Stakeholder Engagement

Reviewing the sustainability impacts of the product or service range

Source: Accounting for Sustainability

Key Challenge

1. Failure to identify and engage with stakeholders is likely to result in sustainability reports that are not suitable and, more damaging, that lead to poor performance by (a) damaging customer satisfaction and perceptions, (b) adversely affecting employee motivation and morale, (c) damaging relationships in the supply chain, and (d) possibly compromising an organization's reputation with the wider community.

2. Balancing stakeholder expectations in a way that does not compromise the long-term sustainability of the organization.

Background

Stakeholder engagement is a process for informing and making decisions in conjunction with different stakeholder groups (see Caption 5). Discussions with stakeholders help to highlight particular interests and concerns. Organizations with highly developed stakeholder engagement tend to be better at anticipating issues and dealing with them proactively. They are then in a position to report on how they have dealt (or not as the case may be) with stakeholders' interests and expectations. One of the Global Reporting Initiative (GRI) reporting principles (for defining content) featured in its Sustainability Reporting Guidelines is stakeholder inclusiveness:

The reporting organization should identify its stakeholders and explain in the report how it has responded to their reasonable expectations and interests.

Where organizations align social, environmental, and economic performance with strategic aims and objectives, rather than simply react to external pressure, stakeholder engagement can lead to broad business and sustainable development benefits that clearly outweigh the effort required. Potential benefits of integrating stakeholder engagement at the strategic level include pooling of resources that can help all parties to gain insights and knowledge, solve problems, and reach goals and targets that none of them could reach alone.

Stakeholder engagement can also bring dilemmas and pose challenges on how to manage the trade-off between stakeholder expectations. Organizations require a process and criteria for managing these trade-offs, and for ensuring that they are both profitable and sustainable.

Key Considerations

Reinforce the importance of stakeholder engagement: it helps to
(a) identify all the sustainability issues and responsibilities of the organization (b) systematically analyze the organization's impact upon (and influence exerted by) stakeholders, and (c) determine the organization's key risk areas. Above all, working in partnership to act sustainably, and to ensure that sustainable development is built into relationships with partners and others in the value chain, helps to demonstrate how an organization is embedding sustainability within its business. The process of identifying significant, material and relevant environmental and social issues is covered in Improving Information Flows to Support Decisions.

Establish a systematic and carefully planned approach to entering a dialogue with stakeholders: UNEP's two-volume 2005 Stakeholder Engagement Manual provides extensive guidance, taking organizations through basic steps and considerations in planning and developing stakeholder engagement (see Caption 6). A systematic process can be fostered by a stakeholder model that identifies stakeholders and communication with them. For example, in its 2006 Sustainability Report, Dell included a Stakeholder Model.

Integrate stakeholder engagement into strategic management processes: For example, HP integrates stakeholder engagement into its core business strategy and states on its website that, We seek relationships and alliances with stakeholders to provide insightful and constructive feedback on our global citizenship programs and help us to progress our efforts. We focus on HP's priority issues, and engage in other areas as well. We identify appropriate stakeholders by assessing their expertise on the subject matter, their willingness to collaborate with business, their reputation, location, and their relationship with government bodies and other stakeholders. Then, we determine the appropriate level and form of engagement.

Ensure that ongoing stakeholder engagement initiatives are practical: For example, as part of its annual sustainability reporting, Baxter Healthcare provides the opportunity for feedback on its sustainability programs and annual reporting via an online survey.

Recognize that no stakeholder constituency can be fully satisfied: decision-making requires an approach that can deal with the trade-offs between stakeholder expectations. Developing an enlightened form of value maximization to help manage trade-offs between stakeholder expectations was argued by Michael Jensen (Value Maximization, Stakeholder Theory, and the Corporate Objective Function, Journal of Applied Corporate Finance, 2001) as a means of solving the issues presented by the multiple objectives of different stakeholders. The premise of this approach is that it is not possible to maximize in more than one dimension (so that multiple objectives is no objective), and that long-term total company value maximization makes society better off. An approach to enlightened value maximization includes the following guidance: invest an additional dollar in each stakeholder as long as the present value of expected benefits from that investment continues to equal at least a dollar. This recognizes that the long-term market value of an organization cannot be achieved if an important constituency is ignored or mistreated. This approach provides management with a principled decision criterion that allows for stakeholder engagement and the pursuit of social welfare, but within the context of seeking to understand value and how it can be achieved.

Ensure that a wide range of employees have the knowledge and 'soft' skills to deal with the challenges of understanding and balancing stakeholder expectations:
Working with a range of stakeholders with different perspectives can present complex dilemmas as well as directly affect long-term business success. International Education Standard 3: Professional Skills and General Education usefully sets out the key components of interpersonal and communication skills that all professional accountants should possess. These include the ability to: (a) work with others in a consultative process, to withstand and resolve conflict; (b) work in teams; (c) interact with culturally and intellectually diverse people; (d) negotiate acceptable solutions and agreements in professional situations; (e) work effectively in a cross-cultural setting; (f) present, discuss, report and defend views effectively through formal, informal, written and spoken communication; and (g) listen and read effectively, including a sensitivity to cultural and language differences.

The process of stakeholder identification and the current practice in this area is also usefully covered in the Institute of Chartered Accountants in England and Wales' 2004 report Sustainability: the role of accountants. This also highlights the valuable role accountants can play in encouraging the effective engagement of stakeholders as well as the benefits and limitations of that engagement, and covers working with NGOs. The report notes that Encouraging companies to engage with stakeholders in a positive and structured way has not previously been a matter of particular concern to accountants.... However, developments in Operating and Financial Review (narrative) reporting and related expectations that directors will identify issues through feedback, surveys and focus groups clearly reflect the expanding need for stakeholder engagement and for accountants to be involved in the process.

Good examples of measuring social responsiveness and key stakeholder engagement can be found in the ACCA/The Environmental Council 2005 report Improving Stakeholder Engagement reporting.