I like to start with a dictionary definition. The
Oxford English Dictionary is my dictionary of choice because (a) I can reach it
in a couple of clicks whereas to reach my copy of Chambers I have to stand up
and lift it down from a high shelf and (b) once I start turning the pages of
Chambers I’ll soon forget what I was looking for as I wander down the tempting
byways of the English language and (c) I can copy and paste from the OED.
So how does the OED define stakeholder?
1. An independent person or organization with whom money is
deposited, esp. when a number of people make a bet or other financial
transaction.
2. A person, company, etc., with a concern or (esp.
financial) interest in ensuring the success of an organization, business,
system, etc.
These two types of relationship are rather different but, unless you’re a gambler, you’re probably more aware of current usage matching the second definition. The stakeholder economy, stakeholder
pensions.. we’re all stakeholders, aren’t we?
I was prompted to think about this by today’s publication
from the Investment Association and ICSA: the Governance Institute entitled “The Stakeholder Voice in Board Decision Making” which urges boards to engage more closely with stakeholders
and offers a series of principles to guide them in doing so. It says that:
“Stakeholders are those groups which are likely to be
affected by the actions of a company, or whose actions can affect the operation
or business model of the company.”
While intuitive, that’s a pretty broad definition. In
identifying such groups, boards will have to set some boundaries and consider
in some detail the form of their interactions with stakeholders. Future
generations may be affected by corporate actions, for example, with regard to
environmental sustainability: how can boards take account of this. Decisions by
government bodies and regulators will affect the operation of the company:
these stakeholders have a very different perspective and relationship with
companies from other groups.
Forty two years ago the Accounting Standards Steering
Committee published a discussion paper entitled “The Corporate Report” in which
it identified the user groups to which corporate reporting was addressed.
“1.9 The groups we identify as having a reasonable right to
information and whose information needs should be recognised by corporate
reports are:-
(a) The equity
investor group including existing and potential shareholders and holders of
convertible securities, options or warrants.
(b) The loan creditor
group including existing and potential holders of debentures and loan
stock, and providers of short term secured and unsecured loans and finance.
(c) The employee
group including existing, potential and past employees.
(d) The
analyst-advisor group including financial analysts and journalists,
economists, statisticians, researchers, trade unions, stockbrokers and other
providers of advisory services such as credit rating agencies.
(e) The business
contact group including customers, trace creditors and suppliers and in a
different sense competitors, business rivals ands those interested in mergers,
amalgamations and takeovers.
(f) The government
including tax authorities, departments and agencies concerned with the
supervision of commerce and industry, and local authorities.
(g) The public
including taxpayers, ratepayers, consumers and other community and special
interest groups such as political parties, consumer and environmental
protection societies and regional pressure groups.”
The paper proposed a series of changes and extensions to
corporate reporting to address the information needs of these groups but, in
spite of this and subsequent work by the Scottish Institute, the accountancy
profession never really managed to make significant changes to corporate
reporting to recognise the needs of these groups and, at the time, the more
immediate challenge of accounting for inflation diverted everyone’s attention.
This list of users has, however, become embedded in thinking about corporate
reporting and it seems like a fairly comprehensive list of stakeholders for
boards to think about.
But another reason why corporate reporting didn’t change to
address this range of information needs was the difficulty in prioritising
those needs. Financial reporting developed to address the information
requirements of creditors and investors and the model we currently have, which
is central to our system of corporate governance, was developed in the
nineteenth century. Unsurprisingly it reinforces the view of shareholder
primacy because in those days investors provided finance. Are shareholders
really investors these days?
Investors are not homogenous. They may be classified in
binary fashion - active/passive, owners/traders – but as a group for any
company they will include a wide range of different perspectives and concerns.
It is not always easy for a company to discover who its shareholders are. They
don’t always want to engage with the boards of the companies in which they
invest – some company secretaries have told me how difficult it can be to
encourage any sort of interaction – so expecting them to exert constraint on
boards in, for example, the area of executive pay may be unrealistic.
If engaging with this specific stakeholder group is
challenging enough, is it reasonable to expect boards to engage with the much
more diffuse group of its other stakeholders? To spend corporate resources on
formalising and reporting on relationships which probably already exist in a
rather amorphous way? It’s difficult to imagine any moderately successful board
which doesn’t already follow the first three “core principles”.
1 Boards should identify, and keep
under regular review, who they consider their key stakeholders to be and why.
2 Boards should determine which
stakeholders they need to engage with directly, as opposed to relying solely on
information from management.
3 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.
And I’m struggling to see the value of the last three.
8 In designing engagement
mechanisms, companies should consider what would be most effective and
convenient for the stakeholders, not just the company.
9 The board should report to
its shareholders on how it has taken the impact on key stakeholders into
account when making decisions.
10 The board should provide
feedback to those stakeholders with whom it has
engaged, which should be
tailored to the different stakeholder groups.
Corporate governance needs to be rethought by first
considering the fundamental relationship between the company and its resource
providers and designing an accountability system which prioritises them. Boards
inevitably consider relationships with other stakeholders in the course of
directing company operations but requiring them to report on such relationships
broadens the scope of corporate governance in a way that can only impinge unproductively
on board activity.
