ICSA and Investment Association publish guidance on stakeholder engagement by boards

ICSA: The Governance Institute (ICSA) and The Investment Association (IA) have published guidance to assist company boards think about how to ensure they understand and weigh up the interests of their key stakeholders when taking strategic decisions.

The guidance is designed to take board through the different elements involved in understanding and assessing the impact of a decision on key stakeholders. It is divided into seven sections dealing with: directors' duties; stakeholder identification; the composition of the board; induction and training of directors; how the board can ensure that it takes account of the impact on stakeholders in its discussions; the mechanics of engagement; and reporting and feedback. The authors believe that a focus on each of these elements is crucial and that each company's approach will be different and must be informed by its purpose, culture and values.

The guidance does not set out a comprehensive range of different approaches that should be considered but does set out some "core principles" which should guide boards (see below). The guidance also contains useful illustrative examples of how some companies have gone about achieving each of the different elements.

The guidance also notes the publication of the government's White Paper on Corporate Governance reform (click here for our overview of the proposals) in which it recommends that the UK Corporate Governance Code be amended to require listed companies to have either a designated non-executive director, a formal employee advisory council or a director appointed from the workforce, or to explain why they do not. The guidance covers each of these approaches.

The core principles state that:

  • Boards should identify, and keep under regular review, who they consider their key stakeholders to be and why.
  • Boards should determine which stakeholders they need to engage with directly, as opposed to relying solely on information from management.
  • When evaluating their composition and effectiveness, boards should identify what stakeholder expertise is needed in the boardroom and decide whether they have, or would benefit from, directors with directly relevant experience or understanding.
  • The chair, supported by the company secretary, should keep under review the adequacy of the training received by all directors on stakeholder-related matters, and the induction received by new directors, particularly those without previous board experience.
  • The chair, supported by the board, management and company secretary, should determine how best to ensure that the board’s decision-making processes give sufficient consideration to key stakeholders.
  • Boards should ensure that appropriate engagement with key stakeholders is taking place and is kept under regular review.
  • The board should report to its shareholders on how it has taken the impact on key stakeholders into account when making decisions.
  • The board should provide feedback to the stakeholders with whom it has engaged, which should be tailored to the different stakeholder groups.

ICSA and the IA state that, if necessary, the guidance will be updated following the government's corporate governance reforms expected to come into effect in June 2018, to reflect the new reporting requirements and potential UK Corporate Governance Code changes. In any event, they will review it in the second half of 2019 to reflect companies' experience of applying the guidance in practice.

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