Hearing stakeholders’ voices in the boardroom
Joint guidelines on how company boards should take stakeholders' interests into account in their decision-making have been released in the UK by the Investment Association (IA) and ICSA: The Governance Institute.
The guidelines, The stakeholder voice in board decision-making, are not mandatory. Instead, they set out ten core principles that should guide the board’s approach when making decisions and engaging stakeholders, including pension funds.
They also acknowledge that there is no ‘one size fits all’ approach and leave it up to companies to choose the best approach for them.
The ten core principles are:
- Boards should identify, and keep under regular review, who they consider their key stakeholders to be and why.
- 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 chair, supported by the company secretary, should keep under review the adequacy of the training received by all directors on stakeholder-related matters, and the induction received by new directors, particularly those without previous board experience.
- The chair — supported by the board, management and 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 guidelines follow the UK government’s release last month of reforms designed to improve corporate governance. These include boards having to publish the pay ratio between the CEO and their average UK worker, as well as a public register to name companies with significant investor opposition.
UK business minister Margot James says a crucial part of those reforms include ensuring 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.’
Investment Association CEO Chris Cummings believes the guidelines should promote long-term value creation for investors.
‘Investors want companies to take decisions which will generate the best long-term value to their shareholders,’ he says. ‘To make such decisions, boards need to hear and take account of the views of their shareholders. Failure to do so could impact on the future success of the company.’
Similarly, ICSA: The Governance Institute CEO Simon Osborne adds: ‘If taken seriously, stakeholder engagement will strengthen the business and promote its long-term success, to the benefit of stakeholders and shareholders alike.
‘Paying lip service to engagement is of limited value to anyone and I would urge the boards of all companies, whether listed or privately owned, to carefully consider the principles laid out in the new guidance.’