Why stakeholder management is essential to sustainable business
In times of crisis, the importance of communication and co-operation between organisations and their stakeholders to maintain confidence in the market, social services, and civil society, is thrown into sharp relief. In this article we explore the principals, challenges and benefits surrounding effective stakeholder management, and the case for organisations formally integrating stakeholder management into their processes and systems.
The goal of stakeholder relations management is to harness positive influences and minimise negative influences on the project, organisation, or partnership. To be effective, the management process must be cyclical, so that learnings are taken forward to the next project or business improvement strategy.
Applying a sustainability lens to stakeholder relations management highlights stakeholder inclusivity (e.g., external stakeholders such as community groups, Indigenous Australians and landholders), which means that stakeholder analysis and documentation is key to enabling the best use of resources. Employees, supply chains, and younger generations, are emerging key stakeholder groups that may also directly influence the success of an enterprise. Interaction among stakeholder groups (i.e. lines of communication, networks, systems) may enhance this level of influence.
Corporate social responsibility provides a good framework by which to manage stakeholder relations, and contributes to international objectives such as the Sustainable Development Goals (SDGs). Stakeholder relations management, and the business value gained by earning stakeholder trust, also provide the foundation for effective communication, resilience, and recovery, through crises like what has been experienced with COVID-19.
What is it?
Stakeholder management is a process within an organisation. It is described in the Association for Project Management Book of Knowledge (APM BoK) as
“the systematic identification, analysis, planning and implementation of actions designed to engage with stakeholders”.
The purpose of stakeholder management is to:
· consider the perspective of stakeholders, and
· act on inputs and concerns in a strategic sense.
APM distinguishes stakeholder management (process and organisation) from stakeholder engagement (relationship and influence) but recognises that one complements the other and both are needed for business success. However, this review found that the terms are also used interchangeably. The term ‘Stakeholder Relations Management’ embraces both concepts of management and engagement and has been adopted in this article.
Who is a stakeholder?
There are numerous definitions of a stakeholder. The Australian Institute of Company Directors (AICD) defines a stakeholder as:
“Persons, groups and entities with a specific interest in an organisation. For a company, this typically includes shareholders, suppliers, customers and employees.”
Stakeholders therefore may be internal and external to an organisation. From the sustainability reporting perspective, the Global Reporting Initiative (GRI) sets the standard for stakeholder inclusiveness. As described in GRI 101: Foundation 2016:
“Stakeholders are defined as entities or individuals that can reasonably be expected to be significantly affected by the reporting organisation’s activities, products, or services; or whose actions can reasonably be expected to affect the ability of the organisation to implement its strategies or achieve its objectives.
This includes, but is not limited to, entities or individuals whose rights under law or international conventions provide them with legitimate claims vis-à-vis the organisation. Stakeholders can include employees and other workers, shareholders, suppliers, vulnerable groups, local communities, and NGOs or other civil society organisations, among others”.
Employees are an emerging impact stakeholder group. Alison Taylor (BSR 2019) reports “One of the most significant trends that BSR is tracking is the emergence of employees as a newly empowered and vocal stakeholder group with an unprecedented ability to impact a company’s strategy and reputation”.
Taylor also highlights the increasing significance of stakeholder networks and the need for systems thinking (i.e. how stakeholders influence each other) in management processes, particularly where individuals or groups can influence the success or failure of the work. The more stakeholders there are, the more potential lines of communication.
The supply chain is another stakeholder group under the spotlight, as demonstrated by the Modern Slavery Act 2018. Obligations for larger companies operating in Australia relate to the risk of modern slavery in its operations and supply chain.
This diagram demonstrates the shift in thinking about stakeholder inclusion. The traditional view shows the organisation at the centre with shareholders on the inner circle. Current thinking considers both stakeholder influence on the organisation and the organisation's impact on them (including ESG considerations). It also recognises there are potential links between stakeholder groups.
Why do it?
The decision to implement stakeholder relations management adds complexity and cost to an organisation's scope (more on challenges below) but there are several key reasons for doing it:
a fiduciary duty to the company – where a Director must act honestly, in good faith and to the best of their ability in the interests of the company
to realise the benefits of stakeholder trust – such as financial resilience, return on equity, valuation, and reduction in costs (BSR 2019)
to better define an organisation’s purpose, enhance strategies and manage projects through engagement and learning from stakeholder expectations.
A fiduciary duty (good faith)
The role of a Company Director is to govern on behalf of the shareholders or members of that company and recognises that maximising the values of its shares is one of the main interests of shareholders.
However, it is interesting to note there is a longstanding governance debate about whether The Corporations Act 2001 should include corporate social responsibilities or explicit obligations to take account of the interests of certain classes of stakeholders (Featherstone AICD 2019).
This would mean that the board must consider the needs of customers, employees, and others to help the company maximise its economic objectives while recognising ESG issues as part of its remit for risk management and sustainability (also known as stakeholder capitalism (Featherstone AICD 2019). Boards that make efforts to govern for a wide range of stakeholders while balancing organisation profitability enable sustainable business.
The Australian government has twice reviewed this proposal but found that the law should remain the same, on the basis that Australian directors will consider broader interests in so far as these things are relevant to the shareholder interests. Nonetheless, there is a trend towards stakeholder trust, from risk to impact and from unrestrained financial growth to sustainable business and there are numerous examples of companies implementing such approaches voluntarily.
To earn stakeholder trust
Much has been written recently on the declining level of trust in government in Australia, despite positive global indicators (e.g. strong economy, declining poverty, and high employment). According to the 2020 Edelman Trust Barometer, business must take the lead in solving the trust paradox because it has the greatest freedom to act.
The 2020 Trust Barometer also makes it clear that competence is no longer enough, with ethical behaviour accounting for the larger proportion of trust capital. Therefore, whereas stakeholder engagement has traditionally evaluated the level of risk posed to the business by the stakeholder, consideration of the impact of business on the stakeholder is now equally or more important.
BSR summarised the value of stakeholder trust as:
financial resilience – good stakeholder relations enables a company to recover more readily from a cycle of bad financial performance
return on equity – better stakeholder relations help to develop assets such as loyalty, reduced employee turnover and improved reputation, which are all sources of competitive advantage
valuation – stakeholder perception affects corporate valuation
reduction in costs – poor engagement leads to direct and indirect costs such as managing conflict with local communities and lost productivity from project delays.
To increase business value
The management of stakeholder relations guides the organisation in engagement protocols, and ensures stakeholder input and analysis informs future programs. This helps an organisation to manage material risks and inform strategic decisions to meet business objectives.
Stakeholder relations management can enable the early identification of risks and opportunities and therefore the implementation of sustainability measures that contribute to initiatives such as:
the Sustainable Development Goals (SDGs)
Environmental, Social and Governance (ESG) reporting/Corporate Social Responsibility (CSR) reporting (e.g. Global Reporting Institute (GRI) ISO 26000 – Social Responsibility)
the Task Force on Climate-related Financial Disclosure (TCFD).
Other benefits of stakeholder relations management to an organisation, include improving their knowledge base, decision-making, responsiveness, and reputation as summarised in the diagram and discussed below.
Knowledge base
Understanding materiality aligns importance for the organisation with stakeholder expectations by asking which sustainability issues matter most to the core business and which matter most to stakeholders? The organisation may then align its purpose with sustainability material issues to build its strategy.
Good stakeholder engagement results in ongoing learning within an organisation as well as increased accountability to stakeholders, which in turn strengthens trust and credibility. Stakeholders can also improve quality by providing access to critical studies or data that are not publicly available (e.g. sensitive financial information) or contained in consultant reports (e.g. historical land contamination and environmental issues).
Decision-making
An improved knowledge base means that better information is available on which to base decisions. In addition, stakeholder expectations are that enterprises take social and environmental (or ESG) concerns seriously and embed them into their business models (Farber and Reichert, IMD 2019).
A good example of marrying up stakeholder concerns and material issues is provided in Mirvac’s Sustainability Strategy. In this case, the information was used to focus their efforts on six material issues compared to 19 previously.
Responsiveness
Identification and characterisation of stakeholders allows an organisation to anticipate potential conflicts and controversies at an early stage. At a project level for example, the potential benefits of engagement with stakeholders are:
the early detection and resolution of issues (e.g. nearby sensitive land use, opposing community values)
avoiding cost overruns (e.g. early contractor involvement in infrastructure design, costs of unplanned for remediation)
avoiding delays to project closure from stakeholder feedback late in the execution stage.
Reputation
Better stakeholder relationships help companies develop assets such as customer loyalty, reduced employee turnover, and improved reputation. These assets all provide competitive advantage and corporate value through social licence to operate (SLO), or acceptance by local stakeholders such as the community or traditional landowners.
From the employee perspective, research indicates working with a purpose is a top priority when evaluating potential companies to work for. In their Employee Benefits Trends Study 2019. MetLife also found that meaningful work or a sense of purpose tops the list for existing or potential employees (93%), particularly for the younger generation, who are more likely to want their work to have a positive impact on the community.
There is an increased perception of quality where stakeholder inputs are valued and implemented (e.g. inclusion in design/review processes at key project stages). Furthermore, collaboration with partners can help solve complex problems that are too much for a single organisation, leading to innovation and benefits for all stakeholders.
What it involves
There are numerous guides on how to undertake stakeholder engagement from different knowledge bases including project management (the APM BoK), sustainability reporting (GRI Reporting Principles for Stakeholder Inclusiveness), internal auditing, and industry-specific expertise. This also points to potential internal stakeholders such as project managers, risk managers, and auditors, and communications teams (as well as employees and managers).
In industry, some organisations have produced stakeholder relationship management frameworks to guide interactions at the program and project levels. Examples of these include:
AER Stakeholder Engagement Framework 2017 (Australian Energy Regulator)
APGA Guideline for Stakeholder Engagement 2015 (Australian Pipelines and Gas Association)
Recent guides worth noting are the Institute of Internal Auditors (IIA) – Australia White Paper on Stakeholder Relationship Management (updated 2020) and the Building Queensland Stakeholder Engagement Guide 2020. The IIA White Paper includes useful exhibits on prioritising stakeholders and development of a stakeholder relationship management program while the Building Queensland Guide draws a lot from the International Association for Participation (IAP2) and provides a stepped process to follow and useful tools.
The answer to ‘what it involves’ is a cycle (or circular) because the stakeholder mix or balance may change, and/or the views or interests of individual stakeholders may change. In general, there are five steps common to most frameworks for different contexts:
1. Identify stakeholders
2. Analyse materiality and stakeholder balance
3. Plan for engagement
4. Engage in accordance with the plan
5. Appraise stakeholder value - i.e. assess the value or quality of.
Points 1, 2 and 5 align with the GRI Tests for stakeholder inclusiveness (in defining report content):
the reporting organisation can describe the stakeholders to whom it considers itself accountable
the report content draws upon the outcomes of stakeholder engagement processes used by the organisation in its ongoing activities, and as required by the legal and institutional framework in which it operates
the report content draws upon the outcomes of any stakeholder engagement processes undertaken specifically for the report
the outcome of the stakeholder engagement processes that inform decisions about the report are consistent with the material topics in the report.
The IIA White Paper is specific to internal auditing but the process may be applied to many activities. Highlights relating to the cycle above are:
analysis helps to prioritise relationships for managing resources and realise benefits by sharing of insights that have an impact
a good plan identifies those responsible for taking care of the relationship, and tailors contact (e.g. frequency, type of communications). It also provides the ability to monitor emerging risks, trends, and issues
engage/appraise – a successful relationship must follow through on commitments given.
Similarly, the Building Queensland Guide expands on many points in the context of infrastructure proposals (seven step process) but one that stood out was planning to establish a participation level for stakeholders, i.e. inform, consult, involve, collaborate, and/or empower.
Also related to planning but at the business level, it is important to make sure stakeholders only appear on maps where they have an interest to avoid engagement fatigue or mixed messages. This might be a project level map (such as an infrastructure proposal), a program level map (where stakeholders have interest in multiple projects) or a portfolio level map (for all projects, programs and areas of business as usual).
Appraisal is important and, like change review processes, it allows the capture of issues and concerns addressed through engagement, evaluates if benefits were achieved and provides suggestions for further improvement. If this is documented and utilised well, it will enable an organisation to stay on top of stakeholder needs and prioritise actions. The benefits of this approach come to the fore during times of crisis, such as is currently faced with COVID-19.
Where internal resources are constrained, collaboration through partnerships may be helpful. A good example is the partnering with an NGO for community consultation for a large infrastructure project or the establishment of a community advisory group.
Potential challenges
To successfully implement stakeholder relations management, it is important to consider and integrate responses to key challenges within the planning process.
One of the most obvious challenges is resourcing because:
stakeholder engagement requires additional time and resources
where resources are limited, stakeholder engagement must be carefully planned to ensure the plan has impact
it may divert resources away from core business activities
personnel must be on board with achieving the desired objectives of stakeholder engagement from the outset (e.g. activities are not tokenistic or undertaken for the wrong reasons).
Other challenges arise if the group of engaged stakeholders is imbalanced or not representative or there is potential conflict that has not been considered. There may not be guidance in place for how to deal with stakeholder conflict or appropriate training may not have been provided.
Stakeholders should be briefed at the start of the engagement process (e.g. for a specific project, new customer/employee/supplier) to ensure understanding of the purpose and their inputs. Specific criteria may be useful in some circumstances (e.g. project approvals, environmental management).
The engage and appraise components of the stakeholder relations plan should specify how to keep stakeholders interested and involved for the required time. Making sure information is kept confidential where necessary is another challenge to address but on the other hand, so is acknowledging inputs where appropriate.
Some specific business processes
This section discusses stakeholder relations management through an environmental sustainability lens. Stakeholder engagement may be a requirement of the Environmental Impact Assessment (EIA)/planning process for project approval at national and State/Territory levels (e.g. Community and Stakeholder Engagement Plan (CSEP)) but organisations may also opt to undertake this voluntarily (for the many benefits discussed in this article).
Similarly, good stakeholder relations facilitate day to day environmental management, particularly the concept of ‘social licence to operate (SLO)’ or community acceptance of the activities undertaken. Effective stakeholder engagement is also a pillar of sustainability reporting to demonstrate how an organisation has acknowledged and responded to reasonable expectations and interests.
Project planning, approval, and delivery
Large scale infrastructure projects (e.g. roads, airports, maritime ports, and water and electricity networks) provide case studies for how good stakeholder relations can help to deliver project success. Stakeholders may be engaged at all stages of the project development: strategic assessment, options analysis, constructability, delivery, maintenance, and closure.
Infrastructure Australia recommends early engagement, noting that consultation processes typically engage communities to a greater extent at the project assessment and delivery phases rather than during concept development and review. Earlier engagement may reduce opposition during approval and delivery through a greater understanding of the challenges and potential solutions.
The Next Generation Engagement Project 2017 is an Australian national study into community engagement in infrastructure. It provides a good summary of project experiences such as, how projects turned out, how influential was stakeholder and community pressure and the causes of project delays (see also their post on $20 billion reasons to care about social licence).
Environmental management
Environmental management of the use of infrastructure once operational also requires good stakeholder relations, since the impacts for residents and other stakeholders are ongoing. The Port Authority of NSW, for example, manages key environmental aspects such as air and noise emissions, associated with its port assets and activities. Their approach is described in strategies, policies, and monitoring programs.
The Authority puts community front and centre with a dedicated web page on their site. They were due to start consultation on a new Port Noise Policy for commercial ships at Glebe Island and White Bay by in April but this has been delayed due to COVID-19. Nonetheless, the goal is to manage the port in a way that is acceptable to residents and the local community while recognising it is a long-term working port. What are the benefits to all stakeholders? The Port Noise Policy “will provide certainty for residents, industry, regulators and approval authorities about anticipated and acceptable levels of noise collectively from port activities both landside and vessels”.
Sustainability strategy
Stakeholder engagement can also help an organisation to shape its sustainability strategy and focus resources. Mirvac for example, recently refreshed their sustainability strategy to focus on issues that matter most to the organisation and their stakeholders, so that they can make a bigger difference in these areas (see the diagram below).
This type of analysis also provides the framework for considering how an organisation contributes to achieving the SDGs and vice versa to shape and steer the sustainability strategy. Using this example below, this includes SDG3 Good Health and Wellbeing, SDG 11 Sustainable Cities & Communities, SDG 12 Responsible Consumption & Production, SDG 13 Climate Action and SDG17 Partnerships for the Goals.
Key Learnings
Viewing stakeholder management through a sustainability lens (i.e. for economic, environmental and social outcomes) is essential for businesses to unlock the value provided by developing stakeholder trust with those that may have an influence.
In addition, understanding and engaging with stakeholders strengthens an organisation's ability to anticipate risks and avoid crises. Even when crisis is unavoidable, good stakeholder relations enable a company to recover more readily, such as from a cycle of bad financial performance.
The investment in stakeholder relations also develops assets such as loyalty, reduced employee turnover, and improved reputation and stakeholder perception which increases competitive advantage and avoids indirect costs along the way due to unforeseen issues or conflicts.
There are many examples of organisations that implement stakeholder relations strategies voluntarily and numerous guidelines to assist them in realising the benefits of engagement. To be effective, it is important to evaluate the knowledge gained for use in future strategic decisions and continual improvement.
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Written by Shelley Anderson, a freelance certified Environment Practitioner and Sustainability professional with experience in Australia and the UK. Her expertise includes pollution and fate, biodiversity creation, sustainability reporting, environmental risk management, and due diligence, across a broad range of market sectors. She was also a Director of the Cotswold Canals Trust (UK) where she applied her skills to charity governance and impact.
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