Monday, August 14, 2006

Stakeholders matter - Sir John Sunderland

Sir John Sunderland is one of those inductry leaders who makes sense and yet whose organisations seem not to heed his words. The woes of Cadbury, the company he heads up, seem to fly in the face of the corporate words of wisdom. But he has just acquired the Seven-Up Bottling Company of San Francisco and the chewing gum business is seing a revival. Like your truly and McKinsey, he too, is talking the relationship langauge and also has an interest in stakeholder management.

Last July, Sir John, currently President of the CBI, talked about the nature of Stakeholderism as it applies today to the Henley Parnership meeting where he gave the keynote address. I have extracted some interesting paragraphs.

What he said is realy the job description of the Corporate Public Relations Chief. Here are words that are wise for all companies and all practitioners in Public Relations in the 21st Century, even if now he may wish he had a public relations member of the Board to add professionally qualified strategy to Group corporate and external affairs

The Stakeholder Paradox

"Today business is expected to engage with a vast crowd of poorly defined newcomers – its so-called stakeholders. And in the UK, for the first time, these newcomers are set to acquire formal rights over businesses if the Company Law Reform Bill becomes law. It will oblige directors not only to safeguard the financial interests of the companies they serve but also to have regard to their employees, customers and suppliers – and to nurture communities and the environment – in every decision they make.

"In complete contrast to its original meaning to a present-day business a stakeholder can be someone with no formal relationship to it and no obligations towards it - whatever.

"A stakeholder means anyone and any group affected by the activities of an organization.

"A few years ago the US Corps of Engineers found it necessary to define its stakeholders. It listed the Army, the Air Force the Administration, Congress employees, the environmental community, trade unions clients, the media, state and local governments professional organizations, architect-engineer firms, construction companies “and others.” Building bridges to these groups has become almost as important to the Corps as building real ones over rivers.

"Almost anyone can be a stakeholder: it is as easy as posting an entry on the Internet. I did a Google search recently on GM Foods and it produced 6.4 million hits. The entries ranged from governments and scientific bodies to NGOs, pressure groups and individuals. 6.4 million self-appointed stakeholders, and, through Google democracy, each gets the same weight. Even interests which cannot use the Internet – like endangered species – can become stakeholders if the media and pressure groups appoint themselves on their behalf. Through environmental pressure groups, the planet itself has been turned into a stakeholder.

"Essentially, these new stakeholders are claimants, who take no account of how their demands on business will be met. They are mostly unelected and unaccountable and think only of their own constituency.

"If the proposed UK Company Law Reform Bill is enacted, British businesses could face substantial new costs in routine administration and record-keeping to defend themselves from the prospect of litigation. It opens up new possibilities for directors to be sued for decisions which adversely affect stakeholders. Directors will have to prove that they acted in good faith towards those stakeholders and to demonstrate that they took their interests into account.

"Even without the complications of this Bill, the arrival of new stakeholders has dramatically complicated business strategy and relationships with traditional stakeholders, particularly consumers and owners.

"... even consumers and owners have become highly disparate groups of people with conflicting interests which modern business is often hard to put to identify, let alone reconcile.

"Consumer markets are increasingly segmented, not only in conventional ways (region, age, income, class, gender, family status and so on) but in their means of accessing goods and services (conventional shopping, or home delivery, or online). Consumers have also segmented themselves in more elusive ways – in their self-perception and their relationship to products and brands.

"Consumers have a limitless ability to re-invent themselves: one minute caring, the next selfish; one minute self-indulgent, the next self-improving; one minute proud of their origins, the next aspiring to be something new. It has always been a challenge for business to search for new consumers whilst retaining the loyalty of the old. The volatility of modern consumers makes this challenge even more acute and with it the penalties of failure.

"Moreover, this volatility has made consumers even more vulnerable to being got at by other stakeholders particularly government and pressure groups.

"The complexities of consumer relationships are matched by those of investor relationships. One is the sheer number of investors in any public company and the disparity in their power, status and interests. Every shareholder, across the world, is entitled to reports and communication – in itself a significant cost to business. Investors range in size from individuals with a few shares to massive institutions.

"Institutional and large-scale investors review these options every day even second by second in today’s instant, always-open global markets.

"Adding to the complexity, we now have the twin phenomena of the ethical consumer and the ethical investor. These people select from the myriad of available goods and services and investments those which give them the greatest moral satisfaction. Some get professional advice, from ethical investment funds but many more take their information from pressure groups, through the Internet and from each other. The Company Law Reform Bill would give such investors new power without giving them any additional responsibility towards other investors or towards other stakeholders in business. There is nothing to stop such investors taking instructions from pressure groups even those who actually want to undermine the company in which they have bought shares.

"So much for consumers and investors. What of another traditional stakeholder – the employee? Employee relationships too are more complex than ever before. Most major companies have global workforces and every major company now has the possibility of acquiring a global workforce through outsourcing. With or without outsourcing operations, more and more companies are turning to more flexible employment patterns including part-time working and short-term contracts.

"Increasingly, companies survive or prosper because of the talent they command in their workforces, their accumulated knowledge and experience allied to their capacity to create new ideas and with them to conquer new markets.

"Joining ethical consumers and ethical investors are ethical employees – people able to choose an employer who gives them a sense of worth.

"All of these factors give business a huge task in managing relationships and many of them also apply to relationships with suppliers of intermediate goods and services. As with labour forces, global companies have to manage global supply chains with no common interest and subject to disparate laws, customs and practices. It is why our human rights and ethical trading initiatives are so important and followed so closely at Board level.

"Consumers, shareholders, employees, suppliers: all of these present challenges as stakeholders even though they have formal and defined links with business. But how much more complex is it to manage stakeholders without formal links who define their relationship with business in their own terms?

"Let’s examine these.

"The first is government. People still talk about “the government” – but government is not singular but multi-layered. If you do business in London you deal with no fewer than five layers: your local council, the Mayor and Assembly, the shadowy Government Office for London, central government, and the EU. None of these bodies have the same agenda and they are elected or appointed by different methods and on different timetables. And as well there is the plethora of quangos and other publicly-funded busybodies who have relationships with business.

"Within each layer of government different departments have different interests. Indeed a single department can sometimes harbour diametrically opposed interests.

"Now let us add to the stakeholder stew the media, pressure groups, NGOs and the law. All these groups have their own interests and priorities, but they feed off each other and of course off government and they all feed off the climate of suspicion which surrounds business in many countries.

"The law, especially in the United States, has become an independent stakeholder as a direct beneficiary of any stakeholder activity which results in legislation or litigation. Moreover, lawyers can now define their own relationship with business and other stakeholders. They can choose to defend business from the claims of other stakeholders or to offer them a means of pursuing those claims through the courts – a phenomenon vastly expanded by the arrival of contingency fees.

"The media, particularly the new flourishing Internet media, are more ready to circulate hostile stories about business.

"Through their relationships with government, media and the law pressure groups and NGOs have become powerful in their own right. Their claims to represent local communities and other interests are often unverified: all that matters is that government (or media or the law) accept them. From that moment on, the pressure group becomes automatically a stakeholder.

"Pressure groups and NGOs also benefit from an asymmetry between their reputations and that of business. If a pressure group plants an inaccurate story or launches a frivolous lawsuit the worst that can happen to it is to be thought misguided or misinformed. (It may even enjoy the halo of martyrdom if it goes down in court). For business, the inaccurate story or the frivolous lawsuit can damage a company or brand reputation which may have taken decades of investment and effort to establish.

"Stakeholder demands, especially from government, have also required major new governance processes and more importantly they have required the entire business organization to understand and commit itself to high standards of business conduct. Nothing wrong with that.

"There are no simple answers but I think that businesses will not go far wrong if they base their strategy on five simple elements.

"The first is self-confidence. Business should always believe that its core activities are worthwhile and represent a contribution to society.

"The second is consistency. Business process, values and statements should be constantly understood, constantly applied.

"The third is engagement with other stakeholders. Even at their most interfering and self-righteous other stakeholders can have a genuine interest in the decisions it makes and very often genuine new insights.

"Indeed, I believe that business itself should behave like a responsible stakeholder – a legitimate and necessary interest group in all the societies in which it operates. Business should display the same persistence and clarity in expressing its views – if not the same self-righteousness – as the pressure groups and NGOs with whom it has to contend. Indeed I believe that business is the natural defender of values which are deeply cherished in world society including the rule of law, protection against arbitrary power, freedom of thought and expression and social mobility. Let us act as stakeholders for those values wherever we operate.

"For the fourth I will paraphrase Abraham Lincoln: you cannot be loved by all of the people all of the time and business needs to recognize this.

"Fifthly, I believe that business must keep uppermost the vital importance of its and its brands reputation.

"Finally, we have to recognize that stakeholder proliferation and its management paradox is a permanent reality. There is no point grumbling about it. As a business grows its markets and activities, it inevitably engages with more interests in local, national and global society. The complexities this causes should be counted as part of the price of our success."

Picture: Sir John Sunderland President of the CBI