Quality engagement with local communities and civil society groups is part of being a good corporate neighbor and improves your company’s social license to operate. It can also positively impact sales and market value. Customers, investors, and regulators around the globe are calling for transparent reporting about the impacts of business activities on communities and local societies. Still, even today, many companies think maintaining an ongoing dialogue with key social groups is not worth the investment. In this article we’ll give you 7 reasons why a solid stakeholder engagement strategy is key to having a responsible and profitable business.
This is a blog in the FairChange series Social Impact: Strategies for Success, about 5 key areas of opportunity to upscale the value your company creates for society.
The international movement towards greater social responsibility from businesses has led to a rapidly growing awareness that meaningful engagement with internal and external stakeholders is key for any company. According to the SustainAbility Common Threads survey (2018), companies and other relevant sectors of society think that we will see even more engagement in the next three to five years. This means: more proactive and more strategic relationship building with communities and other key groups.
Directly related to this trend, in the last 25 years, the number of mandatory or voluntary provisions for private company disclosure of social, governance, and environmental issues has increased exponentially. The Reporting Exchange (2018) registers more than 2,000 global and national reporting provisions.
This means there are plenty of reasons why your company should invest in a solid stakeholder engagement strategy and issue quality reports to inform its audiences about the impacts it has on people and society.
In this article, we’ll detail 7 benefits of quality stakeholder engagement:
- Sound stakeholder management can increase sales and market valuation
- Stakeholder engagement improves your company’s decision-making processes
- Effective relationship management enhances your company’s social license to operate
- An ongoing dialogue with communities prevents costly conflicts
- Stakeholder engagement helps your company address global sustainability challenges
- Local civil society participation enhances effective risk management
- Stakeholder engagement is key to quality impact reporting
Do you prefer to read this post as an eBook, updated with new information and completed with extra bonus tips? Get the eBook on Stakeholder Engagement here!
But before we dive into these 7 benefits, let’s take a closer look at what stakeholder engagement is exactly.
What is stakeholder engagement and why it is important for your business?
Stakeholder engagement refers to the processes and channels that your company can use to build relationships with relevant individuals, groups, and organizations. Stakeholders can be internal or external, including employees, investors, consumers, communities, NGOs, governments, regulators, the media, and business partners, among others.
Within the rapidly expanding movement around corporate social responsibility and social impact management, stakeholder engagement –especially with neighboring communities and relevant civil society groups– is considered a key strategy area. Its goal is to build trust and to create tangible and intangible value, both for your company and relevant stakeholders. This also benefits broader society by addressing social and environmental challenges and by contributing to positive change.
Stakeholder engagement has evolved significantly over time and today it is recognized as a fundamental mechanism for inclusive decision making and accountability. According to the AA1000 AccountAbility Stakeholder Engagement Standard (2015) –the most widely applied global framework on this issue– organizations should involve stakeholders in ‘identifying, understanding, and responding to sustainability issues and concerns.’
It is also becoming mainstream practice for companies to ‘report, explain, and answer to stakeholders for decisions, actions, and performance.’ Widely used frameworks for sustainability reporting, such as the GRI standards, stress the importance of including a variety of stakeholder views into the different phases of the process to elaborate these reports. Stakeholder participation, in turn, improves the quality of the decisions your company makes about its actions for positive social impact.
While stakeholder engagement can include many different internal and external interest groups, at FairChange we prioritize engagement with local populations and civil society groups who are directly impacted by your business’s decisions and activities and that can, inversely, impact your company. So, in this article, I’ll focus on the benefits of meaningful company-civil society relations for your business.
7 reasons why your company should invest in quality stakeholder engagement
The benefits of quality stakeholder engagement are manifold. Below we’ll highlight 7 of them.
1. Sound stakeholder management can increase sales and market valuation
If your company engages in strong stakeholder relationship management practices this can pay off with reputational gains that support sales and share price increases. A meta-analysis of hundreds of corporate responsibility studies by IO Sustainability and Babson Social Innovation Lab finds that firms that treat their stakeholders well have the potential to increase their market valuation by 40% to 80% compared to companies with average or weak relationships. In turn, when a firm performs well financially, good stakeholder relations help sustain this positive performance for a longer period of time.
Corporate survey respondents and interviewees included in the previously cited SustainAbility Common Threads 2018 report indicate that the impacts of stakeholder engagement measured by their companies include commercial opportunities identified or realized, growing market shares, improving the industry’s reputation, and a withdrawal of shareholder resolutions.
The importance of a positive relationship with stakeholders for a company’s market value is illustrated by the inclusion of stakeholder engagement in corporate rankings. For example, in 2014, the longest-running corporate social responsibility benchmark: the Dow Jones Sustainability Index added the quality of companies’ stakeholder engagement as an assessment criterion. A good ranking score in corporate benchmarks is, in itself, a way to improve trust among financial stakeholders. Evidence analyzed by IO Sustainability and Babson Social Innovation Lab suggests that a company’s performance in certain ratings may result in improved financial performance.
Consistency is key to obtaining and maintaining positive stakeholder perceptions and thus, securing increases in market value over time. A study by Wang and Choi (2013) finds that enhanced financial performance driven by positive stakeholder relationships isn’t only dependent on the company being actively involved in social actions. If the way it treats a stakeholder group varies markedly over time or the quality of its relations differs across multiple stakeholder groups, this will lead to the perception that its commitment to social responsibility is inconsistent. This, in turn, can affect the firm’s financial performance.
2. Stakeholder engagement improves your company´s decision-making processes
Effective dialogue with stakeholders enhances the quality of decisions on issues that impact your stakeholders. Widely used international guidelines and frameworks for social responsibility, such as ISO 26000 and AA1000 AccountAbility Stakeholder Engagement Standard (2015), stress the importance of including the perspectives of your organization’s relevant stakeholders in decision-making processes.
At the same time, being transparent about the decisions made and their impacts on your stakeholders –whether they are positive or include consequences that can be perceived as non-desired– is also part of a solid stakeholder engagement strategy.
Establishing dialogues with multiple stakeholder groups enriches your organization’s capacity for analysis. Including multiple points of view and information sources brings in knowledge your organization would otherwise not have access to, helping it to arrive at unforeseen solutions.
Best practices for effective stakeholder engagement from companies around the world demonstrate the importance of a true commitment to act on stakeholder input. The Common Threads report registers a phenomenon it calls ‘stakeholder fatigue’ among its survey respondents. It’s a frequent complaint from NGOs and civil society groups: companies continue to invite them to invest time and share their insights but don’t reflect this input in changed behavior. If your company doesn’t really modify decisions based on relevant stakeholder input, they’ll see no point in participating again.
3. Effective relationship management enhances your company’s social license to operate
Building positive relations with key stakeholders enhances your company’s license to operate. This means your organization’s presence and commercial activities can count on the ongoing approval among local populations, civil society organizations, and other groups. Creating trust and legitimacy through strategic stakeholder engagement is critical, especially if your activities directly or indirectly affect the lives or natural environment of neighboring communities.
Approval among relevant stakeholders comes with quantifiable business benefits. The IO Sustainability and Babson Innovation Lab study finds that risk reduction and enhanced license to operate associated with socially responsible business practices has the potential to protect as much as 10% of the firm’s value. Investors valued mining companies with strong stakeholder relationships 46% – 86% higher than those with average or weak relationships.
CEOs surveyed for the SustainAbility Common Threads report 2018 measure the benefits of active stakeholder engagement through a mix of quantitative and qualitative indicators that include removal from NGO campaign target lists, withdrawal of shareholder resolutions, and identified or realized commercial opportunities.
Investing in relationships with neighboring communities is even more important for companies in sectors with a high potential for causing adverse social and environmental impacts. On-the-ground experiences such as those of mining companies in Peru demonstrate that a social license to operate starts with deeply understanding the socioeconomic environment and a strong commitment to the community. Transparent and continuous communication between the company and local populations and clarity about the benefits and risks involved in the company’s activities are also critical to building trust and social legitimacy.
While building collaborative relations with your neighbors is essential to doing business based on values, it is also becoming a critical component of reputation management among your company’s wider audiences. Increased access to the internet and mobile services and the sophistication of social media platforms has boosted the capacity of civil society, consumer groups, and activist organizations to share any information about (alleged) adverse business impacts on local stakeholders in real-time and on an unprecedented, global scale.
According to the BSR report The future of stakeholder engagement, this trend is expected to intensify in the future. Steadily improving income levels and literacy rates concentrated in the Global South will enhance stakeholder empowerment in companies’ local operating areas, including previously remote and underserved regions. As these populations are becoming increasingly well-informed and capable to voice their concerns, there will be an increase in their demands for responsible corporate behavior around social and environmental matters that affect their lives.
4. An ongoing dialogue with communities prevents costly conflicts
An ongoing and meaningful dialogue with neighboring communities and other local stakeholders helps your company prevent disputes and protests that disrupt operations and may result in significant security risks. It thus prevents extra business costs and revenue losses stemming from actions that look to affect business operations such as blockades, boycotts, or sabotage.
According to a Queensland University and Harvard Kennedy School study, the conflict between companies and communities can incur costs of 20 million US dollars per week for extractive industry projects valued between 3-5 billion dollars. Read more in our blog post: 7 Steps to turn conflict risk into opportunities for responsible business.
Grievance mechanisms are an effective component of any stakeholder strategy aimed at creating peaceful relations with local communities as well as workers and their families. Through these mechanisms, individuals and communities can voice their concerns over the alleged adverse impacts of your company’s activities or those of its suppliers. Common complaints include human rights incidents or environmental damage. It’s important to put procedures for handling grievances in place as a standard practice instead of waiting until incidents occur.
The extractive industry has gained considerable experience in the development of grievance mechanisms and many tools are freely available online to help oil and mining companies set up and implement such mechanisms. An example is the toolkit developed by the International Council on Mining and Metals (ICMM), with guidance that’s also useful for companies in other sectors.
Several guidelines on the market focus on human rights grievances, in accordance with the so-called Remedy Pillar of the widely used, voluntary UN Guiding Principles on Business and Human Rights. A good place to start is the guide about remediation and grievance mechanisms by Doing business with respect for human rights, the leading center of expertise on the Guiding Principles.
Although grievance mechanisms are a powerful tool to address incidents when they occur, it’s important to note that it will be a lot more difficult to build trust when grievances have been filed or a dispute has broken out. This is why the prevention of complaints and conflicts must be at the center of your company’s community dialogue strategies as an ongoing effort.
5. Stakeholder engagement helps your company address global sustainability challenges
Good relations and strategic partnerships help your company and your stakeholders address critical global challenges that impact local societies and create stable and sustainable operating environments.
Human rights risks are among the major global threats. Of respondents to the World Economic Forum’s Global Risks Perception Survey 2018-2019, 34% expect the risk of human rights violations to increase in the short term. Several challenges related to specific human rights are also expected to grow significantly. Examples include: ‘loss of privacy to companies’ (related to the fundamental right to privacy), which respondents think will increase by 63%, and ‘high levels of youth unemployment’ (related to the right to work) by 58%.
Without respect for the human rights of everyone, just and inclusive development is not possible. Human rights respect is also a key component of your company’s relations with workers, suppliers, and local communities. The UN Guiding Principles on business and human rights stress the importance of human rights due diligence by companies to guarantee the dignity and well-being of local communities and other stakeholder groups that can be affected by business activities. Read more in our blog post: 7 Ways promoting human rights adds value to your business.
Corruption is another global threat to sustainable development that is highly relevant for corporate stakeholder relations. According to the World Economic Forum corruption costs the global economy 3.6 trillion dollars every year. It contributes to instability and poverty and its consequences hurt vulnerable people disproportionately. Honest and transparent relations with public sector representatives, stakeholders within the organization, suppliers, and business partners should therefore be a key component of your stakeholder engagement strategies.
Supporting the Sustainable Development Goals (SDGs) is a powerful way for your company to help reduce these global challenges. The 17 SDGs, endorsed in 2015 by the government members of the UN, are a roadmap for collective action across sectors to achieve inclusive economic development, social justice, and protection of the environment by 2030. Read more in our blogpost: 10 Business opportunities of supporting the SDGs.
According to the ‘Better business, better world’ report of the Business and Sustainable Development Commission (BSDC), embedding the SDGs into business models is not only an effective strategy to manage global risks, the positive business impacts are also compelling. The BSDC calculates that achieving the goals will open up 12 trillion dollars in market opportunities and lead to the creation of more than 380 million jobs in both developed and emerging economies.
Building strong relationships with stakeholders is critical to seize these opportunities. Global Goal 17 addresses the importance of stakeholder engagement and multi-stakeholder partnerships–-including public-private and civil society alliances. The UN Global Compact, the United Nations network organization dedicated to mobilizing businesses across countries in support of sustainable development, has its own portfolio of multi-stakeholder action platforms to explore new market opportunities and fill existing gaps to meet the SDG targets.
6. Local civil society participation enhances effective risk management
Effective stakeholder engagement strategies increase your company’s capacity to assess and manage social risks and impacts. This, in turn, can positively affect financial performance.
Several studies document evidence across countries and industry sectors demonstrating the positive relationship between corporate social responsibility and a reduction of financial risks. Effective engagement with key stakeholders leads to enhanced trust, reputation, and brand value. The data studied by IO Sustainability and Babson Social Innovation Lab reveal that the estimated risk protection delivered by a well-managed corporate responsibility program tied to reputation and integrity is estimated at 4% to 7% of the company’s total value.
Galant and Cadez (2017) cite studies demonstrating that the better a firm manages its relationships with its stakeholders, the more successful it will be over time. Market constituents, including employees, customers, suppliers, and creditors can directly trigger a shortfall in economic rents due to unfavorable economic choices. On the other hand, non-market actors such as the general public, media, and NGOs indirectly exert their influence by conveying information. Any of these stakeholder groups –whether their influence is direct or indirect– can pose risks if they’re dissatisfied with a company’s (perceived) CSR performance.
That’s why it’s critical to conduct solid context analysis and risk assessments that go beyond the identification of risks to your company and take into account potential negative effects on local populations. These assessments should include indicators for human rights risks, environmental impacts that could threaten traditional livelihoods, and conflict risks if your company operates in fragile areas. They should be done before and during new operations, when significant changes in existing projects occur, and before closing down existing projects. In each of these situations, they will provide essential insights to build good relations with your neighbors.
The importance of sound stakeholder engagement for the effective management of environmental and social risk is reflected in the widely used Performance Standards on Environmental and Social Sustainability issued by the International Finance Corporation (IFC). Evidence with risk assessments by private sector actors across the globe shows that these processes are most effective if the perspectives of affected communities are added.
By involving local civil society groups, local authorities, and other relevant stakeholders in the process of identifying risks and impacts, your company starts a conversation with the community early-on, making it part of the risk mitigation efforts itself. This, in turn, is the most effective way to avoid unforeseen consequences ending up at your company’s gate when it’s much more difficult to manage them.
7. Stakeholder engagement is key to quality impact reporting
Whether you’re a small or a large company, the elaboration of sustainability reports to demonstrate progress (and setbacks) around the social impacts your company creates should be an important element of your communications strategies. And to elaborate those reports, it’s important to actively involve communities, civil society groups, local authorities, and other stakeholders present in your organization’s areas of influence.
The participation of relevant stakeholder groups is central to the Global Reporting Initiative (GRI) reporting standards –which are the most widely used sustainability disclosure framework adopted by larger companies across countries and increasingly by small and medium-sized companies too. Your company’s stakeholders should participate in all cycles of the sustainability reporting process, from the definition of material topics (or priority management issues) to the evaluation of the quality of previous reports.
Also, the GRI standards demand that the sustainability report should be clear about the key topics and concerns that have been raised through stakeholder engagement, how your organization has responded to those issues and concerns, and how these are being included in the company’s management and reporting cycles.
Other reporting guidelines, such as the UN Guiding Principles Reporting Framework, which focuses on businesses human rights performance, also highlight the importance of incorporating the perspectives of individuals and communities. In particular, groups that are directly or indirectly affected by your company’s activities should be actively engaged in the process of collecting and disclosing data to consumers, investors, regulators, and other key audiences.
In fact, there’s an increasing demand for transparency expressed by consumers, investors, and a critical community of civil society and online campaigning organizations. Companies should not only report on their own actions, but also about the impacts created by actors in their local or global supply chains.
Although it’s not always easy to effectively balance the information needs of these different reader groups, it’s certainly worth the effort. Studies demonstrate that quality CSR reporting creates tangible value for businesses. Kimbro and Cao (2011) find that companies that are signatories to the UN Global Compact and publish the required COP (the yearly Communication on Progress report) show less risk, better market returns, and have lower debt and equity costs. They also have a statistically significant higher Return on assets (ROA).
Actively reaching out to external stakeholders during the elaboration and evaluation of sustainability reports is also very relevant if your company commits to supporting the Sustainable Development Goals.
The PWC Reporting Challenge 2018 analyzes the corporate and sustainability reports of over 720 companies across countries and industry groups and concludes that the SDGs have broken into mainstream business reporting: 72% of companies now mention the Global Goals in their annual corporate or sustainability report. However, according to the analysis, there’s still a long way to go to improve the quality of the information provided. The average reporting quality score for those companies that had prioritized SDGs is 2.71 out of 5.
According to the GRI & UN Global Compact’s practical guide on Integrating the SDGs into corporate reporting, consulting both internal and external stakeholders is a key strategy to elaborate quality SDG-aligned reports. They should be included on a regular basis to provide input during the process of collecting quantitative and qualitative data in relation to each SDG indicator.
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Quality stakeholder engagement: your next steps
As you’ve seen, there are many compelling reasons why your business should invest in constructive, continuous dialogue with local communities, civil society groups and other key stakeholders.
Stakeholder engagement is a topic that means a lot to me. I will be publishing about regularly in the future and will also develop tools for effective dialogue and cooperation with your stakeholders. So come back and check this website for any updates!
Do you want to learn more about other opportunities for creating social impact? Then download the other eBooks in our FairChange series Social Impact: Strategies for Success on the FairChange Academy Digital Learning Platform.
Sources
- The Sustainability Institute: Common Threads Report (2016)
- The Reporting Exchange Website
- AccountAbility Stakeholder Engagement Standard
- Queensland University and Harvard Kennedy School study
- GRI standards
- IO Sustainability and Babson Social Innovation Lab, Project ROI study: “Competitive and Financial Advantages of Corporate Responsibility and Sustainability”
- Corporate Social Performance study by Wang and Choi (2013)
- Guidance on social responsibility – ISO 26000
- Article by Claudia Sícoli Pósleman and Jose M. Sallan: “Social license to operate in the mining industry: the case of Peru”
- BSR Report: “The Future of Stakeholder Engagement”
- Community Development Toolkit by the International Council on Mining and Metals (ICMM)
- Doing business with respect for human rights: Remediation and grievance mechanisms
- World Economic Forum’s Global Risks Report 2019
- UN Guiding Principles on Business and Human Rights
- Economy loses 3,6 trillion to Corruption, article by the World Economic Forum
- Sustainable Development Goals (SDGs)
- Article by Adriana Galant and Simon Cadez (2017): “Corporate social responsibility and financial performance relationship: a review of measurement approaches”
- International Finance Corporation (IFC): Performance Standards on Environmental and Social Sustainability
- UN Guiding Principles Reporting Framework
- Article by Marinilka Kimbro and Zhiyan Cao (2011): “Does voluntary corporate citizenship pay? An examination of the UN Global Compact”
- PWC: SDG Reporting Challenge 2018
- GRI & UN Guide: “Integrating the Sustainable Development Goals into Corporate Reporting”
