Businesses and their social impact – balancing a wider range of stakeholders

The perils of acquiring a reputation for a lack of responsibility regarding the role a business occupies in society are growing. In an era of constant electronic connection, companies who mistreat their employees or exploit suppliers, who are careless or indifferent about their environmental or carbon footprint, or that do not engage honestly and transparently with the wider world can face regulatory scrutiny and reputational damage that could affect their ability to obtain funding, or run the risk being shunned by customers. In an environment characterised by much greater external scrutiny, what does a responsible and accountable company look like?

Every company has a wide variety of stakeholders, including shareholders but also suppliers, distributors and other business partners, members of the workforce, and the wider community in the localities and countries where businesses operate, and balancing these relationships is a key aspect of managing social responsibility effectively. Investor returns should not be prioritised to the detriment of employee wellbeing or protection of the environment.

Increasingly, the interests of these stakeholders are aligned over the longer term. Companies with a poor environmental record may be at risk of paying out heavily to remedy damage they cause, as well as facing a higher cost of funding as banks look to manage their own liability and reputational exposure. Companies that do not manage their supply chains effectively may also suffer damage to their image, and quite possibly to their share price as well as brand value.

Legislation is increasingly backing up market pressures on companies to show how it is responding to environment, social and governance considerations. The European Union’s Corporate Sustainability Reporting Directive, in effect since January 2023, mandates sustainability reporting for all large public-interest companies with over 500 employees, and this will soon be extended to large companies with fewer employees and listed SMEs.

There are four primary areas in which a company needs to manage relationships and operations effectively: its employees, the environment, the local or wider community, and external counterparties.

There are four primary areas in which a company needs to manage relationships and operations effectively: its employees, the environment, the local or wider community, and external counterparties including suppliers, investors and customers.

Changing workplace relationships

Many companies have experienced difficulty making the transition from a world in which company loyalty was taken for granted to one where it must be earned. A more competitive employment market, and greater expectations about job satisfaction, has changed the relationship between employers and their employees. Companies are increasingly having to think harder and more imaginatively about how they foster a loyal and productive workforce.

Businesses have become more aware of the need to create a welcoming environment for their staff as they now often need to compete with the comforts of working from home. There is growing recognition that obliging employees to work in soulless cubicles, fight for parking spaces every morning, or undertake crowded and stressful commuter journeys, is not the best way to ensure individuals are happy and fulfilled. Forward-thinking companies have introduced measures such as showers on site to encourage people who would like to cycle to work, or flexible working hours that enable people to avoid overloaded public transport during the rush hour.

They also understand better the importance of natural light, plants or carefully modulated acoustics in improving wellbeing. They may create relaxation spaces where employees can find privacy or seclusion for thinking time, alongside designated collaboration spaces where they can come together in relaxed surroundings. A well-planned environment can yield substantial improvements in employee wellbeing, and, in tandem, improve productivity.

A well-planned environment can yield substantial improvements in employee wellbeing, and, in tandem, improve productivity.

Creating a supportive environment is also important. Nearly all employees experience problems at some point, ranging from relationship break-ups or bereavement to debilitating health conditions or other personal worries. Having the right support structure in place to help people deal with these issues is not only the right thing to do, but it can also be a powerful tool to create loyalty, not just among the individuals involved but in the broader workforce.

For working parents, childcare arrangements can be a make-or-break issue that determines how well their job can dovetail with other aspects of their lives. Offering sufficient flexibility to enable employees to manage their childcare responsibilities alongside their work commitments is also likely to boost long-term productivity, ensuring that valued employees and irreplaceable skills remain in the workplace.

Treading lightly in the environment

There are today significant financial as well as reputational costs resulting from poor management of environmental risks. Companies in many different sectors, from auto manufacturing to water treatment and distribution, have found themselves subject to heavy financial penalties and other regulatory sanctions, a tarnished image in the marketplace and a reduced market valuation because of environmental wrongdoing. It is also an important factor in recruitment – a recent survey found that 86% of millennials would consider taking a pay cut to work for companies that share their values.

Managing and reducing greenhouse gas emissions may involve looking to alternatives to business travel, introducing internal recycling schemes, waste reduction efforts and perhaps developing circular business models. Finding the right office space is also important. Buildings are responsible for 39% of the world’s energy-related carbon emissions, comprising 28% from operational emissions stemming from the energy needed to heat, cool and power them, and the remaining 11% from their materials and construction processes.

Increasingly, companies will be called upon to address environmental factors in their supply chain, especially if they find themselves legally obliged to measure and report on so-called scope 3 indirect emissions from their value chains and the distribution and use of their products.

Companies in the community

Companies can have an important impact on the community around them. They may be an important provider of employment and stimulus for broader economic activity, creating demand for local infrastructure and services. Managing this mutual dependency sensitively is important for harmonious local relationships.

Employees increasingly expect companies to provide opportunities to engage with the community, which has led to the growth of volunteering days.

Employees increasingly expect companies to provide opportunities to engage with the community, which has led to the growth of volunteering days. Businesses can also engage directly with local initiatives, and sponsor charities, sports teams and educational establishments, or provide structured work experience and training for local people.

Companies also need to understand and respond to local concerns in areas such as expansion plans, environmental problems or other nuisances. Motivated local organisations can be a powerful force, for better or worse.

Dealing fairly with suppliers and customers

A few years ago, the Covid-19 pandemic exposed the fragility of many supply chains, especially those based on a just-in-time model or focused on the lowest cost suppliers, in many cases at the expense of predictability and longevity of supply. At the onset of the pandemic, when many countries wholly or partly closed their borders, some companies found it increasingly difficult to assemble the inputs they needed to meet demand.

Even when restrictions were lifted, fresh bottlenecks arose, such as geographical shortages of shipping containers or of maritime freight capacity, leading not only to disruption of deliveries but soaring prices for in-demand products. Meanwhile, the growing consensus that corporate responsibility extends beyond a company’s own activities has brought awareness that keen pricing is no longer considered an adequate justification for using suppliers that treat their own workers unfairly or expose them to accident or health risks.

As a result, many companies have sought to introduce greater predictability and resilience to their supply chains in the past few years, giving greater emphasis to relationships of mutual trust and respect with their suppliers, and paying attention to fair treatment including avoiding price gouging and late payment. They have also revised their view that cheapest is always best, recognising that their own reputation may be brought down by a supplier’s actions.

Companies that are getting all these relationships right are almost certainly getting the relationships right with their customers as well. Customers are adept at spotting when a company’s behaviour does not match its self-proclaimed values. They will be aware when companies lack transparency, charge them over the odds, or manipulate them. Good companies communicate openly and honestly with their customers.

Undoubtedly, there will still be companies that seek to get away with treating their customers, suppliers and employees poorly, but it’s unlikely to be a successful strategy in the long term. Businesses are also coming to see that being regularly in conflict with external stakeholders is an uncomfortable and mostly unprofitable distraction for managers and staff. Being a good corporate citizen is a better – ultimately easier – way to operate.

Companies with a poor environmental record may be at risk of paying out heavily to remedy damage, as well as facing a higher cost of funding as banks address their own reputational exposure – and they may find themselves shunned by customers or recruits.