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Guidance for UK Boards on Stakeholders

Review and commentary by Cliff Weight

ICSA: The Governance Institute and The Investment Association (IA) have launched guidance to help UK company boards ensure they understand and weigh up the interests of their stakeholders when making strategic decisions.

Commentary: My view is

• They have recommended 10 principles. Principle number 9 is important -“The board should report to its shareholders on how it has taken the impact on key stakeholders into account when making decisions.” – The Government will introduce legislation to this effect and the FRC will likely demand this in future in its next revision of the UK Corporate Governance Code.
• The rest is motherhood and apple pie. Difficult to object to any of it. Easy to support it, but all this (dare I say it) “fluff” is a diversion from the key issues, which include:

• Engagement not working because asset managers do not allocate enough resources to it and don’t do it very well, and because many asset owners and beneficial owners are disenfranchised.
• Fund charges for asset managers are still too high, although they are coming down.
• Fund managers’ pay is too high.
• Our preferred approach to engagement is via Shareholder Committees. See https://www.sharesoc.org/Shareholder%20Committees.pdf The new ICSA/IA guidance fails to make reference to our preferred approach.

Background/ Summary of ICSA/IA Guidance

This follows the recent publication of the government’s response to its corporate governance green paper consultation. The government recognised the strong support for strengthening stakeholder engagement and reporting on this and proposed a number of ways that it believed these areas could be improved.

The proposals included the completion of the ICSA/IA guidance and for the GC100 group – which represents the company secretaries of the FTSE100 companies – to complete guidance on the practical interpretation of the directors’ duty in section 172 of the Companies Act 2006. Section 172 states that a director of a company must act in the way he considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole, and in doing so have regard (amongst other matters) to —

(a) the likely consequences of any decision in the long term,
(b) the interests of the company’s employees,
(c) the need to foster the company’s business relationships with suppliers,
customers and others,
(d) the impact of the company’s operations on the community and the
environment,
(e) the desirability of the company maintaining a reputation for high
standards of business conduct, and
(f) the need to act fairly as between members of the company.

The government added that it would introduce secondary legislation to require all companies of a significant size (private as well as public) to explain how their directors comply with the requirements of section 172.

The government also said it would invite the Financial Reporting Council (FRC) to consult on the development of a new code principle establishing the importance of strengthening the voice of employees and other non-shareholder interests at board level as an important component of running a sustainable business.

Additionally, the government response paper suggested the FRC could consult on a specific Code provision requiring premium listed companies to adopt, on a “comply or explain” basis, one of three employee engagement mechanisms: a designated non-executive director; a formal employee advisory council; or a director from the workforce.

The IA/ICSA paper established 10 principles it believes boards should follow to ensure the stakeholder’s voice is heard in the strategic decision making. This included identifying – and keeping under review – who their key stakeholders are; determining which stakeholders they need to engage with directly; taking the stakeholder perspective into account when deciding on the recruitment process and the selection criteria of directors and ensuring that appropriate engagement with key stakeholders is taking place.

The guidance also suggested that the chairmen of boards – with company secretary support – needed to take a lead in stakeholder engagement by ensuring directors are kept adequately trained on stakeholder-related matters and should determine how best to ensure that the board’s decision-making processes give sufficient consideration to key stakeholders.

ICSA and the IA also state that the board should report to its shareholders on how it has taken the impact on key stakeholders into account when making decisions and provide feedback to those stakeholders with whom it has engaged.

Stephen Haddrill, chief executive of the FRC, said: “Businesses which are successful in the long term support our economy and society by providing employment and contributing to economic growth and prosperity. In doing so, it’s increasingly important that companies develop and sustain meaningful relationships with a wider range of stakeholders. This clear and practical guide will be of great help to companies and promote good strategic and governance reporting.”

Below is part of their section 6, from the ICSA/IA guidance, which potentially relates to how shareholder committees might operate.

6. Engagement mechanisms (extracted from ICSA/IA guidance)

Principles

Boards should ensure that appropriate engagement with key stakeholders is taking place and that this is kept under regular review.
In designing engagement mechanisms, companies should consider what would be most effective and convenient for the stakeholders, not just the company.

Introduction
Many companies already engage extensively with important stakeholders such as the workforce, customers and suppliers in the normal course of business. They use a variety of means and do so for a variety of purposes.

While there will be cases where the board judges that it should engage directly with certain stakeholder groups or on certain issues, the majority of engagement will take place at the operational level. The board should, however, have an overview of the totality of the engagement the company undertakes so that it can decide whether or not it is sufficient for the purpose of informing discussion at the board.

When considering what form(s) of engagement to use, companies should be flexible and willing to deploy whatever method is most likely to secure the desired participation. It should, as far as practicable, be designed with the convenience of the stakeholders concerned in mind, not just that of the company.

This section of the guidance gives some illustrative examples of approaches already being used, with the aim of prompting companies to review their own existing mechanisms and to consider whether there would be value in adopting alternative or additional ways of engaging with the stakeholders concerned.

Assessing and reviewing engagement
As many of these mechanisms are likely to be co-ordinated at executive level or below, the board should satisfy itself that appropriate engagement with key stakeholders is taking place and that it is receiving sufficient and timely feedback on the outcome of that engagement.

The key questions that the board should consider when assessing the overall engagement carried out by the company are:

• Do operational mechanisms for stakeholder engagement cover the breadth of the stakeholder groups that the board considers most important to its decision making or are most affected by the company’s activities?

The Stakeholder Voice in Board Decision Making

• Is the amount of engagement with specific stakeholder groups compatible with the relative priority the board places on them?
• What are the lines of reporting from these activities up to senior management and ultimately the board?
• Who is responsible for designing and carrying out this engagement? Boards should not be designing engagement mechanisms for all levels of the business. However, oversight is important to make sure that the processes are robust and regularly reviewed.
• Is there a need for the board to be directly involved in engagement with particular stakeholders or on particular issues?

The board should carry out such an assessment at regular intervals to determine whether the overall arrangements remain effective, and make changes if not.

Engagement mechanisms
The appropriate mechanism for engagement will depend on the stakeholder group concerned and the nature of their relationship with the company, and different approaches are likely to be needed. Approaches that can work well for groups with an existing direct relationship, such as workers and shareholders, may be less well suited for those groups that are less accessible or less clearly defined.

Forums and advisory panels
Forums and advisory panels of different types already form part of many companies’ engagement mechanisms with stakeholders, as they can be tailored to the needs of different groups. Some of these reports to the board while others engage with management; some meet regularly while others are convened on an ad-hoc basis to provide views or advice on specific issues.

Example: Marks & Spencer
Marks & Spencer has recently introduced a shareholder panel, to help the board to understand the view of retail shareholders. The panel will meet several times a year with the Chairman, CEO and members of management to discuss issues and update these stakeholders.

Panels reporting to management can play a valuable role in the company’s overall engagement strategy, and establishing a forum with direct access to the board is not the only means by which the board can gain an understanding of stakeholders’ views. However, such forums are unlikely to be seen as effective by stakeholders unless they are confident that their views will be heard by the board. It is therefore important to ensure that appropriate feedback mechanisms are in place.

The two guiding considerations in thinking about whether to set up one or more panels that engage directly with the board should be:

• What is the purpose of the desired engagement?
For example, it might be a means of establishing a regular dialogue with a particular group of stakeholders, or it might be in order to enlist the views or support of stakeholders in tackling a specific issue. For either of these, a panel might be an appropriate approach, but is not the only one and alternatives should be considered.
• With which stakeholders do we wish to engage?
A forum or panel might be a suitable vehicle for engaging with, for example, workers, shareholders or NGOs. The UK Government has identified formal employee advisory councils as one of the approaches it believes companies should consider. Forums and panels are less likely to be suitable for engaging with, for example, customers or local communities affected by the company’s activities.
If a decision is taken to set up a forum or panel, then there are a series of further questions that should be considered before it is established. These include:
• What will be the formal remit of the panel?
• How will members of the panel be selected?
For example, if the panel is intended to be representative of the stakeholder group(s) involved – as opposed to members being selected solely as individuals able to contribute to resolving a specific issue – companies may wish to take advice from relevant representative bodies.
• Will a single panel with a wide range of stakeholders be effective, or would a number of panels for different stakeholders be needed?

The Stakeholder Voice in Board Decision Making
• Will the panel engage directly with the board or through management?
If direct engagement is planned, what form will it take? For example, will the panel meet with the whole board on a regular or one-off basis, or only with individual board members, such as the chairman or a designated director?
• How frequently should the panel meet?
• Will the panel be permanent or time-limited and, if permanent, how often should its membership be refreshed? This may depend, for example, on whether its purpose is to provide a regular dialogue or to address a specific issue.
• What administrative, financial or other support will the panel and its members need from the company?

Cliff Weight

2/10/2017

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