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Wednesday
May112016

Alison Taylor: We can use stakeholder trust to measure integrity risk

The last five years have seen a dramatic shift in the transparency environment, in a trend that began with Wikileaks launching the Arab Spring, and which is now reaching fruition in the vast data leaks from Luxembourg, Unaoil and Panama. Companies can no longer reliably distribute information as they choose, or maintain control over its interpretation.

It is a time of great risk and opportunity for companies, where transparency, accountability and stakeholder trust have become reliable proxies for integrity, and critical factors in long-term commercial success. Relationships, and their reputational consequences, have never been more important.

This suggests that the traditional model of FCPA third party due diligence needs to evolve in kind, modeling the same transparency expected of the subjects of the due diligence. Standard approaches to due diligence combine public record research with ‘human source’ confidential inquiries to identify corruption allegations, but this methodology is a blunt instrument, and the resulting information can be difficult to evaluate.

Corporate, litigation, bankruptcy, media and blacklist checks will remain core to any due diligence process. But a far more rigorous approach to understanding reputation and integrity risk is needed. Corruption mutes market signals and diminishes the importance of customer satisfaction and product quality. It distorts a company’s responses to changes in the external environment. It increases the reliance on a few powerful stakeholders, often government officials. Therefore, corruption fundamentally shifts the terms of engagement with stakeholders.

In this context, measuring stakeholder trust presents a way forward. By defining stakeholders broadly, and gathering insights from customers, competitors and communities, companies can evaluate corruption risk and simultaneously gain insight into performance in a host of related areas such as modern slavery, environmental performance, social impact and labor rights. Companies can also understand stakeholder relationships in much more depth, and evaluate where they are dangerously narrow, leading to fragility and dependency on particular regimes or officials. Given the increasing correlation between political risk and corruption risk, this is essential information.

How can stakeholder trust be measured? One answer lies with big data and social media analysis. Even in countries where corporate filings are unreliable and the media is restricted, there is often a thriving social media providing revealing market insights. But the more important and constructive move would be to introduce engagement strategies to measure sentiment across stakeholder categories.

Stakeholder trust can be measured via newly emerging tools, using anonymous input from a large group of diverse individuals, and can provide insight into the overall sustainability of operations -- whether a company has local respect, responds to market conditions, and has broad and deep enough relationships throughout a community. This is a better proxy measurement for integrity than the dominant approach of ‘confidential source inquiries’.

For companies who rely on suppliers, distributors or agents to drive success in particular markets, understanding reputation, connections and integrity is critical, and needs to be measured broadly. Approaches that focus on the identification of specific business practices miss the wider opportunity for commercial and reputational insight.

Perhaps even more importantly, companies need to understand their own level of stakeholder trust in their markets of operation, and use this insight to drive strategy as well as identify integrity hotspots that might be missed by internal compliance processes.

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Alison Taylor is director of advisory services at BSR, a non-profit consultancy and company network focused on sustainability and CSR.

Reader Comments (2)

Very interesting. Thank you. I like the sound of measuring stakeholder trust. Please could you or anyone elaborate on how to do it?
May 11, 2016 | Unregistered CommenterPaul Moxey
Hi Alison, nice post and I couldn't agree more that stakeholder insight is one of many very useful proxies for taking the ethical temperature of an organisation, but it won't in all cases be 'better' than other means. For example, in the case of mis-selling by banks, talking to customers would indeed have shown that advisors were not applying the right duty of care by putting their customers' needs first—but if you take VW, it's highly unlikely that stakeholder trust levels alone would have flagged the emissions scandal (just look at how duped the sustainability rankings were!). Instead, examining company strategy and business objectives (to be #1 in the world) and asking how its ambitious goals could be met in line with strict US regulation would have uncovered the conflicting technical and business challenges VW engineers faced (undue pressure). The upshot? Companies (and stakeholders) need to draw on multiple proxies to gauge ethical culture. For more on this, see my book http://www.dosustainability.com/shop/creating-a-culture-of-integrity-business-ethics-for-the-21st-century-p-66.html
May 11, 2016 | Unregistered CommenterAndrea Spencer-Cooke
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