7k0a0075What does stakeholder engagement mean in the 21st century? How has the topic gained such traction over the past few years? What is the role of the compliance professional in stakeholder engagement? How does increased stakeholder engagement help to make companies stronger, more efficient and, most critically, more profitable? I thought about all of those questions and more when I read a recent Research Report (Report) issued by BSR entitled “The Future of Stakeholder Engagement”. I was equally intrigued by the subtitle of Business Leadership for an Inclusive Economy. The report was authored by Sara Enright and, with additional guidance and insights provided by Guy Morgan, Roger McElrath, Dunstan Allison-Hope, and Emilie Prattico.

I was intrigued largely because the Report speaks to how corporations operate in the 21st century, particularly in the arena of hyper-transparency. The authors believe “There are growing calls from government and civil society for corporations to become partners in supporting a more inclusive economy and sustainable environment—and these expectations will only increase.” From the perspective of the Foreign Corrupt Practices Act (FCPA) and compliance practitioner role that means closer and more in-depth work with third parties. Obviously this presents a FCPA risk but it certainly can be managed if handled properly. Over the next couple of blog posts I will review the author’s discussion of stakeholder engagement theory and then consider their proposals to transform stakeholder “engagement approach across three dimensions: the purpose of stakeholder engagement, the type of stakeholder, and the depth of engagement.”

The authors identify five drivers of change in stakeholder engagement. The authors opine that “These are unprecedented social, economic, environmental, and political developments, over which individual companies have limited influence. These developments offer both risks and opportunities for companies willing to reframe their relationships with stakeholders.” From the FCPA compliance perspective these goals are certainly consistent with the US government stated goal of combating bribery and corruption across the globe. By partnering with stakeholders who do business ethically and in compliance with anti-corruption laws such as the FCPA, companies further this greater goal. However, companies also become more efficiently run and at the end of the day more profitable by engaging with stakeholders on such initiatives as anti-bribery/anti-corruption.

  1. Communication, Connectivity and Hyper-Transparency

There can be no doubt about the speed at which communications move. Even the 24-hour news cycle is becoming a thing of the past. The authors state “In this environment, disputes about company operations can be adopted and amplified by international civil society organizations, or even individual citizens, raising the visibility and impact of those issues.” Yet, it is not simply the speed of these communications but that “poor operational performance at any level of a firm can resonate” with the market and lead to a precipitous drop in stock price. Additionally, there has been an increase in demand for corporate disclosure via government initiatives “by regulations such as Dodd-Frank and the Modern Slavery Act and multi-stakeholder frameworks such as the Extractives Industries Transparency Initiative.”

The authors correctly note that all of these changes have significant implications for “how companies engage with stakeholders. Business leaders can no longer control the timing, content, or interpretation of the information that is disclosed about their companies. Transparency, timeliness, and accountability are increasingly emerging as fundamental characteristics of effective stakeholder engagement.” Yet, I see this as an opportunity for a business solution to these issues.

  1. Individual Empowerment and the Rise of the Middle Class

While the authors believe this prong turns on increased education and awareness across the globe, I see it in a bit of a different light. Professor Andy Spalding is one of the leading commentators on the freedom from corruption as a human right. BSR notes while “Corruption has often been portrayed as a problem limited to developing countries, but it is now clear that this is a misconception. Offshore havens and financial centers such as New York and London clearly play a critical role in the movement of illicit funds across the globe.” One only need consider the US Department of Justice’s (DOJ) forfeiture actions against the Malaysian sovereign wealth fund 1MDB, involving real estate properties in NYC and Los Angeles to see the risk involved.

Citizens of both the US and outside this country will demand the dismantling of structures supporting corruption. This will certainly continue with even US Secretary of State John Kerry speaking out on this point. As these expectations increase it will place greater requirements for companies to work in this area through stakeholder engagement.

  1. The Demographic Shift and the Automation of Work

I found this next section of the Report quite provocative. It was noted that with the aging of the population, coupled with the increase in technology and automation, “business will face intense pressure to move beyond an exclusive focus on shareholder value and provide wider societal benefits…These developments will place a premium on the ability of businesses to demonstrate the value of their support to local communities via investments, local contracting, and tax payments.” Given the uniqueness of this insight, the authors advise companies “To prepare for emerging demands, businesses should begin to assess their evolving roles, market demands, and stakeholder expectations as early as possible.”

  1. The Primacy of Climate Change and Water Resources

Unlike the US Senate, the authors are able to draw a connection between climate change and human activity. The conclusion they draw is that constituencies are seeking “accountability for climate impacts that endanger peoples’ lives and livelihood.” Further, “This may set a precedent for regulatory scrutiny of companies that have contributed to climate emissions and resulting human rights impacts worldwide. From a legal liability standpoint, such cases are difficult to prosecute, but they have enormous potential to affect the companies’ social and political license to operate.”

Here the authors articulate that businesses should “engage with communities in a substantive way, creating a form of partnership by providing communities with a voice in business decision-making. Similar types of engagement should become the norm as companies work with communities on issues related to climate change. As these issues become more pronounced, it will serve business well to establish mechanisms for engaging communities and other stakeholders. Investment in natural resources and ecosystems is one clear avenue for companies to demonstrate value and reduce risk.” Using third party platforms created by FCPA-type compliance programs could certainly be the basis for such engagement.

  1. Supply Chain Oversight Ramps Up

Any person in the FCPA space recognizes the increased emphasis on supply chain as a key part of any best practices compliance program. The increase in complex global supply chains has created greater efficiencies but, as the authors note, “it has also resulted in severe problems with working conditions and environmental degradation in many supplier operations.” The authors currently see the leading approaches as what they term the “audit approach” but believe this “Self-regulation of supply chains will come under pressure as regulatory reach expands and examples of poor governance are increasingly highlighted.”

However, here they believe it will be through engagement with supply chain entities that the greatest efficiencies will be achieved. They urge “a structured approach to identifying, managing, and mitigating supply chain risk will not entirely protect companies from reputational risk.” By balancing “proactive and transparent approaches” stakeholder engagement in the supply chain arena will allow the development of “collaborative solutions to tackle systemic change.”

The bottom line is that change is coming. As a business you can either get ahead of it and use it to your advantage or fall behind your competitors. The authors believe “A more integrated approach to stakeholder engagement is needed. This approach should incorporate consideration of political risk, societal transformation, and dramatic shifts in perception, and focus on building social license at all levels. A deep understanding of stakeholders and a proactive response to their emerging needs is now required. Stakeholder engagement is one of the primary tools companies have to ensure that their activities are inclusive and benefit society. While engaging external actors on risk and reputation will remain important going forward, companies can use meaningful stakeholder engagement to achieve much, much more.”

Tomorrow I will consider how the authors suggest you rethink stakeholder engagement.

To hear co-author Alison Taylor speak on my podcast, The FCPA Compliance Report on this subject, click here.

This publication contains general information only and is based on the experiences and research of the author. The author is not, by means of this publication, rendering business, legal advice, or other professional advice or services. This publication is not a substitute for such legal advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified legal advisor. The author, his affiliates, and related entities shall not be responsible for any loss sustained by any person or entity that relies on this publication. The Author gives his permission to link, post, distribute, or reference this article for any lawful purpose, provided attribution is made to the author. The author can be reached at tfox@tfoxlaw.com.

© Thomas R. Fox, 2016