Recent governance failures at companies such as Rio Tinto and AMP show the risks and damage caused when decisions are disconnected from stakeholder interests, according to a new guide to stakeholder engagement by the Australian Institute of Company Directors (AICD).
Because directors have a duty to act in the best interest of the corporation and have the discretion to determine what is in the long-term interests of the corporation, it is "all the more important for directors to carefully consider the inputs, particularly those external to their organisation, required to arrive at well-informed, value-creating decisions," AICD says in the guide.
Boards need to understand the environment in which their organisation operates, including the interests and concerns of their stakeholders, in order to govern effectively, says AICD CEO and Managing Director Angus Armour.
"Over the past year we have seen examples of the damage that can be done when the stakeholder voice is lost in corporate decision-making," Armour says. "It's important that directors take the long view and carefully consider inputs, particularly those external to their organisation, required to arrive at well-informed, value-creating decisions."
The guide defines stakeholders as "groups that have an interest in an organisation, are likely to affect or be affected by the actions of an organisation, or whose actions can impact the operation or business model." In writing the guide, AICD derived insights and advice from customers, employees, suppliers, Aboriginal and Torres Strait Islander people, as well as activists and community groups on matters such as climate change, human rights and workforce culture.
The guide notes that management should lead day-to-day stakeholder engagement, but the board's role is to create a culture that puts stakeholders at the centre, ensures that it has accurate and independent information about stakeholder perspectives and engage with key stakeholder directly.
"At the heart of this should be organisational openness for two-way dialogue rather than an attempt to 'communicate' through tension points," the guide notes. "Relationships must be enduring and mutually respectful, rather than ad hoc and transactional."
The guide defines effective stakeholder governance in five steps - identifying, prioritising and regularly reviewing the organisation's stakeholder with regard to purpose and strategic objectives, developing a vision for the board's role in stakeholder governance, engaging with key stakeholders to understand, consider and respond to issues, considering stakeholder voices as part of the board's decision-making processes, and evaluating and monitoring the ongoing effectiveness of the organisation's stakeholder governance.
The AICD also outlines general principles for building open and respectful relationships with stakeholders, including that engagement should be, enduring and timely. They should also "involve recognising that there are discrepancies in power and capability between an organisation and a stakeholder group," and they should be transparent, including reporting back on the outcomes of stakeholder engagement processes.
"It is hoped that our guide will provide an effective framework for stakeholder governance to play a part in that process," Armour says.