Theodora Thunder, member of the Red Links Sustainability Consortium and independent consultant, demonstrates the ways in which strategic stakeholder engagement provides a means for organisations to stay in touch with the rapidly changing ecosystem in which they operate in the post-Covid world.
The Review of Corporate Governance Code and Related Listing Rules, published in April this year by Hong Kong Exchanges and Clearing Ltd (HKEX), sets out to encourage, among other things, the ‘effective engagement with shareholders and stakeholders’ by listed companies in Hong Kong. This signals a potential regulatory response to the increasing investor demand for a better understanding of the influence and impact stakeholder expectations have on material risks to future corporate development, in particular in the environmental, social and governance (ESG) space. Box-ticking on internal energy consumption or employment by gender numbers is no longer the ‘dish of the day’.
Post-Covid ESG pivot
While the Covid-19 pandemic is still very much with us, we have entered the ‘post-Covid’ world in the sense that the pandemic has made lasting changes to the business, social and political environment. The stakeholder engagement that influences ESG strategy development in post-Covid boardrooms arises from the internal appreciation of the still-evolving social licence to operate and the rapidly changing ecosystem (increasingly influenced by climate change) in which companies operate. This implies the need for a high-level strategy that recognises disruption around stakeholder expectations and their measurable impact across the spectrum of governance, social, economic and environmental issues.
Strategically engaging stakeholders in this business environment delivers valuable insight into the challenges ahead and sources of disruption. Importantly, this disciplined approach informs resource allocation and management. Boards are charged to allocate resources and justify their decisions. The judicious use of corporate resources is clearly their responsibility and duty of care.
Governance by definition implies a structured approach to organisational management. While most companies undertake stakeholder engagement, the potential risk management focus that strategic engagement brings to the table is often underestimated, or entirely missed, due to a lack of a well-organised and purpose-driven strategy and framework behind it. From a governance perspective, the identification and treatment of risks before they impact operations is cheaper than recovery after the fact.
Stakeholder engagement, due to its elastic nature, is best managed through a strategy based on principles for action, captured in a policy framework that guides rather than prescribes process. This has been the approach of many global ESG leaders, such as Unilever in product development under its ‘sustainable living plan’, or Patagonia with its ‘culture matters’ strategy in employee engagement. The objective is to articulate the strategy and roadmap (governance and policy) while encouraging flexibility in the navigation and method of engagement (risk management and metrics). Using this framework gives the latitude to develop fit-for-purpose engagement while retaining the disciplined and transparent governance when measuring, managing and reporting the social, economic and environmental risks to organisational development.
The principles of inclusivity, materiality, responsiveness and impact, foundational to AccountAbility’s AA1000 series (www.accountability.org), present a practical four-stage framework for stakeholder engagement in practice. Each principle (outlined below) serves a specific purpose towards strategy implementation and, in turn, facilitates next-step actions to create a cycle of momentum for continuous improvement. As a management tool, this cycle articulates expectations, documents material risks, guides and monitors the response mechanisms and provides the feedback and learning senior management and boards require for strategic decision making.
Inclusivity invites stakeholder voices to have a say in the risks and decisions that will impact them. This alerts senior management to the disruptive influences and changing priorities within the stakeholder universe akin to the adage of being the ‘canary in the coal mine’. Inclusivity creates the environment for constructive dialogue and ensures that all relevant stakeholders are involved and heard. The goal is to listen, learn and build trust.
Materiality builds on the stakeholder voice as it represents a critical measure of impact the company has on the risks across its value chain and a voice that amplifies if mitigating actions operate as intended.
It is important to remember that materiality is largely a risk assessment process from the company perspective, and an exercise in voicing expectations and influence from the stakeholder perspective. Materiality can therefore potentially involve a judgement call between the two, especially when a conflict of interests arises.
Thanks to many converging standards, such as those of the Task Force on Climate-related Financial Disclosures and the Sustainability Accounting Standards Board, the concept of double materiality is fast becoming the norm in reporting. Double materiality makes it clear that organisations have a responsibility not only to report on the risks impacting them, but their own impacts on the economy, environment and society within which they operate.
Responsiveness is where the rubber meets the road in developing and implementing fit-for-purpose mechanisms to manage material issues. It is important to act transparently with stakeholders when developing a response to their feedback and to ensure that any actions align with the targets and goals of your ESG strategy. Prior to developing any initiative, the resources, internal competencies, management support and, critically, the buy-in from relevant stakeholders need to be in place. Without these, response is a non-starter.
On the opportunity side, issue owners should consider partnering with stakeholders to leverage outcomes and impact rather than just responding to expectations. Building in common goals when developing a response incentivises collaboration and increases the efficacy of actions.
When assessing and reporting impacts, the board holds itself and its reputation to account for how its actions affect not just its stakeholders and organisational development, but also its broader ESG commitment to ecosystems and society. With effective and disciplined engagement supported by a structured reporting process, management can disclose more meaningful context to performance that demonstrates accountable responses to expectations, including the social licence to operate.
Internally, impact highlights the strategic and operational intent of engagement, the maturity of the company’s sustainability development management, efficiency of internal resources allocation and the levels of competencies to implement ESG strategy at all levels of the organisation, including the board.
Art or science?
Stakeholder engagement is often perceived and used more as an art than a science and is therefore difficult to organise into meaningful data points. Taking the steps to recognise engagement as a strategic governance tool, as HKEX encourages listed companies to do, suggests a company can transform art into science through a structured management and process that informs decision-making at all levels of the organisation.
SIDEBAR: Link REIT – a case scenario
The Hong Kong-based real estate investment trust, Link REIT, is one of the first listed entities in Hong Kong to publicly formalise and hold itself accountable to a board-level stakeholder engagement policy and process. When implementing its ‘business as mutual’ development strategy, the company recognised early the need for a structured stakeholder engagement policy supported by a disciplined companywide process to achieve stated ESG goals and targets.
‘Stakeholder engagement allows us to benchmark how critical business relationships and interactions grow and improve, while providing a valued feedback loop for supporting delivery of corporate strategy,’ comments Dr Calvin Lee Kwan, Head of Sustainability and Risk Governance, Link REIT.
At the operational level, Link’s engagement policy instructs and facilitates ‘business as mutual’ across the group’s several operating regions and business disciplines. Using the principles-based approach, the ESG strategy goals are articulated within the stakeholder engagement policy, while allowing for a diversity in operating cultures and stakeholder expectations in implementation. With this structure in place, the engagement process is more productive, produces more meaningful performance data, encourages trust and, importantly, adds to management’s understanding of any emerging risks and potential development opportunities. Further, a key component is to provide the clear feedback to participants so that they know that their opinions are heard, encouraging them to continue participating in such exercises.
This article was first published in CSj the monthly journal of The Hong Kong Chartered Governance Institute, October 2021, and is reproduced here through the kind permission of Theodora Thunder, member of the Red Links Sustainability Consortium and independent consultant.
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