With renewed interest in CSR, stakeholder engagement has become a buzzword. But in practice, only a very few companies earnestly pursue the policy of stakeholder engagement. Stakeholder group, by definition, is any group, which has a stake in the company. Members of stakeholder groups are likely to benefit or suffer loss or pain from the company’s operations. Examples of stakeholder groups are shareholders, employees, customers, vendors, financiers, local government and officials, central government and officials, political parties, regulators, local community, NGOs and media.
Companies engage with those stakeholder groups, which have the potential to significantly impact the economic performance of the company. An example is the importance that firms place on the supply chain management. Similarly, a firms’ engagement with political parties is well known. Firms are reluctant to engage with stakeholder groups, which have no power to impact the business, even if they are negatively impacted by the business. For example, unless some activist groups or the government take the cause of the tribal community, which is worst affected when a mining company develops and operates mines in tribal areas, the company ignores its concerns and expectations.
Stakeholder engagement is not just sharing information with stakeholders. It is a kind of collaboration with them. The objective is to build a relationship of trust with all stakeholder groups. The process is to understand their concerns and expectations and to take those into account while deciding on strategies and operations of the company. The traditional management practice is to negotiate with stakeholder groups. For example, companies negotiate with employees through their union or association on various concerns (e.g., safety and working hours) and expectations (e.g., wage revision). Peripheral stakeholders, who are not directly associated with the business, are often viewed as troublemakers. The objective of negotiation with them is to reduce trouble in doing business. For example, when a company decides to establish a new factory at a new location, it negotiates with the local community, through NGOs or elected members of the local body, about employment opportunities to the members of the local community and the firm’s initiatives for the development of the local community.
Stakeholder engagement is a process of dialogue and not negotiation with stakeholders. The outcome of a negotiation depends on the relative bargaining powers of the negotiating parties. The result of a dialogue depends on the honesty and commitment of all the parties and not on their relative bargaining powers.
Stakeholder engagement requires commitment of significant resources. It is neither practicable nor desirable to engage with every stakeholder group on every issue. Therefore, effective stakeholder engagement requires prioritasation. Traditional stakeholder management recipe requires prioritisation based on the levels of interest and power of different stakeholder groups. This method reflects the ‘negotiation’ mindset. Effective stakeholder engagement requires prioritisation based on the importance of different issues. It takes into account how the decision will impact various stakeholder groups, including shareholders. This approach, fits into such concepts such as, ‘corporate citizenship’, ‘responsible companies’ and ‘sustainability’,
Building a relationship of trust with all stakeholder groups is not easy. Trust is built through continuous dialogue and demonstration of honesty and commitment over a long period of time. . Therefore, stakeholder engagement should be an ongoing process. Companies need to establish a mechanism to enable stakeholders to regularly communicate with the management and to provide regular feedback to them on actions taken to address their concerns and expectations.
Companies evaluate every action from the perspective of ‘creating shareholder value’. Therefore, we see a lukewarm response to CSR. Visionary companies take long-term views, anticipate things to come much in advance and innovate ways to benefit from CSR activities. Therefore, they appear to be proactive in the domain of CSR. Stakeholder engagement makes a business case for companies, which aspire to grow. Visible companies derive benefits from stakeholder engagement. It reduces financial, reputational and political risks by managing environmental and social expectations better. Stakeholder engagement helps to identify issues before they become critical.
Innovative companies find that engagement with fringe stakeholders generates innovative ideas, which can be translated into innovative products, services and processes. Above all it helps to develop and hone up the skill of managing relationships, which is very useful to companies, which are required to manage varied and complex relationships.
There are plenty of examples to demonstrate that stakeholder engagement contributes positively in creating shareholder value. An example at home is the Tata Group. A manager, who can build ling term relationship of trust with stakeholders, is more valuable to the company than a manager who negotiates well with so called troublemakers.
Affiliation: Chairperson, Riverside Management