Adrian Henriques reviews "Corporate Diplomacy: building reputations and relationships with external stakeholders" by Witold Henisz, and the author himself responds

Witold Henisz is the Deloitte & Touche professor of management at the Wharton School, University of Pennsylvania. His book, Corporate Diplomacy, deals systematically with corporate affairs in large companies. The book is a masterful template for how to run a successful corporate affairs department in pursuit of a “social licence to operate”. The question which the book does not address, however, is how far running a corporate affairs department can ever deliver the accountability upon which such a licence will ultimately depend.

The book opens with an extended and almost heart-rending account of how AES-Telasi, a subsidiary of the US power company AES, failed to bring reliable electricity to Tbilisi, the capital of Georgia, through failing to address the concerns of its stakeholders. The bulk of the book sets out techniques and approaches in a number of areas which should be addressed to avert such failure:

• Capturing data and analysing stakeholders, their relationships and interests.
• Constructing a business case for corporate affairs interventions.
• Conducting stakeholder engagement.
• Adopting appropriate managerial styles.
• Reputation-building.
• Securing internal management and staff buy-in.

Almost all the techniques given, with the exception of those in the chapter on stakeholder engagement, accurately reveal how successful large companies can manipulate their stakeholders to ensure that their main commercial goals are met. This is not meant to imply that a successful “corporate diplomat” would cynically deceive naïve stakeholders in order to get the company’s way. But it does suggest that most vulnerable stakeholders will have little chance to block a project or significantly change the course the company is pursuing. The emphasis is on clarity over which stakeholders can influence a project and how to bring them on board.

Real issues

The chapter on stakeholder engagement is different. It describes the real issues and difficulties of stakeholder engagement with the stakeholder perspective very much in mind. In fact the best sort of engagement is described as one in which the stakeholder takes real power and is able to control a project. Yet the tension between this aspiration and the need to deliver corporate objectives is not discussed at all.

This is probably because the book is focused very largely on major mining projects in the non-western world. For such projects, stakeholder engagement is often focused on the manner in which projects are delivered or the nature of the development gain in the form of community projects, rather than putting the central commercial objectives in question. Yet the real test is whether community stakeholders would be given the power to veto a project. Of course governments, as stakeholders, can block projects, but how often does a local community?

An internal reflection of this issue is the apparent assumption in the book that there will always be a business case for corporate affairs. This can only be true if the project will run worse without it. Henisz cogently makes the argument that for large projects, this is very likely to be true. However, what will the business case look like if stakeholder engagement brings to light an underlying strong opposition to the project? And what should happen if the business case is negative for “corporate diplomacy”?

It might have changed the focus and conclusions of the book if a wider range of companies had been covered in more detail. How does a corporate affairs department operate within a drug company or a retailer, for example? For these companies, the stakeholder base is far wider and more diffuse and rather different techniques of engagement are required. In practice corporate affairs at these companies often concentrates on the influential stakeholders and leaves the more numerous consumer stakeholders to the marketing department.

The big question remains: is the activity of corporate affairs management consistent with corporate accountability? What we have seen from so many companies is an effort to placate and in some cases simply manipulate stakeholders to bend them to their will. “CSR” has become captured by managerial interests. What would be required for the most vulnerable stakeholders to be given real power over how companies affect their lives?

Witold Henisz responds to Adrian Henriques’ review of his book

Adrian Henriques’ review of my book – Corporate Diplomacy: building reputations and relationships with external stakeholders – offers some strong praise, for which I thank him, but also some criticism that I find instructive for potential readers of the book and practitioners of Corporate Diplomacy more broadly.

First, let me thank Adrian for his assessment of the “systematic” approach and “masterful template” that emerges after a “heart-rending” account of failure that opens the book.

The review turns more critical where he equates my efforts to “ensure that [large companies] main commercial goals are met” with “stakeholder manipulation”. While he acknowledges that the chapter on engagement “describes the real issues and difficulties of stakeholder engagement” with the aim of allowing “the stakeholder [to take] real power” and … control [of] a project”, he feels that I do not address the tension “between this aspiration and the need to deliver corporate objectives”. He does not approve of my focus on identifying the “business case” for stakeholder engagement demanding that companies should go further. He decries the “capture” of CSR by managerial interests and wishes for a world in which “the most vulnerable stakeholders … be given real power over how companies affect their lives”.

Financial returns

This is a criticism that I hear from time to time from activists and even corporate employees charged with responsibility for community affairs or sustainability. They are uncomfortable with my call for them to translate the work that they do building relationships with stakeholders into an estimate of financial returns to shareholders. They note that they follow a moral compass not a financial calculator. They want to convince others to follow them for the same reasons.

The problem is that they are working within companies that are controlled by managerial interests. Those interests use their own language and evaluative criteria that are financial not moral. While there are numerous books and efforts to transform the modern corporation and encourage it to pursue goals other than shareholder value maximisation or to constrain those corporations with new binding international legal commitments, I take a different tack. I embrace the status quo and show that it can be harnessed to change practice in a manner consistent with the moral goals of the activists.

By demonstrating a financial return to empowerment of the most vulnerable, one can achieve more than by demanding that empowerment on moral grounds. Showing a 30% return on investment will lead to more rapid, substantive and meaningful change than demanding the CFO use a different criterion to evaluate sustainability investments. In fact, it will make the financiers, engineers and lawyers the greatest advocates of stakeholder engagement. Notably, John Ruggie adopted a similar strategy (see the study, The Costs of Conflict with Communities in the Extractive Industry) as one component of his effort to win support for the Guiding Principles on Business and Human Rights.

In the current era of hyper-connected globalisation, the ability of activists to capture injustice and broadcast it globally is a powerful driver of change in corporate practice. The lesson has been learned first by the companies that interact with the most vulnerable stakeholders who are targeted by their peers or even their governments. Contrary to Adrian’s assertion, it was actually the historical choices by companies in the extractives sector to avoid engagement with relatively vulnerable stakeholders and comply with the demands of the most powerful stakeholders that often led to conflict culminating in billion dollar write-offs. Now these firms are learning. Others can learn from their mistakes instead of repeating them.

The book complements these insights with those from construction projects, hotels, development projects and military ventures. They are also relevant in apparel (eg response to Rana Plaza and child and labour rights more broadly), consumer goods (eg palm oil or Fairtrade coffee and cocoa), agribusiness (eg GMOs), pharmaceuticals (eg funding for drug discovery for poor populations), electronics (eg worker rights and conflict minerals) and retail (eg Fast Food Global).

Overcoming the divide

An ongoing struggle in the implementation of better stakeholder engagement strategies across these sectors is the hostility or even lack of respect that managers with training in operations, finance, marketing, law or engineering have for those in what they perceive as the cost-centres of government affairs, community affairs, sustainability, communications and external affairs. The feelings are often reciprocated. The goal should be to overcome the divide rather than accentuate it.
I do acknowledge that there are cases where we encounter real conflict between shareholder value and stakeholder interests. At those times, we need tools beyond those that I offer in this book. However, given that there are so many cases where we can achieve both aims, it seems counter-productive to ignore the lessons of firms on the frontlines of Corporate Diplomacy. Ironically, hectoring the financiers and engineers and lawyers about the flaws in their belief systems and seeking to change those belief systems to favour the needs of the most vulnerable is the definition of stakeholder manipulation. By contrast, listening to those internal stakeholders, understanding the constraints and behavioural drivers they face and framing efforts to change corporate behaviour in a way that highlights a common shared interest is the definition of Corporate Diplomacy.

Adrian Henriques is visiting professor of accountability and CSR at Middlesex University and a social auditor who blogs at www.henriques.info and tweets at @adrianhenriques. 

Witold Henisz is the Deloitte & Touche professor of management at the Wharton School, University of Pennsylvania and principal at Prima LLC. Follow him by joining the Corporate Diplomacy Group on LinkedIn, @whenisz on Twitter or at http://www.corporatediplomacy.com.

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