internet web
site. The media releases web page received 300 percent more hits in August than
the normal monthly average.
T ut:
Shells rapid and comprehensive response to the crisis has had reputational as well
as tangible business benets. Shell received widespread praise including awards or
crisis communications. There was no discernible impact on sales during the crisis,
long-term business damage was avoided and Shells reputation with stakeholders
was actually enhanced.
SHELL TURNS CRISIS SITUATION INTO A STAKEHOLDER RELATIONS VICTORY(COntinUed)
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Support rom the local community was immense. Many residents and local groups
openly praised Shells involvement and relationship with them. Ater the crisis, Shell
recorded higher than average attendance at the community consultation committee
meetings and the next Gore Bay Terminal open day.
During and ater the crisis, the NSW Premier Bob Carr announced that Sydney is,
and will continue to be, a working harbor that allows commercial shipping trac. He
ruled out closing Sydney Harbor either permanently or temporarily and said moving
Gore Bay Terminal was not an option. Today, Gore Bay continues to operate as a
receiving and storage acility or Shell.
SOURCE: Adapted rom case study by Helen Morgner, External Aairs Ocer, Shell Australia Limited,
www.gri.com.au
engaging wiTh ConservaTionisTs anD CommUniTies affeCTeD
by mining
Ater 20 years o preliminary study, engagement, and orming partnerships, Rio
Tinto invested $775 million in operations in southern Madagascar to extract ilmenite,
a white pigment derived rom titanium ore, which has many industrial applications.
A great deal o time and eort went into understanding the social and environmental
issues related to the titanium extraction project because Madagascar not only has
one o the worlds richest ecosystems, it also has one o the most impoverished
populations.
Southern Madagascar has long been identied by conservationists as one o the
top biodiversity hot spots on the globe, with thousands o rare plant and animal
species. To develop the mine, the company had to relocate 80 households and
provide compensation to another 510 amilies that would be aected by mining
activity. NGOs also voiced concerns about some 50,000 people living near the
proposed site, saying an infux o migrant workers may exacerbate the spread o the
HIV/AIDS virus.
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Local priorities, such as livelihoods and cultural heritage, are not always shared
by conservationists. Consequently, stakeholder engagement and constantcommunication is needed to reconcile dierences. Early on, Rio Tinto set out to
learn about the local cultural and
economic environment to try to
determine how the project could
be integrated into the local society.
Since Rio Tinto plans to operate
the mine in Madagascar through
its QMM subsidiary or at least 40
years, it developed a community-
relations strategy based on mutual
respect, active and reciprocal
partnerships, and a long-term
commitment to the community.
The companys interest in integrating
the mine with the local community
is demonstrated by a special
co-management agreement or
renewable resources. Ater months
o public consultation, the agreement was signed by Madagascars government
and Rio Tinto representatives in 2002. The agreement involves the local population
in the sustainable management o their renewable natural resources, and is
reinorced by a DINA, a uniquely Malagasy social contract traditionally entered into
in order to manage a potential source o social confict. DINAs are widely applied
in Madagascar and have come to be legally recognized. More importantly, asthey are anchored in custom and tradition, they render legal agreements culturally
acceptable.
To make sure that the mine has a positive impact on Madagascar, beyond direct
employment and tax revenue, Rio Tinto is sponsoring project enterprise and
micronance programs to support the development o local SMEs, and considering
ways to build the capacity o local communal and government groups.
ENGAGING WITH CONSERVATIONISTS AND COMMUNITIES AFFECTED BY MINING (COntinUed)
It is thgh cstti with
ected cmmities tht we e
be t destd d mit
the eects petis.Wht is imptt is tht thse
i ected cmmities he
eibe mechism bigig
isses cce d iteest t
tteti.
www.itit.cm
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The company has also partnered with environmental groups to nd ways to
manage the impact o the mine. In 2004, Rio Tinto developed a corporate
biodiversity strategy in consultation with experts rom conservation and community
development organizations, including the companys biodiversity partners. In 2005,the partners and other organizations continued to assist Rio Tinto to develop a plan
to implement the strategy. It commits Rio Tinto to have a net positive impact on
biodiversity wherever the company works.
For Rio Tinto, globalization spells opportunity combined with the need to engage
better with the communities within which we operate. We recognize the importance
o listening to, understanding and respecting the belies o those who do not
understand or share our views. That takes time and resources, but it is worth the
eort. Done well, it reduces risk and allows us to trade with and develop projects
in nations that, not so long ago, opposed oreign investment and ree trade, said
Charlie Lenegan, Managing Director, Rio Tinto.
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Iv. BEST PraCTICES For ProaCTIvE anD EFFECTIvE
STaKEHolDEr EnGaGEMEnT
There is no single engagement strategy that will work or all companies. Dierenttypes o businesses or operations will have dierent impacts and will thereore
require dierent types o relationships or engagements with stakeholders. A nuclear
power plant will, o course, need to have more substantial interaction with regulators
and community members than a bakery, and producers o highly visible name-
brand products may need to do more engagement than producers o intermediate
products.
This chapter includes an overview o how management should engage withstakeholders on a day-to-day basis. In addition to championing engagement as
a core business value and ensuring that management is engaging in ways that
are useul and meaningul, boards o directors can also be directly involved. As
companies increasingly consider stakeholder issues and concerns when making
decisions, boards may incorporate a stakeholder engagement or governance
model, managing companies to increase value or all stakeholder groups.
General guidelines or management best practice:
stt . Relationships take time to build. Trust and mutual respect are
established over time. Trust is also much harder to build i stakeholders are only
consulted when there is a problem or crisis.
kp p d. The outcome o a truly open and responsive stakeholder
engagement process cannot be dened in advance as solutions that satisy
multiple parties can seldom be guessed at beorehand. Consultation where the
company has already determined their plan o action is likely to be perceived asan untrustworthy public relations exercise.
T t pctc t t d d tt t cp
d t td. Explain what input is needed rom stakeholders and
how it will be used in the decision-making process again, driving the shared
values continuum. Ask or input on how inormation should be disclosed.
m t u uct.Taking a systematic approach
that is grounded in the business strategy and operations increases the likelihood
that engagement will create value. As with other key business unctions, directreporting lines and the engagement o senior management are critical.
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T -t . For issues that are intrinsically related to company
strategy, ongoing dialogue and standing stakeholder bodies can be more
valuable than one time, ad hoc engagement. Publicly disclosing inormation that
is important to stakeholders helps to ensure that ongoing dialogue is useul or all
parties involved.
Ident i fy ing and Pr ior i t iz ing Stakeholders and Their Issues
Because it is neither possible nor desirable to engage with every possible
stakeholder on every conceivable issue, appropriate planning is necessary to
engage strategically, in a way that will
be useul or a company.
Two ways o prioritizing are by
stakeholder group or by issues.
Businesses generally begin engaging
with core stakeholders, those that
have the most legitimate and urgent
issues or those most likely to have
an obvious, direct impact on thebusiness. Another way o deciding
where to begin is looking at issues,
rather than stakeholder groups, and
initiating engagement around issues that are most material to a company.
The ollowing are useul questions to consider when determining how to begin
engaging with stakeholders:
1. Who are our stakeholders?
2. Which groups are voluntary stakeholders (e.g. employees and shareowners)
and which are involuntary stakeholders (e.g. people exposed to pollution
rom operations)?
3. What do we think their interests are?
4. What opportunities and challenges do they present?
5. What responsibilities and obligations (economic, legal, ethical, andphilanthropic) do we have to dierent stakeholder groups?
Becse it is eithe pssibe
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Stkehde Eggemet d the Bd: Itegtig Best Gece Pctices34
6. What strategies, actions, or decisions should we take to best deal with these
responsibilities?
Stakeholders will also decide what issues matter and they will do this regardless ohow company managers prioritize issues. It is essential or management to be open
to stakeholder concerns to understand what they are and to be able to respond to
new concerns when that is appropriate.
Stakeholder mapping involves creating a visual diagram to help analyze and
prioritize stakeholder groups. The graphics below provide an example o a template
that can be used to prioritize stakeholder groups, ranging rom those that most
directly impact a company and are most directly aected to groups within thebroader socio-political environment. Graphic 3 provides a sample template and
Graphic 4 shows how this is used or a specic company.
Note that once a company identies important stakeholder groups, it must then
ensure that engagement takes place with appropriate representatives o that group.
For engagement to be perceived as credible, it should be as open and transparent
as possible. Not all community members will have the same interests or opinions,
or instance. Even shareowners can have very dierent opinions and interests.
Transparent stakeholder engagement allows stakeholders in and between dierent
groups to disagree with each other.
Another way to prioritize stakeholders is to take a list o all stakeholder groups
and consider how strongly they infuence or are infuenced by a company. In the
example below, the strength o the connection between a company and each
stakeholder group is estimated by answering yes or no to seven questions. The
higher the total score, the stronger the connection between a stakeholder group
and the company, and thus the more highly the company is likely to prioritize the
stakeholder groups interests.
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Graphic 3: Prioritizing Stakeholders - Template
Graphic 4: Prioritizing Stakeholders - Royal Dutch Shell
Employees
Unions
Joint Venture
Partners and
Alliances
Local
Communities
and Citizens
Customers
and Users
Regulatory
Authorities
Private
Organizations
Governments
Supply Chain
Associates
Social-Political Arena
Resource
Base
Industry Structure
Social-Political Arena
CORPORATION
Customers
Global
Scope
Quality
Standards
State-owned
Enterprises
Suppliers
Technology
Disposal: Brent Spar
Sustainable
Development
Human
Rights
Identity:
Planet Shell
Layoffs
Global Joint
Ventures
Strategic
Alliances
China
Reputation
Global
Political Norms
Renewable Resource
Technologies
Repressive Governments
as Business Partners
Investors
Resource
Base
Industry Structure
Social-Political Arena
SHELL
Employee
Culture
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Table 4: Prioritizing Stakeholder Groups
STAKEHOLDERS
DOESTHISG
ROUPSTRONGLYINFLUENCE
THECOM
PANYSPERFORMANCE?
ISTHIS
GROUPSTRONGLYINFLUENCEDBY
TH
ECOMPANYSPERFORMANCE?
W
ILLTHISGROUPSTRONGLY
INFLUENCEORBE
STRONGLYINFLUENCED
INTHEFUTURE?
TOTAL
ECONOMIC
ENVIRONMENTAL
SOCIAL
ECONOM
IC
ENVIRONMENTAL
SOCIAL
EMPLOYEES
1
0
1
1
1
1
1
6
CUSTOMERS
1
1
1
0
0
0
1
4
LOCALCOMMUNITY
INVESTORS
SUPPLYCHAIN
SOURCE:thegRiSusnblyRepornCycle:aHndbookforSmllOrnzons,
2007,p.2
7
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Deciding Which Issues are Mater ial to Stakeholder
Engagement
In accounting, inormation is considered material i its omission or misstatement
could infuence the economic decision o users taken on the basis o nancial
statements. For the purposes o stakeholder engagement, material inormation
is anything that, i unknown or misunderstood, would prohibit management or
stakeholders rom making sound judgments and taking appropriate action.
One tool or helping to dene the materiality o issues is AccountAbilitys ve part
materiality test. To help with engagement planning, this test can be used to rank
issues as being o high, medium, or low materiality in the ollowing ve areas:
Issuesthathavedirectshort-termnancialimpacts
Issueswherethecompanyhasagreedpolicystatementsofastrategicnature
Issuesthatcomparableorganizationsconsiderwithintheirsphereofmateriality
Issuesthatthecompanysstakeholdersconsiderimportantenoughtoacton
(now or in the uture)
Issuesthatareconsideredsocialnorms.
O course, a company may underestimate the importance o a particular issue to
a key stakeholder group. Materiality rankings give some indications about where
to begin an engagement process, but the dialogue may change in response to
new inormation about stakeholder concerns. While the goal is to be transparent
and open, an enterprise may also decide that there are some issues that it cannot
discuss publicly, even i these issues are closely related to operations or stakeholder
interests. This might include proprietary inormation that is valuable to the companyor issues that are under review by courts or government authorities.
Ways to Engage: Methods and Channels
Consultation tends to be a one-way fow o inormation, where a company solicits
input rom stakeholder groups. Dialogue is a more robust conversation. It gives
companies an opportunity to provide context or their operational issues, and
also means recognizing the potential or engagement to infuence the behavior o
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regulators, investors, consumers, competitors, and suppliers. For stakeholders that
are most closely linked or impacted by a company, ace-to-ace meetings are most
appropriate. Open houses, public orums and disclosure may suit the needs o
other stakeholder groups.
While ad hoc stakeholder engagement is generally less valuable than ongoing
engagement that develops relationships and trust, it may be useul in the early
stages o engagement as a way to get more inormation about stakeholder interests
and nd appropriate representatives o stakeholder groups with which to engage.
Formal engagement can take many
orms, rom partnerships with NGOs,to ormal community engagement
programs or advisory bodies.
Advisory bodies are oten helpul in
extractive industries projects, where a
standing advisory body can serve as
representatives or local communities
impacted by mines or drilling. In such cases, a company may have an ongoingrelationship with a community or decades, in which case it is worthwhile to develop
an ongoing orum to acilitate communication and address concerns.
One nancial services company that uses a standing advisory body is Australias
Westpac. The companys chie executive ocer annually convenes a Community
Consultative Council, which is comprised o representatives rom 20 diverse
stakeholder groups. Each participant is invited to highlight emerging concerns or
trends and propose how the bank should address them and how much relevance
the bank should attach to the issue.
Dierent types o stakeholders will have dierent preerences or how they preer
to interact with a company. It can be helpul to ask stakeholders how they wish to
engage, what inormation they would like and what their expectations are or the
process.
Cstti teds t be e-
w fw imti, whee
cmp sicits ipt m
stkehde gps. Dige is
me bst cesti.
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The table below lists all o the ways that Anglo American engaged with various
stakeholder groups during 2006.
Table 5: Channels Anglo American Uses to Engage with DierentStakeholder Groups
ex Ss k cs eggm 2006
ivss Results presentations and road shows, annual presentations,sustainable development presentations, bilateral meetings andsurveys
Gvms Direct engagement and through industry associations, nationalpartnerships, international partnerships
i
gzs
Membership o UN Global Compact, ICMM, WBCSD andGlobal Business Coalition on HIV/AIDS, EITI, VoluntaryPrinciples on Security and Human Rights. Dialogue with theInternational Finance Corporation, the World Bank and UN
cmms Community engagement plans, socio-economic assessmenttoolbox, various public orums and meetings, impactassessments, complaints procedures and whistle-blowing