Sound corporate governance practices are essential for efficient, viable and sustainable growth of companies and institutions, including governments. An interesting definition of corporate governance is that which defines it as “a system of law and sound approaches by which corporations are directed and controlled, focusing on the internal and external corporate structures with the intention of monitoring the actions of Management and Directors and thereby mitigating agency risks which may stem from the misdeeds of these corporate officers”. (Sifuna, Anazett (2012).
The contemporary view of business as affirmed by Sarbanes-Oxley Act of 2002 and the Cadbury Report of 1992 is that the Board of Directors and Management are responsible to not only shareholders, but to stakeholders. There are generally two main stakeholders to be considered: external and internal stakeholders. While external stakeholders comprise of shareholders, debt holders, regulators, trade creditors, suppliers, customers and communities affected by the corporation’s activities; internal stakeholders comprise Board of Directors, Executive Management, and other employees.
Each group has different interests and objectives which may result in conflicts of interests, a typical one stemming from the agency theory. The essence of corporate governance is the ability of the Directors to manage the diverse expectations and interests of the various stakeholders and particularly to ensure that Managers as agents act in the best interest of the owners.
There are three stakeholder theories of Corporate Governance namely – the strong form theory, the minimalist model, and the pragmatic view.
The strong form theory canvasses that Management is answerable to all stakeholders and should try to satisfy them. The minimalist model postulates that Management is legally answerable only to the shareholders as owners and may consider other stakeholders. The pragmatic view holds that Management is not answerable to all stakeholder groups but should take account of them in the interest of commercial practicality.
There has been a shift from the traditional shareholder value-centered view of corporate governance in favour of a structure that seeks to protect the interest of a wider circle of stakeholders i.e. the strong form theory. Successful companies consider all stakeholder interests relative to the type of influence and threat they possess.
The primary step in stakeholder management is identification. Stakeholders do not have the same influence and are not affected in the same manner and thus should be identified and managed according to the impact, opportunity and threat they pose to corporate returns, reputation and sustainability. It is useful to identify those directly impacted and those indirectly affected to enable the Board of Directors define strategies to deal with each group.
Effective stakeholder management entails categorization of stakeholders based on their ability to impact positively or negatively on the operations of the Company, their power, influence and level of interest and their motives.
Communication is key in dealing effectively with stakeholders. Stakeholders require access to regular, reliable and comparable information in sufficient detail .Insufficient or unclear information will affect investor confidence and impact negatively on share price or access to equity capital. Effective communication and disclosure will improve public perception of the Company. To be effective, communication must be treated as an on-going pro-active process.
The goal of stakeholder communications and engagement is to manage expectations and minimize surprises. Red flags to be mindful of in stakeholder management include missed deadlines (regulator), strikes (employees), legal actions (customers, suppliers), bad press etc.
Managing a company efficiently to maximize returns for its shareholders is important and is at the heart of enterprise. However, it is just as important to ensure that the Company is appropriately directed such that the divergent interests of other indispensable stakeholders are balanced by the Board and Management.