July 14, 2022

Stakeholder Governance in the Boardroom

Engaging with stakeholders is the key to long-term success.

As boards of directors recognize how their decisions impact the world around them, they’re embracing both ESG considerations and stakeholder governance practices. This shift from shareholder governance is causing an evolution of board functions, strategies, and objectives. Boards need to understand the best ways to implement these new processes—considering how their operation affects all stakeholders, not just their shareholders.

Opponents of stakeholder governance argue that it’s antithetical to the principles of shareholder primacy and the core of capitalism. While the reality might be less doom-and-gloom than detractors would have everyone believe, stakeholder governance undoubtedly requires concessions by corporations.

It's the board’s job to navigate these waters, and to find balance between what’s best for the stock price and what’s best for the stakeholders. A singular focus on shareholder profits isn’t enough to help corporations succeed anymore. It ignores the negative impact shareholder primacy can have on the company’s reputation, investment opportunities, recruitment of valuable employees, and more. Directors need to mitigate risk to their shareholders while also capitalizing on the opportunities that their various stakeholders provide.

Stakeholder Interests in the Boardroom

Stakeholder governance is gaining momentum—spurred by the pandemic, the increased threat of climate change, and the demands for companies to be transparent about their role in perpetuating inequality or other social injustices.

Among the many goals of stakeholder governance, in addition to adopting ESG principles, is the increased valuation of the company and its stock prices. The board’s objectives should be to operate an ethical, profitable, and sustainable company that will continue to provide value to the shareholders in the short and long term. Boards are beholden to ALL their stakeholders: employees, communities, customers, suppliers, shareholders, and more.

Stakeholder governance (or stakeholder capitalism) is closely tied to the ESG movement that’s revolutionizing the way business is done around the world. Consumers are demanding more and more transparency into companies’ record of responsible and sustainable operation, and they’re spending their money on brands they can feel good about supporting.

 Investors are noticing. They understand the effects that climate change has up and down a company’s production chain, and they’re keen to invest in companies that are taking steps to mitigate the risks posed by climate change. The upside is that more companies committing to ESG principles has a positive effect on society as a whole, leading to less pollution, higher wages, and increased equality.

Investors are looking for companies that are transparent about their commitment to ESG-related issues and their corporate governance processes. They look for measurable disclosures that they can compare against other companies, to get a complete picture of the short-and long-term performance of the company. The company’s relationship and commitment to all its stakeholders is a crucial metric for investors.

Stakeholder Governance and Long-Term Value

Boards are recognizing that the decisions they make and the businesses they represent have an impact on society and the environment. It’s no longer enough for companies to show their support for diversity in their Instagram posts during Pride Month. They need to show their support for people and the planet through consistent, thoughtful business strategy.

Directors are considering all their stakeholders in their decision-making processes—it’s the key to a sustainable business model. Why? Because a businesses’ success depends on nurturing relationships between businesses and their stakeholders—suppliers, employees, customers, investors, communities, shareholders, and more.

In stakeholder governance, boards don’t prioritize one stakeholder over the others. They understand that long-term value creation depends on doing what’s in the best interests of each of their stakeholders.  

Good corporate governance has never been more important, and, as always, making well-informed decisions is the foundation of every board. Since directors have a fiduciary duty to act in the best interests of the company, this necessarily means that those decisions must work toward the company’s long-term success. Considering all their stakeholders in the decision making process can be complicated, but it’s the foundation of good corporate governance.

Improving Engagement Between the Board and Stakeholders

Improving engagement with stakeholders is an opportunity for the board to increase sustainability and long-term valuation. Clear and consistent communication with stakeholders gives board members a more comprehensive view of the company’s entire lifecycle. It makes it easier to predict any opportunities and mitigate any risks. Directors need to ensure they’re keeping all their stakeholders in mind when they’re making decisions that affect the company.

 It's important to keep the lines of communication open between the board and their stakeholders. It’s crucial for the board to get a comprehensive view of how the business operates, and what it does well and how it could improve.

As stakeholder governance becomes more widely accepted, boards are realizing that expertise matters. Commitment starts at the top—just like boards need experts in technology, finance, and operations, they need directors who have experience bringing ESG practices to the company. It’s the board’s role to define the company’s overall strategy, direction, and purpose.

Effective stakeholder governance requires boards to recognize, understand, and engage with their various stakeholders. Keeping the needs of their stakeholders in mind during the decision-making process is the key to the company’s long-term growth and success, which is good news for both shareholders and stakeholders.

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