iStock / Trumzz
April 29, 2019
In 2019, the question of how to build and retain trust—among investors, regulators, customers, suppliers, civil society organizations, and the general public—is the most pressing challenge facing business.
The stakes have never been higher. The average tenure of a business on the S&P 500 shrank from 33 years in 1964 to 24 years in 2016 and is forecast to last a mere 12 years by 2027. Competition, innovation, and technological disruption, while important drivers, tell only part of the story. If a business is not trusted by its stakeholders, it will not be able to maintain revenue, let alone grow, and may soon find its very existence imperiled.
To make matters even more challenging, societies worldwide are experiencing a crisis of leadership and trust in institutions across government, business, and the media. Hyper-transparency, geopolitics, social inequalities, and the increasing fragility of global governance mechanisms are all contributing factors. Businesses must now navigate an increasingly fraught external environment via a combination of firm core principles and imaginative new approaches.
In 2011, BSR published a five-step guide to stakeholder engagement in response to requests from companies for practical guidance on how to navigate the tricky topic of identifying, interacting with, and responding to external voices. The appetite for this topic has been insatiable: the 2011 report has consistently ranked among BSR’s top five most-viewed reports since its publication. And as effective engagement with society continues to be a topic of enormous, ongoing interest, we have just released an updated version of our report to account for major developments over the last eight years that have made the stakes higher than ever.
Why is stakeholder trust so important today?
First, an exponential increase in transparency means that companies must behave as if everything they say or do might become public.
Information becomes available at an ever-accelerating pace. While it is still disseminated primarily on dominant technology platforms, our understanding of facts and truth is far more contested and diffuse. Public concern over social and environmental issues can escalate rapidly on social media (ocean plastics are a recent example) and hyper-local conflicts between business and communities can generate global reputational crises.
Employees are also emerging as one of a company’s most vocal, empowered stakeholder groups; they increasingly invite wider, deeper scrutiny of their employers via media interviews, data leaks, petitions, and even walkouts.
Contractual confidentiality clauses are no longer an effective way to manage this new dynamic: The boundary between the corporation and society has grown permeable. Companies need to embrace strategies that make transparency, timeliness, and accountability core operating principles while bearing in mind that workers may view their social responsibilities as more urgent and compelling than their employers’ short-term profit targets.
Evidence signals that consideration of environmental, social, and governance issues is highly correlated with corporate performance over the long term.
Second, even big investors are declaring that an exclusive focus on company interests has become counter-productive.
BlackRock CEO Larry Fink made a pressing case for strategic stakeholder engagement in his 2019 annual letter, noting: “Companies that fulfill their purpose and responsibilities to stakeholders reap rewards over the long-term. Companies that ignore them stumble and fail. This dynamic is becoming increasingly apparent as the public holds companies to more exacting standards. And it will continue to accelerate as millennials—who today represent 35 percent of the workforce—express new expectations of the companies they work for, buy from, and invest in.”
This quote reflects a broader shift in investor sentiment. Evidence signals that consideration of environmental, social, and governance issues is highly correlated with corporate performance over the long term. Companies that rely on one-way, PR-led approaches to manage these issues will not thrive. Fink’s challenge necessitates a robust engagement strategy in which companies determine how to weigh and balance a broadening array of overlapping and conflicting interests in a transparent and defensible way.
Finally, companies in 2011 primarily understood stakeholder engagement as a way to understand and manage reputational risk.
A key question in any mapping exercise was “Can we trust the stakeholder?” Today, it is usually more important to ask: “Can the stakeholder trust us?” The development of international frameworks that shape sustainability efforts, most notably the UN Guiding Principles on Human Rights, has driven a shift in emphasis toward corporate impacts on society and away from self-interested risk considerations.
We have substantively updated our framework to reflect these developments, emphasizing such new stakeholder mapping criteria as vulnerability, developing a new set of core engagement principles, and shifting the focus away from one-way information-gathering and toward building mutual trust and understanding. We have also considered stakeholder engagement in the context of new business models such as digital platforms, wherein companies face billions of stakeholders and can have an unprecedented impact on their lives.
Stakeholder engagement may seem more difficult and overwhelming than ever, but it needn’t be. Our updated report takes full account of how the world has changed while maintaining our original focus on practicality and clarity. BSR’s goal is to help companies build a deeper understanding of the social systems in which they operate—and to help them develop purposeful direction in pursuing their own goal of building sustainable trust.
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