Stakeholder relationships are the secret weapon
Financial performance, as Professor Mervyn King points out in his foreword to the King IV Report on Corporate Governance for South Africa, is no longer seen as sole proxy for holistic value creation, and financial capital is just one of six capitals any organisation uses to create value. (The other capitals are: manufactured, human, intellectual, social and relationship, and natural.)
Professor King also notes the shift away from a narrow focus on short-term objectives towards a broader assessment of the long-term effects of any strategy on the organisation and the economy on which it depends.
The nature of this change is particularly evident in the growing importance of stakeholder relationships. The foundations for this approach were laid in King III, but King IV has expanded it considerably. King IV argues that organisations have an interdependent relationship with their stakeholders, and that each of the six capitals they use expands the number of stakeholders who have a material interest in the organisation, and to whom it should account.
Potential stakeholders could include industry and business organisation, regulators, government entities, academia, environmental, consumer and advocacy groups, and local communities.
Employees, customers and members of the supply/value chain are also stakeholders in the organisation; they all play a role in its success and are impacted by its actions.
The stakeholder universe may vary depending on context, and this in turn will affect which part of the organisation takes the lead in managing each relationship. For example, a company with numerous manufacturing facilities might manage its relationships with the government and regulators from head office, but each facility would take responsibility for liaising with local communities and environmental groups.
Nevertheless, stakeholder relationships should be seen within the context of the overall risk management framework.
Clearly, too, sound stakeholder relationships will not only help develop more robust strategies, they will also stand any organisation in good stead when it experiences headwinds.
Well-established communication channels with stakeholders will already exist and, hopefully, be characterised by a measure of trust.
As King IV makes clear, while the interests of one group of stakeholders (the providers of financial capital) are not prioritised, the principle of stakeholder inclusivity will typically require the organisation to balance competing stakeholder interests over time, and this may include having to make trade-offs between competing stakeholder interests.
Being forced to take into account the full context in which the organisation operates is obviously something that will make the process of developing a strategy much more rigorous, and should ultimately result in a much better one.
Another key concept that must be borne in mind when considering stakeholder relations is materiality. This principle underpins King IV, and should be judged “in terms of its inherent nature, impact (influence) value, use value, and the circumstances (context) in which it occurs”.
The concept of materiality, properly applied, will ensure that no organisation is held hostage by “stakeholders” who have no legitimate connection with it.
Sound stakeholder relationships have become critical to ensuring any organisation’s “social licence to operate”, and also to safeguarding its reputation.
An organisation that has dissatisfied or unheard stakeholders will be likely to be blindsided by challenges, and will find it faces headwinds when trying to recover from any setback. As a result, stakeholder relationships are embodied in Principle 16 of King IV: In the execution of its governance role and responsibilities, the governing body should adopt a stakeholder-inclusive approach that balances the needs, interests and expectations of material stakeholders in the best interests of the organisation over time.
Organisations that manage their stakeholder relationships pro-actively and soundly show that they understand that they operate within a complex socio-economic-political context, and are better prepared to navigate it successfully. They are thus much more likely to survive and prosper over the long term.
Parmi Natesan and Dr Prieur du Plessis are chief executive and facilitator of the Institute of Directors (IoDSA), respectively. Email: [email protected]