Stakeholder engagement is key to upholding principles of the UK Corporate Governance Code

As we approach the end of 2019, many companies will be thinking ahead or may have even begun drafting their annual reports. With significant changes to the many codes of governance (e.g. the QCA Code) as a result of the publication of the UK Corporate Governance Code 2018 (the 'Code') and the introduction of the Companies Miscellaneous Reporting Regulations 2018, 2019 has been a transitional period for many companies as they put arrangements in place to implement the necessary changes to achieve compliance. One of the key areas which most companies will no doubt be focusing on is stakeholder engagement, following the Code's emphasis on companies effectively engaging with their shareholders and wider stakeholders.

Below, we outline some of the key considerations companies should be thinking about:

Have you identified your stakeholders?
Stakeholders are defined as those groups which are likely to be affected by the actions of the company, or whose actions can affect the company's operations.

These are usually shareholders, investors, employees, suppliers, customers, communities, etc. but will differ from company to company and will change from time to time:

  • carefully think about your company's sector, location, etc. when identifying stakeholders – who is affected positively or negatively by the company's operations? Think about involving other parts of the business in order to capture all stakeholders
  • identify both positive and negative stakeholders. This way you have an idea on either's ability to potentially impact the company's activities
  • categorise your stakeholders – e.g. internal and external stakeholders or in groups with similar interests. Consider carrying out a mapping exercise using a materiality matrix, for example listing key stakeholders groups, what may their short term and long term concerns and expectations be?
  • think about if/how the company's current activities and future plans could impact each stakeholder group.

How to engage with your stakeholders?

Following the identification of stakeholders, engagement mechanisms should be implemented and regularly reviewed by the board to ensure they remain effective.

The Code suggests that companies use either one or a combination of the following mechanisms for effective workforce engagement:

  • a director appointed from the workforce
  • a formal workforce advisory panel
  • a designated Non-Executive Director; and other methods e.g. pulse surveys, suggestion boxes, access to the CEO, quarterly updates. The Code also permits alternative methods of workforce engagement but requires companies to explain what alternative arrangements are in place and why it considers these arrangements to be effective.

Companies will also need to define what they mean by 'workforce' in the absence of a definition – for example, does the workforce include temporary workers or contractors in addition to permanent staff?
It is important to note that, 'not one size will fit all' and that method(s) adopted by one company will differ from another.

For example, some companies use a combination of all three mechanisms suggested by the Code whilst others have opted to use a designated non-executive director.

In engaging with other stakeholders, companies should think about the following:

  • what form of engagement is appropriate and how much engagement is required with each stakeholder group?
  • what mechanisms does the company have in place already and are they fit for purpose and effective?
  • which stakeholder groups require early engagement on key issues, e.g. major shareholders? Most major shareholders now like to be consulted on key issues, as opposed to once a year during the AGM season to obtain their votes.
  • how does the company engage with smaller shareholders? Directly through the chair or senior independent director, in groups or through feedback from the investor relations team and so forth.
  • how does the company engage with its customers and suppliers? Is this through site visits, customer and supplier feedback surveys or is this delegated to relevant senior management teams and then reported to the board?

What are some current areas of focus amongst stakeholders?

Before approaching stakeholders, boards should clearly identify any areas on which they wish to engage with stakeholders on and any areas/topics which may come up during meetings. Some areas with increased focus (especially amongst investors) include:

  • directors' remuneration, CEO pay ratios and pensions
  • environmental, social and governance
  • board diversity, independence and overboarding
  • the effectiveness of the external auditor
  • stakeholder views and decision-making.

Provision 5 of the Code states that: "The board should understand the views of the company's other key stakeholders and describe in the annual report how their interests and the matters set out in section 172 of the Companies Act 2006 have been considered in board discussions and

Companies will need to consider the best mechanism to report stakeholder views up to the board to ensure that the board is kept well-informed. For example, will this be presented in the form of a written report to the board or a verbal update from management? Will there be a record/register kept of key decisions?

Reporting on stakeholder engagement

Many investors, shareholders, stakeholders and other interested groups will be scrutinising the report and accounts of companies as they report fully for the first time (in some cases) on:

  • how the company has complied with the new requirements in this area
  • who the stakeholders are and what process was undertaken to identify them
  • what mechanism(s) are in place for stakeholder engagement and how successful have they been?
  • how stakeholder views are fed back to the board and how has this impacted the company's strategy and the board's decision-making – are there any specific tangible examples or case studies?

The year ahead will see a number of changes for companies not only in the corporate governance arena but also as they deal with the effects of Brexit.

We will no doubt see a number of different approaches and ways in which companies report in this area.

However it is important that companies are open, honest and transparent in their engagement with stakeholders and avoid generic or boiler plate language when reporting in order to provide meaningful and sufficient explanations to their stakeholders. 

Ben Harber FCG is partner and head of company secretarial services at Shakespeare Martineau

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.