Boards have been pulled into the governance of stakeholder relationships. The acceleration of previous socio-economic trends, business model disruptions and 24-hour news cycles have forced boards to address the interests of multiple stakeholders today rather than in the future. Those boards and investors that previously saw value in multiple stakeholder relationships are finding the resiliency and systemic support to thrive during the present turbulence.
In a previous article, I talked about the importance of stakeholder relationships as a key governance principle in achieving a company’s mission and strategic outcomes. I also talked about how those relationships are built upon trust and I began to define elements of trust using aspects of trust delineated by David Maister, et. al. How then does a board actually oversee and steward trust through the life of stakeholder relationships?
Before we explicitly address that question, let’s first set the context by defining key modes of stakeholder relationships and the kinds of activities that are included in each one. Let’s also note how credibility, reliability, interest, and transparency affect the development of trust in each one. Three key modes of stakeholder relationships are:
- Initial stakeholder engagement
- On-going stakeholder management
- Stakeholder problem solving
While the first two modes are sequential, the third mode, problem solving, can occur at any time during a relationship with stakeholders. Let’s explore each mode.
Initial Stakeholder Engagement
The initial engagement of stakeholders begins with expectations of the company and the stakeholder. Whether that is a customer, employee, investor, business partner, regulator, or community, there is an expectation of some kind when first choosing to engage.
For example, a customer expects the company’s product or service to “perform a job”, in the language of Clayton Christensen, that the customer wants or needs. An employee expects remuneration, recognition, fulfillment of some kind, and perhaps social reinforcements. An investor expects certain return on capital and so forth.
The company also has expectations from all of the categories of stakeholders. Whether that is capital from investors, revenue and promotion from customers, labor and loyalty from employees, etc., the company has expectations of stakeholders and the on-going relationship.
These engagement expectations also carry stated and assumed promises from the other side. To the degree that expectations and promises are articulated and demonstrated through word and deed, value begins to be created and trust begins to grow.
On-going Stakeholder Management
Once the expectations and promises are mutually established, either explicitly or implicitly, the stakeholder relationship begins to live and develop through time. In order to engender trust, the relationship itself must be transparent and explicit.
Expectations are usually formalized and captured as outcomes and metrics. For example, in a manufacturing process, companies can provide suppliers with order forecasts and timely evaluated receipt settlements while business partners can supply products that meet quality standards and the expected delivery date. Both parties in this relationship can formalize financial and non-financial metrics to reflect those outcomes, measuring the progress, success and value creation of the engagement. Another example of formalizing expectations is that of customer outcomes and metrics, one stakeholder category that has a long history of management sophistication and success in comparison to other stakeholder categories.
Outcomes and metrics will best be established through collaboration of both parties, whether that occurs intentionally through planning meetings, negotiation, etc. or informally through collecting “voice of the customer”, employee surveys, data analytics, etc.
After outcomes are defined, the execution tasks and processes of the on-going engagement are defined and followed. The status and changes of those processes must be formally and informally communicated often to continue to foster transparency and, in turn, trust.
Stakeholder Problem Solving
Every stakeholder relationship will experience problems at some point, from within or outside the relationship, and they could occur in either mode above. Some of those are caused by events (e.g., pandemics, social unrest, market disruption, etc.), some are caused by mis-communication, and some are caused by changes of expectations or capabilities from various parties. When problems arise, the stakeholder relationship is tested.
One key to solving problems while maintaining and strengthening the relationship is transparency. That means quickly recognizing and communicating the issues while being transparent about the motives for solving the problem, the methods that will be used to solve the problem, and the criteria used to declare success. That is, of course, best accomplished by collaboration among both parties of the issue, e.g., company and customer, company and supplier, company and investor, etc. It is also best accomplished at the beginning of the relationship prior to the onset of any problems.
Board Steerage and Oversight
So now we have defined three modes of stakeholder relationships and characterized the modes by describing some of the activities and interests within them. We have also begun to point toward examples of how aspects of trust can be applied and reinforced during those modes. With that context in mind now, how does a board actually oversee and guide stakeholder relationships?
As always, the most powerful way a board can do that is with questions. Questions surface the unknown and inattentive into the the light for consideration. In this case it is those governance questions that reinforce the purpose and values of the company while assessing the capability and risk of achieving the strategic outcomes established for each stakeholder category.
One way we could organize those questions is to use elements from a framework called the Governance Capital Model. It was developed by The Institute for Excellence in Corporate Governance of the Jindal School of Management at The University of Texas at Dallas (UTD) for use as an assessment tool and guide for governance excellence. The model defines governance capital as:
The tangible and intangible value of an organization’s people, resources, processes, and culture available to achieve the organization’s outcomes.”
The Institute for Excellence in Corporate Governance, The University of Texas at Dallas, Jindal School of Management.
As a board director, if we organized our governance questions about stakeholder relationships using the categories of people, resources, process, and culture, we could ask something similar to the following highly condensed questions.
People
Do we have the people on the board, in the C-Suite, and in the organization with the right skills, experience, and adaptability to initiate, manage, and problem solve stakeholder relationships for each category of stakeholders, i.e., customers, employees, investors, business partners, government regulators, and community, such that we will achieve our financial and non-financial strategic outcomes?
I realize that the compacted and unwieldy sentence above contains a lot of concepts and assumptions. It can be parsed by asking focused and detailed questions as the specific situation demands. For example, one could ask if we have the right people in the C-Suite with the necessary skills to manage our community stakeholders at large, such that we will achieve our stated strategic outcomes for local community involvement. As another example, we could ask if we have the right people in the organization with experience to problem solve with our supplier stakeholders for the purpose of creating enhanced resiliency in our supply chain together.
We can apply that approach of question parsing to each of the following remaining compacted questions, again as the specific situation demands.
Resources
Do we have resources of capital, assets, and external partners that are sufficient, deployable, and sustainable, to enable the company to initiate, manage, and problem solve stakeholder relationships for each category of stakeholders, i.e., customers, employees, investors, business partners, government regulators, and community, such that we will achieve our financial and non-financial strategic outcomes?
Processes
Do we have value-creation, control, and reporting processes that are documented, measured, and reviewed, thus enabling the company to initiate, manage, and problem solve stakeholder relationships for each category of stakeholders, i.e., customers, employees, investors, business partners, government regulators, and community, such that we will achieve our financial and non-financial strategic outcomes?
Culture
Do we have the cultural artifacts, value and practices that are defined, aligned, and reinforced, thus enabling the company to initiate, manage, and problem solve stakeholder relationships for each category of stakeholders, i.e., customers, employees, investors, business partners, government regulators, and community, such that we will achieve our financial and non-financial strategic outcomes?
A New Approach
A new approach to governance requires a board to continually oversee and steward trust through all stakeholder relationships. I have summarized one way to actually do that by using a scheme of stakeholder relationship modes along with elements from the Governance Capital Model of UTD’s Institute for Excellence in Corporate Governance.
By defining the company’s stakeholders, identifying the mutual expectations and promises, ensuring that processes are intentionally managed across a company’s organization, and resolving issues transparently, all stakeholder categories can be addressed to create mutual value. Over time, this builds stakeholder relationships of trust.
It is the board’s job to ask the salient questions that surface the organization’s intention, value creation, growth capabilities and risks of all stakeholder relationships.