Stakeholder engagement drivers – Part 2: Self-interested organisations

In the first part of this series of posts we looked at three levels of commitment to stakeholder engagement, self-interest, enlightened self-interest and altruism. This, and the following posts will expand on these and illustrate them with examples.

The antithesis of engagement

Lets start by looking at an extreme level of disengagement – methamphetamine (P) production and distribution. This example shows how the core business impacts negatively on a range of stakeholders.

The classic approach to stakeholder engagement is to look at categories of stakeholder engagement – owners, employees, suppliers, customers and the community. If we consider P production from a suppliers perspective, raw ingredients are sourced either in bulk from unscrupulous suppliers, or from chemists (drug stores). Chemist shops (in New Zealand) have collaborated with Police to restrict this source. As a consequence, medicines, once readily available for genuine consumers are now difficult to access. Chemist shop staff have additional layers of security checking to cope with when selling the product.

People that rent houses that are used to “cook” P are another unwitting supplier and therefore stakeholder. These houses are left drenched in toxic chemicals and require detox processes to prepare them for the next tenant.

A high proportion of users get addicted to P and their behaviour and priorities change. This might include resorting to gambling, stealing from employers, family and others. The families of P addicts often despair at the changes that the drug induces in the addict. The increase in crime, generated by the need to secure funds for the continued supply of the drug, diverts police resources as does the activity required to counter the drug production and distribution. Other crime fighting initiatives may well be under-resourced exposing citizens to more crime.

Without expanding further, we can see that in this case, the “commercial activity” has negatives that cascade through the community. The stakeholders of the illegal drug industry are many and varied and the impacts can reach deep into our communities.

Other examples

Sadly, examples of organisations disregarding the well-being of stakeholders in their pursuit of profit are all too common. Here are some examples:

  • The tourist operators along the Gulf Coast became stakeholders of BP and Halliburton when oil washed on to their beaches.
  • Those of us that carelessly discard plastic waste may well cause marine life to be consumers of the waste, and therefore stakeholders. Albatrosses in the Pacific consume plastic, thinking it to be food. Their gut can fill with plastic, leading to certain death.
  • Alcohol companies and their marketing agents that target young people with promotions help to foster a binge-drinking culture with sometimes devastating social outcomes.

An unwitting stakeholder – a young albatross killed by plastic waste  

While the illegal drug industry is an extreme example, it illustrates that organisations that operate from self-interest, can generate significant unintended misfortune for stakeholders. We can expect that organisations that operate from higher motives can generate significant good, as we shall see in subsequent posts.

image credit: Science News for Kids

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Stakeholder mapping – for threat or opportunity?

To map stakeholders, AccountAbility’s approach is to rank each stakeholder with a number of factors. This approach provides some scaffolding to enable a more objective assessment. Here is a summary of these factors from an earlier version of AccountAbility’s AA1000SES. 

  • Responsibility – the organisation has, or in the future may have, legal, financial and operational responsibilities in the form of regulations, …etc.
  • Dependency – stakeholders who are dependent on an organisationʼs activities and operations in economic or financial terms
  • Influence – stakeholders with influence or decision-making power (e.g. local authorities, shareholders, pressure groups).
  • Representation – stakeholders who through regulation, custom, or culture can legitimately claim to represent a constituency
  • Proximity – stakeholders that the organisation interacts with most, including internal stakeholders …etc
  • Policy and strategic intent – stakeholders addressed through the policies and value statements

Threat bias

Notice how the bias in these factors is towards threat rather than opportunity? Sustainability initiatives, such as stakeholder engagement have developed in the context of threat. Corporates adopted social responsibility initiatives in response to criticism of their social and environmental performance. These were rearguard and defensive actions. Programmes such as the Global Reporting Initiative (GRI) are an example. In this century, corporate are exploring sustainability initiatives as a source of innovation and competitive advantage. I described this shift in an earlier post – What is Sustainability 2.0?

If your organisation wants to express its sustainability initiatives as an opportunity, it would pay to change the factors used in stakeholder mapping to, at least, balance opportunity and threat.

This can be achieved in a number of ways:

  • creating a higher weighting for opportunity factors
  • reducing or combining threat factors
  • adding opportunity factors.

For example, you might combine threat factors such as responsibility and dependency, thus halving their influence in a final rating. Adding an opportunity factor, such as “potential for creating shared value” will further shift the balance. The “shared value” factor identifies those stakeholders the organisation can work with to create shared value. An example could be using a waste product from a stakeholder as a raw material, or supporting education initiatives to upskill the local population as a potential labour force.

Anthony Robbins identifies pleasure (opportunity) and pain (threat) as two motivating forces. Avoiding pain may be a stronger motivator than moving towards pleasure. Is this the case with sustainability and stakeholder engagement? If we are responding to perceived or potential threat we will probably develop a compliance mentality – and I don’t think compliance is that motivating. I would like to think that an aspirational approach based on pursuing engagement opportunities with stakeholders is more motivational. What do you think? 

Engaging stories: rebuilding Christchurch

The City of Christchurch, New Zealand was devastated by a series of earthquakes. The largest, on the 4 September 2010 wrecked havoc in the central city, but the second quake on 22 February killed 181 people and all but destroyed the central city. The response of the people of Christchurch is an inspiring engagement story. On 11 August, the Christchurch City Council released it draft Central City Plan.  The plan was immediately received with acclaim.

From an engagement perspective, the plan embodies three foundational strengths:

  • inspirational leadership
  • inclusion of the indigenous Ngāi Tahu
  • comprehensive public participation and community engagement

 Inspirational Leadership

From the day of the first quake, the indefatigable Mayor, Bob Parker fronted up and communicated clearly, exuding a aura of compassion and hope. As in the image below, he was often seen on camera with a person translating his words into sign language, an unspoken symbol of inclusion. When the Council released the draft plan there appeared to be an evident sense of celebration and unity in the council – not that common in local body politics.

 Inclusion of the tangata whenua

The Mäori tribe Ngāi Tahu are the indigenous people of the Canterbury region. In formal occasions, it is common for Mäori to acknowledge tipuna (ancestors) and those who have died. The draft plan beautifully incorporates words authored by Ngai Tahu to set an appropriate context for the plan. Here is the English translation:

This mihi is given by the Ngāi Tahu Rūnanga – Te Ngāi Tūāhuriri- to acknowledge and respect the people who have been lost and those whose hearts are grieving them, and the sorrow of this .  It also acknowledges the losses and pain of all people in Christchurch and Canterbury who have suffered as a result of the earthquakes.  Ngāi Tahu recognise their atua/god Rūaumoko as having pulled his umbilical cord and caused so much to break, including land from the mountains to the sea.  While acknowledging the pain, Ngāi Tahu see us uniting us as one people – the survivors (morehu) of Christchurch and Canterbury.  The mihi is a call to Christchurch to rise up, and together to rebuild Christchurch brighter and better.

Public participation – share an idea

Following the second quake, the City Council launched Share an Idea, a public engagement campaign to lay the foundations for the rebuild. In six weeks, the website, www.shareanidea.org.nz generated over 58,000 visits. Ideas were also harvested through facebook and twitter. Virtual engagement was complimented by a two-day community expo (attended by over 10,000 residents) and a series of public workshops. These are two of the larger examples of over 100 stakeholder meetings. (See the draft plan for more detail of engagement).

A total of 106,000 ideas were shared during the six week campaign – that is one idea from every 2.2 residents. Share an Idea generated a level of community involvement that has never been seen before in New Zealand.

The fruit of the engagement process

The thousands of ideas clustered into 5 themes:

  • green city
  • market city
  • city life
  • distinctive city
  • transport choice

The plan includes contributor’s comments to directly link the ideas generated to the completed draft plan (click on the thumbnail for a larger image).

Mayor Bob Parker described the new Christchurch as “a safe, sustainable, green, hi-tech, low-rise city in a garden”.

Out of adversity comes an unprecedented opportunity. We are embarking together on one of the most exciting projects ever presented to a community in New Zealand, perhaps the world…This is our city, it will rise again

Bob Parker

This is just a taste of a truly inspirational document. Anyone interested in stakeholder engagement, community participation or organisational development will benefit from a closer look.

Sustainability depth – are you green from top to bottom?

Companies trumpet sustainability initiatives, but what is the significance of these initiatives? Another lens we can use to evaluate their efforts is a measure of sustainability depth. There are three levels of performance to consider:

  • the company’s in-house sustainability performance
  • the impact of the company’s products and services on society and the planet
  • the company’s leadership role in sustainability in its industry or sector.

Lets look at examples of some industries to understand the significance of this approach.

Banking

You probably will have noticed banks that use advertising to announce their use of green cars. Or perhaps they have chosen to occupy green office space. While these initiatives are helpful, they are dwarfed by the impact the banks’ products and services have on the planet and society. The capital that they provide can support sustainable initiatives or more traditional extractive initiatives. The flow of capital has tended to be more determined by risk analysis rather than an analysis of sustainability.

The practices and example of the Grameen Bank exemplify creative thinking and dedication to sustainable aspirations (in this case, the eradication of poverty). The achievements of the Grameen Bank leave most Western Banks looking homogenous and deficient in leadership. One notable exception (you may know of others) is Vancouver’s VanCity Bank. This statement from their Accountability report indicates their willingness to show leadership at all three levels.

 

Another evidence of their commitment to sustainability is their relative longevity – Citizens Bank, a subsidiary, was talking about sustainability before the turn of the century. Closer to home (New Zealand) the Australian banks here were at least more conservative and responsible, sheltering us from the worst of the financial crises.

In the banking industry, the impact of their in-house sustainability initiatives are miniscule, compared to the greater impact of their products and services and the banking industry’s huge influence on economies. The banks to support are, yes, those who run fleets of green cars, but more importantly are engaged in leadership discourse in their industries. The worst examples of banking were the junk-bond traders that were essentially corrupt and dishonest. Who are the banking leaders who will follow the example of Muhammad Yunus and position the industry to both serve and prosper?

Retail

As with banking, you can imagine retailers who focus on in-house sustainability, but are locked into the need to grow their business. They may be tempted to sell whatever they can to make a buck with little focus on the environment or wider society.

It appears that Walmart has become a very positive exemplar of deep sustainability. They have a long way to go – but are taking initiatives from in-house sustainability, through to industry leadership. Here are examples:

In-house sustainability – For Walmart, electricity is their number two operating expense. They are moving on two fronts.LED lights have been installed in freezer panels, providing a 70% reduction in energy consumption. LED lights will eventually be rolled out throughout stores and carparks. Walmart also have installations of solar panels underway. Over 30 stores are already installed with another 20 to 30 in the pipeline.

Another massive opportunity to improve in-house sustainability is with Walmart’s transport fleet. This video refers to a goal to increase transport efficiency by 100% from a 2005 baseline, by 2015. By the end of July 2011, they have achieved 65%.

Impact of products and services – Walmart aspire to improve the quality of food that their customers eat. Here is an extract from a recent article:

With more than 140 million customer visits each week, we have an opportunity to make a real difference in the nutritional quality of the food we sell, so we have a long-term goal to make food healthier and make healthier food more affordable.

First, we are reformulating thousands of our private brand packaged food items and working with branded products to do the same. By 2015, we will:

  • reduce sodium by 25%
  • reduce added sugars by 10%
  • remove all remaining industrially produced trans fats in our packaged food.

And here is a video about organic lettuce production at Walmart.

Leadership role in sustainability – Because of its size, Walmart can be particularly effective as a leader in the retail industry. When they get interested in initiatives such as LED lighting, solar panels and transport efficiency, they indirectly accelerate the mass adoption of better technology by consequence of their size in the market place. Recently Walmart has turned its focus on food-waste, reacting to the news that approximately one-third of food produced globally is wasted and are working with the USDA on projects to reduce waste. They also are working to access produce closer to the point of sale.

The examples here are a sample of the great work that Walmart is doing and provide a great illustration of a company engaging with sustainability across the three dimensions identified here.

Drive and imagination is the key

In the positive examples here, including Professor Muhammad Yunus of the Grameen Bank and Walmart, we see clear evidence of a desire to create a better world. This drive in turn generates the cognitive resources of imagination and breadth of vision that create new possibilities and transform industries from the top to the bottom.

I would love to hear of more examples.

Stakeholder engagement pays!

This blog positions stakeholder engagement at the leading edge of sustainability and also, as a core process underpinning a superior business model is transforming older, extractive and exploitative models. However, it is also great to have evidence that stakeholder engagement supports financial sustainability in addition to environmental and social sustainability.

Witold Henisz led a major Wharton School research project to deliver such evidence summarised in Spinning Gold: The Financial Returns to External Stakeholder Engagement. Here is the abstract from their document:

We provide direct empirical evidence in support of instrumental stakeholder theory‘s argument that increasing cooperation and reducing conflict with stakeholders enhances the financial valuation of a firm holding constant the objective valuation of the physical assets under its control. We undertake this analysis using panel data on 26 gold mines owned by 19 publicly traded firms over the period 1993-2008. We code over 50,000 stakeholder events from media reports to develop an index of the degree of stakeholder cooperation or conflict for these mines. By incorporating this index in a market capitalization analysis, we reduce the discount placed by financial markets on the net present value of the gold controlled by these firms from 72 to between 33 and 12 percent.

My (limited) understanding is that the reduction in net present value is increased significantly when stakeholder co-operation is low and stakeholder conflict is high. Here is a video explanation of net present value.

Apart from the great result, what impresses here is the size of the study and the stunningly positive result for stakeholder engagement. Notable too, is the assertion that mining companies that were once known for a myopic short-term view, are now “global leaders in the implementation of stakeholder engagement”.  A participant in the research commented:

It used to be the case that the value of a gold mine was based on three variables: the amount of gold in the ground, the cost of extraction, and the world price of gold. Today, I can show you two mines identical on these three variables that differ in their valuation by an order of magnitude. Why? Because one has local support and the other doesn‘t. (Yani Roditis, COO Gabriel Resources, interview by authors)

The researchers position the two factors of high stakeholder co-operation and low stakeholder conflict as essential to building the implicit or explicit social license to operate. Investing in positive stakeholder relations builds both social and political capital.

The nature of the research confines analysis of the benefits of stakeholder engagement to financial factors and shareholder value. As such it removes the tension between proponents of shareholder value, such as Milton Friedman and the broader stakeholder theory such as Edward Freeman.

Broader stakeholder benefits

In addition to the financial benefits of effective stakeholder engagement, there are other less tangible and quantifiable benefits. As more businesses learn to take a less extractive stance and engage more, the benefits of greater social capital compound. Trust is built and fractured communities develop more cohesion. If the ethos of external engagement of these mining companies becomes culturally embedded throughout the organisation, local people employed in mining operations, should also benefit from a more engaging workplace. Ideally these cultural practices become more manifest and normalised in worker’s families and the wider community. How is this quantified?

This landmark research in sustainability provides much-needed hard data to demonstrate the benefits of stakeholder engagement. One disappointment is the title – associating the PR metaphor of “spin” is unfortunate, as effective stakeholder engagement is the antithesis of spin. Ideally engagement is based on authentic and transparent communication rather than the more manipulative intention of spin. But hats off to Witold Henisz and his team for a superb research contribution.

Sustainability – what’s real?

There are a belwildering array of sustainability ratings – but what do we believe? How do we know they are measuring and evaluating the right things?

In their Rate the Raters documents, SustainAbility identified over 50 sustainability rating agencies. SustainAbility will offer insights into how credible each rating system is, but I suspect that many imponderables will remain.  For example, in part two of the study, the Dow Jones Sustainability Index was ranked highest in credibility by the study’s participants. But in his article titled,When Pigs Fly, RP Siegal noted with incredulity that Haliburton is now listed in the Dow Jones Sustainability Index.

Here are two reasons that determining a company’s sustainability will remain problematic:

  • the bureaucratisation and commercialisation of quality processes
  • determining sustainability

 The bureaucratisation and commercialisation of quality processes

In the galaxy of organisation endeavour, sustainability reporting can be regarded as a quality measure. For example, while the ISO 9000 series deals with operational quality matters, the ISO 14000 series deals with environmental management. While ISO 14,000 may not be classified as sustainability reporting, it serves the same purpose, in that it provides third party assurance of a quality measure.

I like Tom Peters perspective on quality. He quotes Richard Buetow, a Motorola executive.

With ISO 9000 you can still have terrible processes and products. You can certify a manufacturer that makes life jackets from concrete, as long as those jackets are made according to the documented procedures and the company provides next of kin with instructions on how to complain about defects. That’s absurd.

Where quality processes are formalised, they can divert resources from the product or service itself. Any product or service will justify a finite amount of resource input, so ideally, any quality process will add value equal to or greater than its cost. Too often, compliance-driven quality processes militate against quality as they divert resources away from product or service delivery. This is a big issue in service delivery sectors such as education and health. When teachers spend more time on quality assurance processes, they spend less time on preparation for delivery. It may be that, unless there is a compelling reason to get third party assurance, that resource is best invested in enacting sustainability aspirations, rather than measuring them.

I’m not arguing against quality processes – but I am stressing that they have to add value. Sustainability reporting processes will add value to the economic bottom line where there are game-changing benefits. For example:

  • a supplier demonstrating conformance with a client’s ESG (environmental, social, governance) standards to ensure continuance of business
  • securing a listing in a sustainability index
  • remediating reputation losses.

But unless there are clear benefits from quality process third party assurance, why bother?

BP’s gulf oil spill illustrates this issue. Along with Shell, BP scored consistently highly in GRI (Global Reporting Initative) reports, and I believe the company’s leaders had, and have, genuine sustainability aspirations. BP invested a lot in rebranding as “beyond petroleum.” But the gulf oil spill incident has undone a lot of the energy BP had invested in sustainability initiatives. What the GRI couldn’t assess, were complex embedded processes, such as the quality of engagement between BP and its suppliers, and the impact of budgets and deadlines on safety and operations. (This video recounts BP’s PR problems)

Commercialisation

No doubt ratings agencies are also well motivated, but budget pressures will typically create pressure to grow the business and perhaps make processes than they need be. SustainAbility’s Rating the Raters cites commercial pressures as an impediment to more transparent report, partly because the raters are paid by those being rated.

Determining sustainability

Part two of this blog will explore what sustainability means in different industries, and from whose perspective.