Episode 10 - Stakeholder capitalism and engagement

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JB: Yeah, thanks, Rachael and hello, everyone. My role at Nasdaq is to lead our board advisory work and also our Center for Board Excellence in Europe, Middle East and Africa. In practice, that means focusing on things like board evaluations and supporting clients through other important processes like succession planning [or] onboarding of directors.

What do we mean by stakeholder capitalism? Well, stakeholder capitalism is a bit of a buzzword du jour, I think we have to accept [that], but we shouldn't lose the real meaning behind this [concept]. That's that successful companies should be defined by more than just generating shareholder capital or increasing share prices. That doesn't mean it's a naive utopian view of companies being able to run on good intentions alone. It doesn't even necessarily avoid potential conflicts and challenges to the concepts. But it does allow for different measures of performance and risk, and it brings to the fore matters like culture and incentivisation.

It's intrinsically linked to sustainability as it's grounded in a view that giving consideration to wider interests, perspectives and impacts leads to longer-term value creation. So, it's important to continue to talk about stakeholder capitalism, alongside ESG (environment, social and governance) ¬– another thing that is on everybody's lips. So ultimately, we're still talking about capitalism, we're still saying that companies exist to deliver economic growth but [we’re] encouraging a different view on the path to that [goal], and different KPIs (key performance indicators) to use.

I'm always at pains to caveat any discussion on stakeholder capitalism with [saying] this isn't a new thing. During the Victorian era and into the 20th century there existed avant garde welfare capitalism. We saw this in various western industrialised nations – the UK, the US, France, Germany – and it can be seen in the development of model micro-societies like Saltaire, which was created by Sir Titus Salt, or Bournville, created by the Cadburys. Both of those examples being in the UK where there was an explicit view driven at the time by religious beliefs. The Quaker religion specifically [argued] that the welfare of workers, their families, [and] future generations was a responsibility of business leaders.

Nowadays, the concept has become more enmeshed in societies and government policy and it engenders a broader concept of stakeholders through which to frame the decisions. Nonetheless, it’s important to think that through the roots of capitalist societies this kind of concept has existed. It's encouraging [that] we're coming back to it and developing that further stakeholder engagement ¬– because we put those two things alongside each other – to address the second part of the question. Here's the natural means by which to achieve stakeholder capitalism, in my view. You can't consider or act in the interests of different parties if you don't understand them or engage with them in the first place.

JB: In short, the last two years. I think they have really shone a light on the concept and its benefits. Boards have faced an extraordinary convergence of events – a global pandemic, shrinking labour markets or tightening labour markets, volatile economic markets, state-sponsored cyber attacks, unstable geopolitical conditions, civil unrest – it feels like this period in particular has brought with it a more inclusive, stakeholder-centric perspective to creating shareholder value.

The Business Roundtable’s 2019 statement on the purpose of a corporation marked the beginning of a new era in the in the United States. The European Commission made stakeholder governance the foundation of a 2021 Sustainable Corporate Governance Initiative. The UK led in legislating the concept of enlightened shareholder value, or consideration of stakeholder impact in decision-making, as early as 2006 through Section 172 [of the UK Companies Act 2006]. Reporting on how these considerations have been evaluated is now firm practice in the UK and [is] influencing governance trends around the world. I think we can be proud of the role that we've played in this, but it's really the last two years that have really put it under the microscope.

In the face of ongoing and mounting challenges, the concepts of stakeholder engagement and sustainability seem to be strengthening. We're learning that stakeholder-centric organisations may wield greater influence, and even be more trusted. When we're speaking to boards, directors, importantly, are increasingly engaged. Boards around the globe appear to be exhibiting more agility, tech savviness, risk awareness, a forward-looking perspective and resilience. They're hearing different perspectives more loudly and more clearly and those become more difficult to ignore.

JB: Personally, I find it most helpful to frame this in [terms of] the Directors Duties [outlined in the Companies Act 2006], specifically number four, the duty to exercise reasonable care, skill, and diligence. I'd even put a focus on the word ‘care’.

Maybe this is looking through rose-tinted spec[tacle]s, but a duty of care obliges boards to consider how company activities will likely impact financial risk as it pertains to customers, employees, partners, suppliers, communities, shareholders, as well as long-term profitability. To effectively discharge that duty of care through a stakeholder-oriented perspective, directors should define who their stakeholder population is and gain a better understanding of their demographics and particular interests. Once stakeholder constituencies are defined, directors should review and balance those interests against [the impact of] any pending board decisions. Boards are uniquely placed within an organisation to effectively promote and safeguard stakeholder interests and develop new ways of bringing their voices into the boardroom.

JB: Front and centre in this for me, particularly through and post pandemic, are two stakeholder groups: employees and customers. We can wrap that around with society as a whole but employees and customers as a particular concept, as two stakeholder groups, are front and centre.

Developments of recent years have driven a stronger keenness to understand customers. Even before the pandemic and today's challenges, as customer demographics evolve, as new generations come to the fore, business leaders increasingly seek to unlock opportunities, head off risks, predict trends. When it comes to customer engagement, we're moving beyond relying solely on customer satisfaction surveys because this has been something that's been on the agenda for a while. It's not just about net promoter scoring, there are some interesting developments. You can break these down, they will apply in different ways to different types of organisation.

In the retail world, where you have individual customers, playing back verbatim positive and negative customer letters in the boardroom can be [an] incredibly powerful [way of] bring[ing] a real situation into the boardroom. I've seen boards have one of each at every board meeting just to open up, let's set the tone. Here is some positive feedback we've heard from our customers. Here's something negative, potentially a complaint, for example, that we've seen.

Linked to that and taking it a bit further, you can map customer journeys and look more closely at their outcomes. This is something as a concept that will be very familiar to those working in the financial services world, it’s very much how we think about conduct. Looking closely at complaints, how was a complaint handled for example? Did the customer speak to the people they needed to, did they feel listened to? Or other processes like purchasing, if they're going through a buying process, what did they experience? Let's take an example – we've got the overall data around this – but let's take a little example and let's walk through exactly what these individuals experienced. It's about bringing it to life. Historically we have primarily relied on quantitative data around these things. Now we need to be bringing these things to life, to hear those voices it becomes more qualitative.

On the wholesale side, if we think about where you might be interacting with other businesses, primarily as your customers, then invite customers to a board session to feedback and discuss their experiences. Have the managing director or the chair or the CEO of one of your most important companies come and talk to the board. To have not just a tête-à-tête but more of a fact-finding personal session around where the benefits and challenges might be. You can see joint advisory with key customers connecting non-executive directors, connecting management to understand both sides of the table, that can be very powerful.

The other side I mentioned, on the employees side, the Covid-19 pandemic quite explicitly drove a push to connect with employees. As whole workforces were displaced from offices overnight, boards and business leaders needed to quickly understand what might be affecting their employees. From concerns around physical and mental wellbeing to managing operational risks from a dispersed workforce, adapting authorities and processes to match the ‘new normal’ day-to-day operations – a phrase we've heard far too much over the last few years.

Ultimately, the [UK] government's flirtation with mandating workforce representatives, like we see on dual-tier boards in the US, was dismissed. Rightly, in my opinion, because I don't think it is compatible necessarily with unitary boards and it can add a bit of complexity and opacity. But the principles are sound in terms of mandating away and facilitating boards to get that employee voice into the boardroom to make sure those considerations are taken.

We have seen organisations take proportionate approaches – emphasis on the word ‘proportionate’ – to ensuring employee voices are heard. We've seen things like the ‘chair’s council’ as a concept: getting some bright young things from across the organisation with a broad demographic together to sit down with the chair to discuss topics that might be coming up in the next board meeting, so that you get that voice fed through [to the board] by proxy through the chair.

One of my clients has recently brought in what they call ‘NEBAs’ – non-executive board advisers – where you might need some skills around the table, but don't necessarily have the room on the board [for a new board member]. So how do we facilitate that? Well, they've looked at the next level down: not experienced board directors, but people coming through an organisation with specific skills and experience to give them exposure to the board. One interesting area there is having someone who's an HR, people person from outside the organisation to give those perspectives and bring that employee voice through.

A bit like with the customer side, playback of employee journeys can be interesting. What were [the] experiences of specific individuals going through the joining or onboarding process, going through promotion processes, going through reviews of their reward and remuneration? Also similar to the customer side, playback of good and bad news stories, to determine lessons to be learnt, and then filter that back down through the organisation so everyone can benefit from it.

Embedding access to non-executive directors is quite an interesting one. Man marking with particular executive leaders but also maybe on a topic-by-topic basis. We've seen the concept of a champion at the board, ie, a non-executive director who maybe has a name badge, which underneath says a particular theme, that they take some responsibility [for] thinking particularly about. Why not have that [topic] as employees and their interests?

Hopefully what comes across there is that boards are really thinking about this and there's some really interesting developments that we're starting to see. And we're starting to see boards learn from each other in terms of what might work. Because the wonderful thing about boards is, often individuals are sitting on more than one board, and so they can bring that perspective through [multiple boards].

JB: First and foremost, when we talk about some of those potential opportunities that have been taken, some of those developments, there's a key theme, and [that is that] they all demand time. They all involve a bit of thought, they all involve some commitment from individual directors, from senior leaders in the organisation, from the company secretary. Time is a challenge, particularly when you already have a very full calendar. Access to non-executive directors in that context, in particular, is very important.

I think already-full agendas, the fact that boards are not sitting around twiddling their thumbs, particularly right now, where we're living in such a rapidly changing world with new developments it seems every single week throwing a curveball. So motivating boards, and those that support them, to step back and invest that kind of time if it is available, is a bit of a challenge. Because we're feeling swamped.

In some organisations there is low engagement around these things. When we think about culture around an organisation, it's all very well trying to bring the employee voice in, that needs to be reciprocated. It’s all very well trying to bring the customer voice in, that needs to be reciprocated, it can’t just be done unilaterally in all cases. There is low engagement, and that's going to pose a challenge in itself. They [the board] need to take a baby-steps approach and demonstrate the success in order to build on [it].

JB: I think that's a really interesting point, Rachael. Yes, I think there certainly could be, and I would see those two things going hand in hand. As we're thinking about how to engage, and who to engage with, the board needs to hold a mirror up to itself and say, are we reflecting our stakeholders? It really grows from the work that's been done over recent years around developing more of an understanding, and more of a strategic application, of the skills, knowledge and expertise that needs to be around the board [table]. Part of that really has driven into [the question of,] are we representing our different stakeholders enough? Do we have people who the customers would identify with or where you can speak their language? Do we have people that the employees will understand?

I was having this conversation with a board recently, where we delivered a board evaluation for them, and they were reflecting on this very strongly. For them, from a diversity point of view, that included things like social mobility. They're seeing a lot of their customers struggling with the cost of living crisis in parts of the country that might be, and feel to be, quite neglected. [They’re asking,] can we really, as a board, speak that language given the background that we currently have? I think that's a really important point to make.

JB: I think the answer to that question lies in the practices that company secretaries already demonstrate. It's just making sure the right lens is on it. Like building the relationships with the non-executive directors outside of the boardroom, something that company secretaries are already doing for a whole range of purposes. Using those interactions to promote ideas [and] introduce internal and external resources for them to connect with and who might be presented in front of the board to gain insights from outside the organisation is really powerful.

Building a connection with the chair, specifically in serving the chair’s needs, ensuring that stakeholder engagement is regularly reflected on and that's led by the chair. At strategy days, in reviewing management information and minutes, in performing post-meeting health checks, to challenge back on, have we really given consideration to all of these stakeholders that we've identified when we've been making these decisions? Do we really understand the impact that our decisions are having?

JB: With a lot of hard work, I think. Organisations need to develop more sophisticated data points for understanding the various stakeholders. I think that would mean moving beyond pulse surveys and net promoter scores, as I mentioned earlier, or focusing on mainly quantitative metrics. The power here is in qualitative data points; it’s understanding journeys and outcomes. It's hearing that voice figuratively, or literally, and it's continuously reflecting on the appropriateness of those data points.

True measurements should include questions to the board on effectiveness of stakeholder engagement during board performance reviews, for example. It shouldn't be something that is just on the agenda and that’s that. It needs to be thought of as something the board is there to do. In the same way, when we look at performance of boards, we look at the dynamics around the table, we look at how well the board is supported, administered. We look at individual processes, or areas of responsibility, like risk appetite, or strategy and performance. We need to be thinking about stakeholder engagement in that same way, encouraging new ideas, reflecting on how well existing ones have delivered or been embedded.

JB: I think as we've been discussing, understand, map who your stakeholders are. Consider each in turn for what type of board decisions will impact them the most. In theory, [outline] who the primary stakeholders are for the various board responsibilities, map them across. What is not understood, cannot be measured, so we need to be able to have that basis.

Once you have that list, and those decisions are mapped, consider the most important touch points. Consider creative, qualitative ways of hearing and taking account of that voice. Then don't rest on laurels. Keep challenging, keep challenging ourselves as boards, as people who support boards, for the appropriateness of those measures, and listen to outside examples for trends and tips from elsewhere.

JB: Thanks, Rachael.