17 Feb

Measuring Relationships: a route to competitive advantage and reduced risk

Mervyn King

This article originally appeared as a blog on the International Integrated Reporting Council website. It is reposted with permission from the International integrated Reporting Council.

Corporate failures and scandals often have deep relational roots. So too does success, for the essence of any business is to invite people into relationship as investors, customers, employees or suppliers and to make such relationships more valuable. Yet, as the authors of The Relational Lens recently published by Cambridge University Press point out, these relationships are too often like dark matter – the fabric of the universe that passes unseen.

As a global leader on corporate governance and reporting I have advocated since 1994 that in its decision making process a board needs to take account of the legitimate and reasonable needs, interests and expectations (NIE’s) of its primary stakeholders.

Either management must have an ongoing communication with stakeholders or a Corporate Stakeholder Relationship Officer (CSRO) should do so. The CSRO informs management of the stakeholders’ NIE’s and does a written report to the board on the quality of the relationships.  At every board meeting there should be an agenda item “Stakeholder relationships.”  This will result in the board having an oversight which is informed in regard to managements’ proposals on strategy.

The Salz Review into Barclays, the National Commission on the BP Deepwater Horizon Oil Spill, the Inquiry into the death of Victoria Climbie (a major UK public service failure), or indeed the reviews into almost any corporate failure show that weaknesses in relationships between the company and its stakeholders are readily identified after things have gone wrong. But would Volkswagen or Deutsche Bank have landed in their current situations if their internal and external stakeholder relationships had been better founded and managed?  Could the many corporate disasters, of which Enron, Lehmans, Cendant, Worldcom, HealthSouth, Tyco, Qwest Communications, Toshiba, BP and Arthur Andersen are just some of a long litany, have been avoided by a more systematic management of stakeholder relationships?

Restoring confidence in corporate, political and other institutions will require more than clever PR. It requires systematic measurement and reporting on the quality of relationships with all major stakeholders so that companies can take specific steps to address the key issues seriously.

Andy Haldane, Chief Economist at the Bank of England puts it this way in his comments on The Relational Lens: “There is widening acceptance that organizations – large and small, public and private, commercial and charitable – may be failing to meet the needs of their societal stakeholders. This has, in some cases, caused a rupturing of trust, a loss of social licence. This book … equips companies with the tools to begin the slow process of rebuilding trust, relationship by relationship.”

In corporate reporting on social and relational capital, companies have too often resorted simply to recording their CSR spend. With integrated thinking and embedding sustainability issues into a company’s business strategy CSR has become yesterday’s thinking.

The lack of available quantitative measures is perhaps the main reason why the boards of companies, as well as executives and managers, invest so little monetary, temporal and other resources into understanding, managing and measuring relationships with their stakeholders.

A way forward is shown by the new book by John Ashcroft and his colleagues, based on over 20 years of measuring relationships within and between organizations across the public and private sectors, as well as in different parts of the world. They demonstrate persuasively that all relationships operate in 5 domains – communication, time, information, power and purpose. Using these 5 domains will aid the CSRO in carrying out their mandate.

This approach identifies whether the conditions for effective relationships are being put in place and identifying perceptions gaps around the effectiveness of such measures. Looking at the preconditions for relationships serves as a way to assess a leading indicator of risk, focuses on the relational building blocks of such outcomes as trust, accountability or loyalty, identifies the factors that can be managed and changed, as well as enabling more constructive and effective dialogue about the issues identified.

All that makes this book timely, especially for the corporate world.

Here is the framework, here are the tools and the case studies to enable companies to give stakeholder relationships the kind of detailed and systematic attention which will bring an informed understanding to a board about a company’s social capital, and help bridge the divide between financial and social capitals.

‘The Relational Lens: Understanding, Managing and Measuring Stakeholder Relationships’ was published by Cambridge University Press in October 2016. A video of the launch can be found at Relational Analytics.

Author: Professor Mervyn King SC, Chairman, International Integrated Reporting Council

Photo: Mervyn King by Sveriges Kommunikatörer on Flickr.

19 Feb

United Breaks Guitars

Guitar

Back in 2008, singer/songwriter Dave Carroll was flying to Nebraska with his fellow band members.  As he was getting out of the plane, on a stop over in Chicago, he heard a passenger say “they’re throwing guitars out there!” Dave and his band members looked in shock as they realised that their guitars were being thrown out of luggage compartment. Indeed, his $3500 guitar was broken. Carroll filed a complaint with United Airlines, Airline, but he was informed that he was ineligible for compensation because he had failed to make the claim within its 24 hour time frame.

So Carroll, as a singer/songwriter, decided that writing a song was the only thing he could do. So he wrote a song about the incident called “United breaks guitars”. He put it up on YouTube and unfortunately for United Airlines it went viral. As of writing this it has 15,583,732 views.

After 150,000 views, United contacted Dave Carroll and offered to pay him to take the video down. He had changed his mind, however. It wasn’t about the money anymore. In fact, he suggested they donate the money to a charity.

United also discovered that “United Breaks Guitars” wasn’t just a single song. It was part of a trilogy. Furthermore, soon Carroll was doing interviews, there were parody videos and now there is even a book! This wasn’t just embarrassing publicity for United Airlines, the BBC reported that United’s stock price dropped by 10% within three to four weeks of the release of the video – a decrease in valuation of $180 million!

This story clearly shows the powerful impact that social media can have. It is also an illustration of the importance of good stakeholder relationships. Just one bad relationship with a customer cost United Airlines millions of dollars. While most bad stakeholder relationships don’t cost a company millions of dollars, their importance and the risk if they go wrong, is undeniable. Yet despite the potential for most companies do not measure or manage their stakeholder relationships.

In a recent interview with Global Reporting initiative, Mervyn King, Chairman of the International Integrated Reporting Council, argues:

“Companies need to be informed about the needs, interests and expectations of their stakeholders throughout the year and when they’re strategizing, otherwise the oversight that they have over management and its strategic proposals is not an informed oversight. At every board meeting there should be an agenda item that wasn’t there before: ‘Stakeholder Relationships.’”

According to King therefore, the boards of many companies are carrying out uninformed oversight. Therefore, for proper accountability and informed oversight, companies must be informed properly about their stakeholder relationships.

Some might see this simply as another unhelpful addition to all that companies have to do. However, proper management of stakeholder relationships can be a huge force for value creation. For companies that begin a dialogue with their stakeholders can develop a strategy that is much more informed. Furthermore, through such a dialogue, and through relationship measurement, companies can increase the levels of trust in their relationships with their stakeholders. This trust brings confidence, sustainability and innovation. So while companies will want to manage the risk in their stakeholder relationships to prevent any negative outcomes, investing in these relationships, measuring them and beginning a dialogue can drive a company forward and increase its value.

Photo: Guitar (by Shane Adams on Flickr)