The Stakeholder Imperative | Risk Advisory | Deloitte Netherlands

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The stakeholder imperative

A prerequisite for resilience

Introduction

Broad and balanced stakeholder acceptance is an imperative for a strong license to operate. Stakeholder acceptance goes beyond mere customer and client satisfaction. Proactively and structurally driving the mutual understanding of interests and expectations between organizations and key stakeholders allows boards to engage and mobilize critical support for business strategy and decisions. The value of stakeholder acceptance is even more clear during challenging times. The more substantial stakeholder acceptance and support, the better the ability to recover from a business critical situation. So when leadership teams have to deal with high impact events, one would expect stakeholder orientation to be a priority feed into the decision-making process. In particular because of the fact that under pressure, your view narrows. But when the going gets really tough, the influence of multiple stakeholders in decision-making seems to strongly diminish, with often costly and damaging effects. Leaders need to make a change, in the long term interest of the organisations they lead.

A tale of two crises

Let’s compare the two most recent crises we experienced since the start of this
millennium. The importance of (a lack of) stakeholder acceptance on corporate
license to operate became abundantly clear in 2008. Leading banks and insurance companies had to be bailed out with governmental capital injections and guarantees to avoid a wave of bankruptcies. This crisis impacted almost every stakeholder group imaginable. It was soon concluded that an irresponsible, high risk appetite in the financial industry was one of the causes of the crisis. As thisrisky behaviour was fuelled by the generous bonus schemes common in the industry, stakeholders no longer accepted ample use of this practice. In addition, there was broad stakeholder consensus that generous reward schemes were inappropriate for private companies rescued with tax payer’s money. The industry was held accountable: it could no longer put its own (financial) interests first, and was expected to firmly take into account and act in the interests of a much broader stakeholder audience.

The (non)executive teams leading the companies out of the crisis to restore credibility, stakeholder acceptance and trust. They needed all the support they could get. One would therefore assume that stakeholder positions would be centre to making strategic decisions. However, the following decade saw many high profile cases involving companies announcing to pay out bonus schemes, only to be so heavily criticized by stakeholders that often these decisions were withdrawn and public apologies made. The impact cannot be underestimated: loss of credibility and customers, increased regulatory and political scrutiny, additional legislation, limiting competitiveness. Lack of stakeholder orientation led to low trust levels that still resonate today. Has anything changed?

Once bitten, twice shy?

Today, we are again in a crisis, albeit with a different cause. The Covid-19 pandemic and controlling measures have led to a historic economic decline. In the Netherlands, EUR 8 billion in government support has been paid out to 140.000 companies to help them absorb the most urgent problems. Contrary to 2008, there is sympathy and support among stakeholders for companies that use this support. Still, stakeholders groups do not consider this bail-out a free ride. Companies will be held accountable; boards have to act responsibly and with integrity in putting the financial aid to good use. The sense that we are in this together and we need each other to get through this, is fragile. More than ever, boards are expected to consider the interests of multiple stakeholder groups in the critical decisions they now face. But again, we see decisions of (non)executive boards miss the mark, again followed by multi- stakeholder backlash, decisions retrieved and apologetic statements issued. Leadership teams risk creating their own, costly, issues, by ignoring stakeholder positions. In particular during challenging times when tough decisions have to be made, they need a maximum of stakeholder support and a minimum of resistance from these groups. A responsible business builds and maintains a strong, sustainable license operate for the long term. Two factors can drive the change.

Bias impacts stakeholder influence

Board members, however experienced and skilled, are also humans with biases. It is well known that in critical situations the influence of cognitive biases in decision-making increases. It is important to understand the role of bias in how stakeholder positions are assessed and integrated in strategic decision-making of boards. There are three types of bias to be considered.

The first is confirmation bias. This is the tendency to look for, identify, prefer, consume and reproduce (sources of) information that confirm or support an individual’s already existing convictions, values or positions. Closely related is cognitive dissonance. This occurs when newly acquired information conflicts with pre-existing understandings or when actions are contrary to one one’s own convictions, causing unpleasant tension or discomfort.

The third type is the Dunning-Kruger effect. This refers to the lack of cognitive capabilities to understand and accept that our conclusions and choices can be wrong, because we tend to overestimate our own knowledge or ability in a subject (or underestimate our incompetence for that matter). In short, we do not like opposing opinions and we tend to think that our own ideas and those of the group we belong to, are better than those of others. Group think amplifies this limited perspective. As a result, contrary thinking and opinions are easily dismissed and excluded from strategic decision-making.

Increased control through a better informed process

Awareness of and calling out the risk of bias is easy, but not sufficient. Boards need to structurally manage the bias and change their approach to stakeholder positions in the decision-making process, in order to increase acceptance and limit resistance. There are four steps that can easily be taken to improve this process, regarding stakeholder assessment, scenarios and contingency planning:

  1. Thorough assessments on stakeholder positions towards certain issues, the company and industry have to be available before critical decisions are made. These assessments then inform the decision-making process, not merely follow from it. This requires structural representation of the owner of the stakeholder portfolio at the table where decisions are made.
  2. Taking into account the stakeholder assessments, scenarios then have to be developed based on the various strategic options that can be decided on. These scenarios have to take into account the objectives and desired impact of the options across multiple domains and include short and long term effects. The outcome will clearly identify positive effects as well as vulnerabilities, and direct the team towards a substantiated, preferred strategic decision.
  3. In particular during critical times when tough decisions have to be made and your position is under pressure, it is impossible to fully meet all stakeholders’ expectation. Criticism is inevitable. Contingency planning for the preferred scenario that is most likely to follow from the decision, is crucial to ensure control of the process and allow for speed when having to take mitigating measures.
  4. Ensure reflection and outside-in views by design. It is crucial to avoid tunnel vision and being lured into an echo chamber. The knowledge and insights gained from a broadened perspective, may not support or change preferred routes, but will at the minimum help you build better scenarios.

All of the above interventions will drive control and impact. Stakeholder understanding and acceptance drives and protects your license to operate. The direct and indirect costs of including stakeholder orientation far outweighs the direct and indirect costs required to repair damage caused by not including stakeholder orientation, far outweighs the costs of integrating stakeholder orientation. Boards that embrace truly embrace this thinking, build resilient businesses.

More information

For more information please feel free to reach out to Frédérique Demenint via the contact details below.

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