5 basic principles for effective stakeholder governance

How do boards ensure key stakeholders are involved in decision-making? A new AICD guide for directors offers insights on good stakeholder engagement practices.

As June Oscar AO, Aboriginal and Torres Strait Islander Social Justice Commissioner with the Australian Human Rights Commission, puts it, “For too long, corporations have existed in a bubble, disconnected from other stakeholders, including Indigenous Australians. Organisations can no longer operate in this bubble. They must be informed and clear about their responsibilities.”

David Gonski AC FAICDLife, former ANZ chair, says directors don’t have to agree with the views of stakeholders being put forward. “It’s not a black- and white-exercise. Directors need to simply inject themselves into the issues being raised.”

Stakeholder governance requires organisations to identify, engage with and understand stakeholder perspectives on key issues, then reflect on how they should be addressed in decision-making. Done well, it strengthens an organisation and ensures its long-term success — to the benefit of shareholders and stakeholders. Done badly, it can increase an organisation’s financial and non-financial risk profile and lead to major reputational damage.

Maintaining a clear and consistent dialogue with stakeholders better equips organisations to understand the environment in which they operate. Benefits include knowledge sharing, effective decision-making and increased mutual trust, improved risk management and accountability. It can also lead to reduced costs and create value.

While addressing stakeholder concerns can involve additional costs, over the longer term these may be offset in other ways. For example, lower compliance costs and a platform for product and service improvement and innovation.

Elevating stakeholder voices to the board: A guide to effective governance is based on interviews with stakeholders including customers, employees, suppliers and directors. Its focus is on non- shareholders. We outline the role of the board, key principles and best practice.

The board role

Directors have duties at law in Australia to act in good faith and the best interests of the organisation. Traditionally, this duty has been understood as owed to shareholders as a whole. However, it is increasingly recognised that the best interests of an organisation cannot be isolated from the interests of its stakeholders, including the community.In most organisations and circumstances, management should lead day-to-day stakeholder engagement. However, the board should create a culture that puts stakeholders at the centre, ensure it has access to accurate and independent information about stakeholder perspectives and engage with key stakeholders as appropriate. At the heart of this should be organisational openness for two-way dialogue rather than an attempt to “communicate” through tension points. Relationships must be enduring rather than ad hoc and transactional.

A board’s approach will be tailored to the purpose, size and nature of the organisation, and the stakeholders involved. Boards of smaller organisations may not have established a formal framework for stakeholder governance, nor undertaken a deliberate identification exercise. However, even the smallest organisations will have important stakeholder relationships and can benefit from applying the principles outlined below.

Five key principles for effective stakeholder governance

1. Stakeholders and organisational purpose

Stakeholders are groups with an interest in an organisation who are likely to be affected by the actions of an organisation, or whose actions can impact the operation or business model. Investing time in identifying and prioritising stakeholders and assessing their interests forms the basis for effective stakeholder governance. This is a dynamic process, and stakeholder groups and their priorities may evolve over time. Board and management should regularly review the stakeholder map.

Key questions for boards

• Which groups are vital to the organisation’s long- term success and what are their interests?
• Which stakeholder group(s) are likely impacted (positively or negatively) by the actions of the organisation?
• Does the organisation need to reassess its key stakeholders? How often should this be done?

2. Vision

Boards should consider overseeing the development and adoption of a formal framework to guide the company’s stakeholder engagement activities. This will identify why stakeholder governance is important and ensure the board incorporates stakeholder perspectives into its decision-making and other governance processes. SMEs and NFPs may not need a formal framework, but should be asking themselves these questions.

Key questions for boards

• Does our organisation need a formal stakeholder governance framework? Do existing governance frameworks ensure our information needs are met in terms of stakeholder perspectives for decision-making, management oversight and risk management?
• Does our vision for stakeholder governance connect to the organisation’s values?
• Is it clear who is responsible for engaging with each stakeholder group and when?

3. Engagement

Most stakeholder engagement occurs at the management level. To provide effective oversight of management, the board must ensure it is receiving timely and accurate information about stakeholders. There may be circumstances where the board determines it should engage directly with stakeholders. The board must consider what form of engagement is most appropriate for the stakeholder group, not just the board.

Key questions for boards

• Should it be directly engaged with a particular stakeholder group or on a particular issue?
• Is the engagement with each stakeholder commensurate with their importance?
• Is the engagement with a particular stakeholder tailored to that group?

4. Decision-making

The board can take practical steps to ensure sufficient consideration is given to stakeholder perspectives, including requesting that board papers address stakeholder perspectives and impact, schedule meetings with stakeholders as part of regular board meetings or strategy days and delegate responsibility for specific stakeholders/ issues to board or advisory committees.

The board should also consider if it is necessary to communicate decisions with an impacted stakeholder group and how best to do so.

Key questions for boards

• How does the decision-making process reflect stakeholder perspectives?
• Is it getting the right information about stakeholders (for example, do board papers consider the “stakeholder impact”) and do we allocate sufficient time to consider these issues?
• Does it have the right structures to enable a deep dive on key stakeholders and/or issues (for example, would an advisory committee support decision- making processes or does the board have a board committee that explicitly encapsulates stakeholder impact in its remit)?
• How should it report on and/or communicate decisions to impacted stakeholders?

5. Evaluate

It is important to assess the effectiveness of the organisation’s stakeholder governance and adjust as necessary. This should be led by management with board oversight. Directors may consider commissioning an external party to undertake an evaluation of the health of stakeholder relations. Key questions for boards:

• Does it regularly review the effectiveness of the organisation’s stakeholder governance strategy?
• What independent, external data speaks to our relations and stakeholder impact?
• Should it engage an external party to assess the state of our stakeholder relations?

Hallmarks of good stakeholder governance

There is no one-size-fits-all approach. A common thread is that successful boards have curious directors who take a genuine interest in the various facets of the environment in which the organisation operates. Through their purposeful inquiry into the perspectives of the company’s employees, suppliers, customers and other stakeholders, curious directors are invariably better placed to make informed decisions about the long-term future of the organisation. Key observations include:

• Directors that demonstrate an aptitude for stakeholder relations should also understand their own prejudices. It is critical that directors do not think they understand an issue based on their life outside the boardroom. When a director has an awareness of their own motivations, biases and moral preferences they can bring a greater understanding to the board table, which in turn results in better decision-making.
• Engagement should be respectful, enduring, transparent and timely, the board acknowledging the expertise, perspective and needs of stakeholders.
• Boards must take steps to ensure they have the best possible information (including stakeholder perspectives) to inform the development of the strategy. Strategic decisions will range in scale and scope and may include decisions to enter a new market or withdraw a long-standing product, for example. In making such decisions, the board will need to have regard to the impact entering a new market will have on the local community or how the withdrawal of a product will affect customers.

Adapting the board’s engagement

Stakeholder representatives who AICD consulted highlighted the need for boards to design their stakeholder engagement programs around the interests and needs of each stakeholder group, rather than adopt a standardised approach.

Customers

Boards must understand the limitations of customer experience metrics. Taking steps to understand the worst experience customers have via qualitative data may help boards uncover hidden issues. There is value for boards in creating opportunities for direct engagement with actual customers.

It can humanise the challenges some customers may face and reconnects the board with the organisation’s purpose. Customer engagement at board level often includes customer advisory committees, briefings with customer advocates/ advocacy groups and starting a board meeting with a “customer moment”.

Employees

Boards often have greater opportunities for engaging directly with employees than other stakeholder groups do. Directors should make the most of this access, particularly to get their own lens on culture. Employees can be a conduit to understand the needs of other stakeholder groups such as consumers, suppliers and the broader community.

Most fundamentally, they may be able to alert boards to latent risks well before senior management is aware of them. Types of employee engagement include “town hall” meetings, site visits, inviting employees at various levels to meet with directors and workforce advisory committees.

Suppliers

Respectful relationships with suppliers can have a significant impact on an organisation’s profitability over the longer term. Boards should remain alert to significant power imbalances between big business and small suppliers, particularly around unfair contract terms and payment terms. Boards should set expectations for reporting and probe management on supplier complaints and outstanding payables.

ACON

In some cases, although uncommon for listed companies in Australia, an organisation may determine to formally appoint a stakeholder representative to the board. This is often facilitated by reserving or requiring a board position be appointed from a particular stakeholder group, such as an employee-elected representative or, in an NFP context, a beneficiary of the organisation’s services. For example, ACON, a leading HIV prevention organisation, constitutionally mandates that a person with an HIV seropositive status sits on the ACON board.

Collins Foods

Collins Foods, the largest franchisee of KFC stores across Australia, employs more than 10,000 teenagers. At the height of COVID-19, different social distancing rules applied across states and territories, causing significant disruption to how in-store dining and takeaway at KFC stores could be managed from staffing and food safety perspectives.

Chair Robert Kaye led a direct communication campaign, calling close to 200 employees randomly selected from different levels within the company, to check on how the new protocols were being received, check on frontline employees’ wellbeing and, most importantly, learn what practical and moral support the organisation could provide.

OZ Minerals

OZ Minerals defines its strategy around five stakeholder groups: shareholders, suppliers, staff, government and community. All decisions and KPIs are assessed against value creation for these five stakeholders.

To ensure all stakeholders have an opportunity to meet and interact, OZ Minerals holds an annual stakeholder day in which it brings together 300 people representing all stakeholders to their premises in Adelaide. While this is largely management-led, board members participate in the stakeholder days.

IAG

Insurer IAG has a Consumer Advisory Board led by the CEO, with the CEOs of customer advocacy organisations participating. The chair attends as an observer and directors are encouraged to attend.

The committee provides the board with the opportunity to hear directly from customer advocates about vulnerable and disadvantaged customers, an important subset of customers.

According to the Consumer Action Law Centre’s Gerard Brody, “For customer advocates like us, IAG’s consumer advisory board is a venue where senior management and board directors can better understand customer vulnerability and the experience of a customer’s engagement with their business.”

Indigenous peoples

Boards should ensure an organisation fosters genuine, ongoing connections with Indigenous communities, mindful of historical actions and broader injustices suffered by First Nations peoples. Boards should be ready for raw and direct feedback. Indigenous advocates suggest organisations have regard to the UN Declaration on the Rights of Indigenous People, which calls for free, prior and informed consent.

ESG issues

The board should ensure steps have been taken to understand if human rights risks exist in the organisation or its supply chain. Similarly, the board should ensure environmental issues are given serious consideration. Management should be empowered and resourced to do this. Consultations with communities or “rights holders” should consider language and cultural barriers to effective engagement, which should occur early in any decision-making process.

Community

This encompasses a wide range of stakeholders. The board should remember that engaging with this vast group of stakeholders can improve an organisation’s decision-making, reputation and competitiveness. Boards should note the community may have a sceptical view of the organisation and efforts to engage with them may be dismissed as disingenuous public relations.

The role of the chair

The chair plays a vital role and is responsible for communicating the views of the board, in conjunction with the CEO, to shareholders/members, broader stakeholders and the public. The chair may lead engagement with key stakeholders where necessary. For example, the chair may have one-on-one meetings with key stakeholders or let employees know that he/ she is open to hearing grievances directly, particularly where these relate to any improper behaviour on the part of senior management.

The chair can then decide whether to raise the concerns with management or bring them to the board for broader investigation on a confidential basis. In addition, the chair should be considering:

• Is the board receiving appropriate information about stakeholders?
• Are directors aware of emerging stakeholder issues?
• Is sufficient time allocated to considering stakeholder perspectives in decision-making?

Indigenous engagement

Boards have a responsibility to ensure stakeholder voices that are not ordinarily heard have such an opportunity. Indigenous communities undeniably fall into this category. The destruction of ancient Aboriginal rock shelters at Juukan Gorge by Rio Tinto is just one example of the Indigenous stakeholder voice being lost or ignored in a corporate decision-making process.

Organisations need a principled approach to engagement with Indigenous people, and the board must ensure this forms part of a stakeholder governance vision. Organisations must engage early and invest in the relationship. A “tick-a-box” approach to engagement led or managed by a corporate affairs team with limited board/ management oversight is unsatisfactory. It can be perceived as disrespectful and meaningless.

Taking time to understand traditional owner or Indigenous community protocols and timelines for consultation is also critical for effective engagement. Engagement should be ongoing and genuine, not just when a specific approval/consent is needed. According to one stakeholder representative, “Boards must acknowledge there is still a lot of trauma in the room and be accepting of and ready for the rawness of the feedback”

Interviews have identified that traditional owners value direct board-to-board engagement. This should occur “on Country” and does not need to be frequent. Engagement should not be overly formalised and “minders” — corporate affairs or legal representatives — should be left behind.

What directors say

Legal duties

Under both the common law and Corporations Act 2001 (Cth) (Corporations Act), directors owe duties to the company as a distinct legal and commercial entity to:

• Act in good faith in the best interests of the company
• Not use their position or information as a director to gain an advantage or cause detriment to the company.

Similar duties are owed by directors of state-based incorporated associations and other non-Corporations Act entities. Responsible persons of registered charities also owe similar duties under the Australian Charities and Not-for-Profit Commission (ACNC) Governance Standards.

While there is no explicit duty to take into account stakeholder interests, equally there is no obligation to pursue short-term profit. Directors have considerable latitude to make decisions they consider will be in the long-term interests of the corporation, and will often take into account the interests of stakeholders in doing so.

Resources

• AICD Director resource: Elevating stakeholder voices to the board: A guide to effective governance 
• AICD General duties of directors
• AICD and Australian Council of Superannuation Investors joint research report: Governing company culture: Insights from Australian directors
• UN Guiding Principles on Business & Human Rights
• AICD Modern slavery resources: Modern slavery risk oversight & Signing off on modern slavery statements 

Timby

Boards operating in remote communities can use TIMBY to quantify their organisation’s impact.