In this second and final part, I look at stakeholder engagement as a critical component of King III and conclude with an excellent case study from Gap on how the clothing retailer used the principles of engagement and material issue identification to save its face, give it political clout and enhance its public image.
King III
Stakeholder engagement is a critical governance issue. King III says the board should value the effect of stakeholders' perceptions on the company's reputation. The board should delegate to management to proactively deal with these relationships. It should strive to achieve a balance between stakeholders' needs and the interest of the company.
When the organisation reports, it must ensure that it presents substantial information to enable stakeholders to make decisions about the company's sustainability and the board's capability to manage the organisation into the future.
An organisation can only get stakeholder buy-in, on the material issues it selected to report on, if it proactively engaged during the reporting journey. It needs to identify stakeholders and use the report to explain how it responded to their expectations and interests. The report strengthens stakeholders' ability to make informed decisions about these issues, and the actions the organisation took to mitigate their business impacts, risks, challenges and threats.
Gap case study
The MIT Sloan Management Review's How Gap Inc. Engaged with its Stakeholders provides an excellent case study supporting the business value of detailed stakeholder engagement and the key organisational learning that can arise from the process. It also highlights the complexities and on-going nature of such a journey.
Gap recently averted a potential crisis in Lesotho where its factories allegedly dumped toxic materials and other harmful chemicals into a nearby river. The company responded in a swift and ethical manner that contained the situation long before it became a catastrophe. Only a decade earlier, global protests continued for months because of factories' human rights violations involving child labour in Cambodia. The only thing that changed in the 10 years since Gap's first social crisis emerged was the way it engaged with stakeholders.
Gap's stakeholder engagement strategy transformed the way the company approached inevitable trading problems. The strategy underpinned five key elements:
Issue resolved
These five steps enabled the organisation to resolve the complex, potentially disastrous Lesotho issue before it made world headlines and instead enabled the company to gain stakeholder trust, enhance political clout and improve its public image.
Gap could easily have blamed the problem on the subcontractor, cut the ties and gotten out of the country. Instead, by becoming aware of the problem through engagement and identifying what is material to its stakeholders, the company released a media statement declaring its commitment to improve the lives of the people of Lesotho, detailing the actions they took to resolve the situation.
The engagement process can be painful, but it can also be hugely rewarding for business. Organisations can no longer afford to remain oblivious about the discussions on their products and services. Stable, progressive organisations interact transparently with stakeholders and report on the material issues that affect them in a concise, contextualised sustainability or integrated report. These are the companies of the future.
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