Published and draft legislation - United Kingdom
Stakeholders in decision making
Institute of Chartered Secretaries & Administrators / The Investment Association
At the beginning of 2017, as discussed in issue 10 of Progreso, the British government sent out for public consultation a Green Paper on reforming certain areas of corporate governance to bolster the market’s confidence in the country’s companies. After this consultation period, the government published a document analyzing the feedback on the Green Paper from nearly 400 participating companies, and proposed nine reforms to the British corporate governance system, as we also analyzed in the previous issue of Progreso.
Among the proposed measures, the government has tasked the Institute of Chartered Secretaries and Administrators and The Investment Association with giving British companies guidelines on how to engage with their stakeholders, in compliance with Section 172 of the 2006 Companies Act.
To fulfil this mandate, these two institutions have published this document jointly, to foster stronger governance for companies around the country, in the conviction that bearing in mind stakeholders’ opinions and needs when taking business decisions will lead towards their long-term success.
Below follows a summary of the seven chapters that lay out the document’s 10 key principles, centered mainly on the duties of the board of directors:
Section 172 of the 2006 Companies Act establishes the obligation of company directors to consider their stakeholders’ interests when taking decisions to promote the success of the company.
Specifically, they must consider the long-term consequences of resolutions they adopt, the best interests of employees, the need to foster relationships with suppliers, consumers and other stakeholders, the impact of the company’s activity on the environment and society at large, the company’s good repute and high standards of business conduct, together with the need to act in a fair and appropriate manner.
The governing body should define which stakeholders are important to the company and which are most impacted by its activity, as well as identifying which are key for long-term value generation, or to the contrary those which may have a negative impact on value generation.
Once this exercise is complete, the way in which the company interacts with these stakeholders should be studied, to see whether further information is needed about them, and whether a more direct line of communication between them and the directors is needed, if they are important for the company’s long-term success. To ensure effective communication, it is advisable to identify a contact person for each stakeholder.
In addition, given that the importance of stakeholders and their impact on the company may vary over time, the board should define a regular review process of the stakeholders it considers to be significant.
Composition of the board of directors
In addition to their areas of expertise, directors must be able to understand their stakeholders’ needs. When analyzing their composition and effectiveness, the board must decide what weight to give these areas of expertise and decide whether to reserve one or more seats on the board for directors who belong to a specific interest group and/or whether to broaden the selection criteria for non-executive directors to identify candidates with directly relevant experience with one or more categories of stakeholders.
If the board decides that new directors are needed with expertise and understanding specific to a particular stakeholder, it should set out: i) the criteria for selecting them, ii) who will lead the recruitment process, and iii) how the potential candidates will be identified.
If board directors are required to represent the workforce, the board should consider: i) the number of representatives needed, ii) the process to follow for appointing them, iii) the support they might need to perform their duties (induction and training), and iv) how they will communicate with their colleagues and receive their input. These considerations may also be applicable in the event of the board needing a member who has experience with other stakeholder groups.
Induction and training
Once the board members have been appointed, they should receive induction programs tailored to their areas of expertise and skillsets. To define them, the Chairman and Secretary of the Board should meet the new directors to design the induction plan most appropriate to their learning needs.
To ensure that the induction covers all the information that a new director should know about the company’s stakeholders, the following activities can be considered: i) meetings with senior management, with staff representatives or labor committees, with the company’s principal external advisers and its most important customers and suppliers; ii) site visits; and iii) briefings on the company’s local, regional and global operations, as well as any impacts on local communities.
The Chairman of the Board should also regularly review and discuss with each board member their development and training needs.
The Chair, supported by the other board members, senior management and the company secretary, should determine how best to ensure that the board’s decision-making processes give enough of a voice to key stakeholders.
The Chair should ensure that the board receives the necessary information about issues affecting its stakeholders, and that the board has enough time to discuss these issues at its meetings. This report makes some recommendations on this: to incorporate a prompt such as “impact on stakeholders” in all strategy and policy papers requiring a decision; or else to have standing agenda items addressing these groups on the agendas of all meetings; or otherwise a rolling program of meetings with them.
The Board must also consider whether to create a specific committee to analyze the institution’s engagement with its stakeholders, or to add this remit to one or several of the support committees that already exist. It could also weigh up the merits of assigning to one or several board members the task of assessing the impact of decisions on stakeholders, and of ensuring that these questions are debated at all board meetings.
The board must have an overarching vision of all its engagement mechanisms with important stakeholders so that it can decide whether these are fit for purpose or whether changes are needed to ensure their effectiveness.
The appropriate mechanism for engagement will depend on the stakeholder group concerned and the nature of their relationship with the company, so different approaches should be considered to identify their needs: forums, advisory panels, surveys, social media, annual meetings, whistleblowing policies, etc.
Reporting and feedback
The board should report to its shareholders on how it has taken the impact on key stakeholders into account when making decisions. The main mechanism for this is the annual report and the annual financial statements. These must clearly and accurately identify the company’s key stakeholders, the mechanisms used so that the board is aware of their interests and how these interests have informed the decisions taken.
It should also explain the mechanisms deployed with stakeholders throughout the year and, to ensure that board members are fulfilling Section 172 of the Companies Act, include the assessment made by the board of the suitability and effectiveness of these systems.
The information in the annual report can also be useful for other stakeholders as well as for shareholders, although other forms of reporting and feedback should be considered, such as reports on specific issues, resources on the corporate website, newsletters, forums, social media, etc.
The board should decide how often the different stakeholders should receive information, according to their needs.