Stakeholders’ Place in Governance
- Posted by David Gray
- On February 11, 2021
- Owners and Ownership, Policy Governance System
A recent article on boardagenda.com caught my eye. The thrust of the article is that, as a result of the pandemic, businesses are being compelled to “…adopt more of a ‘stakeholder’ approach to governance.” To this end, the article argues that businesses ought to have “…a special committee to represent stakeholder interests to the board and shareholders.”
The article is just one of many that have been written in the wake of the much-publicised statement issued last year by the Business Roundtable (of America) setting out its evolving view of the purpose of a corporation. The statement, which listed customers, employees, suppliers, communities and shareholders as stakeholders, ended with these sentences:
Each of our stakeholders is essential. We commit to deliver value to all of them, for the future success of our companies, our communities and our country.
No-one can realistically argue that stakeholders aren’t essential. Of course they are. An organisation would be foolish to ignore the voices of customers, employees, funders, philanthropists, unions, regulatory bodies, governments and the myriad other groups which comprise its stakeholders.
But is the establishment of “a special committee” as recommended in the article—especially a mandatory committee, as the authors argue should be the case—really the best way to address stakeholder interests? I suspect not.
In my view, the greatest need of governing bodies is not the mandatory insertion of yet another component into the machinery of governance; rather, the need is for governing bodies to have a system of governance which automatically takes into account, to an appropriate degree, the interests of all relevant parties.
I use the term ‘system’ advisedly. According to the Code of practice for delivering effective governance of organisations published by the British Standards Institution (also known as BS13500:2013), a governance system is the “set of interacting and interdependent components [including structures, policies, processes, technologies and information] forming an integrated whole, which enables the accountability, direction and control of the organization in the long-term interests of those stakeholders who are actually, or equivalent to, the organization’s shareholders.” The definition is a bit of a mouthful, but it does describe the integrated and all-encompassing nature of a governance system.
My observation over 20 or so years as a consultant and coach in governance, in addition to many more years as a CEO and board chair, is that governance routinely comprises an ad hoc collection of activities and processes, rather than a system designed for the specific purpose of achieving effective governance. Few organisations take the time to research and choose a system of governance suited to their particular circumstances.
A system of governance takes into account the perspectives of the organisation’s stakeholders according to the particular characteristics of the stakeholder and the organisation’s own context. Thus, for example, a system of governance could provide for—
- the voice of staff to be heard through the monitoring of executive limitations covering the treatment of staff;
- the voice of customers to be heard through the channel of the CEO, whose responsibility it is to meet the needs of customers and to ensure that mechanisms exist for customer feedback to be received by the organisation and, where appropriate, made known to the governing body through the monitoring process;
- the voice of funders, philanthropists and policy-makers to be heard through board education initiatives, as board members monitor the environment in which the organisation operates as part of their policy-making responsibilities.
Different boards will have differing needs when it comes to stakeholder engagement. Many would benefit from having a stakeholder engagement plan, depending on the number and nature of their stakeholders. In some cases, a committee along the lines suggested in the boardagenda.com article might well be appropriate. In every case, though, the solution chosen by the board should form part of the integrated system of governance used by the board.
Our governance system of choice at The Governance Coach is Policy Governance®. In our experience, it provides for the legitimate voices of stakeholders to be heard and responded to as appropriate by the board. It gives paramountcy to the voice of owners/shareholders, as it should, but also provides plenty of opportunity for other relevant voices to be heard.
The boardagenda.com article concludes as follows:
The stakeholder debate has a long way to run. If the idea is to gain traction it will undoubtedly need a stronger commitment in regulation than it currently has, or companies could easily wander from the path.
It is probably fair to say that there is some way to go before the interests of stakeholders are given their proper weight by governing bodies of all kinds. However, the solution is unlikely to be found in “a stronger commitment in regulation.” Rather, it will be found in a greater understanding of, and commitment to, systems of governance which appropriately integrate the interests of stakeholders into the work of governing bodies.
 The fact that the statement was issued by a group comprising CEOs, rather than owners or owner-representatives, is another discussion in itself; my position is that it is the prerogative of owners, not CEOs, to determine the purpose of the entity they own.