WHAT gets measured, matters. Measuring the effectiveness of stakeholder, investor and other corporate communication activities, however, has always been somewhat ambiguous. Until now.
Wharton Professor of Management Witold Henisz has found a way of measuring the benefits of stakeholder engagement activities to public mining companies that operate in risky environments. Henisz and two co-authors researched the role that stakeholder events played in companies’ efforts to maximize profits. The answer: huge.
As Henisz notes in a paper entitled Spinning Gold: The Financial Returns to External Stakeholder Engagement (PDF 480KB): “There is a powerful business case to win the hearts and minds of external stakeholders. We found in our research that the value of the relationship with politicians and community members is worth twice as much as the value of the gold.”
The authors used data from 26 gold mines owned by 19 publicly traded firms between 1993 and 2008. By coding more than 50,000 stakeholder events from media reports – by hand, no less – the researchers developed an index of the degree of stakeholder cooperation or conflict for these mines.
Stakeholders, for the purposes of the research, includes everyone from local and national politicians and community leaders to priests, war lords, paramilitary groups, NGOs and international bodies like the World Bank. A stakeholder event includes actions or expressions of sentiment from groups friendly and not-so-friendly towards mine owners. The authors note that because mines are so big, whoever the politically relevant stakeholders in an area are, they often take sides because so much money and so many jobs are at stake.
Henisz and his colleagues reviewed data of gold mining firms listed on the Toronto Stock Exchange to calculate the net present value of their mine. That value was then compared to the company’s market valuation. The result: the companies traded at a 72% discount compared to their net present value. Why? Because the net present value did not take into account the probability of delays or disruptions, and the cost overruns or revenue shortfalls that result.
By incorporating the stakeholder cooperation index in a market capitalization analysis, the researchers reduced the discount placed by financial markets on the net present value of the gold from 72% to between 33% and 12%.
Getting with the program
The research quantifies what a number of mining firms have already realized – that reducing conflict with external stakeholders in favor of winning their cooperation improves the companies’ chances that a mine plan can proceed on budget and on time, and most importantly, generate sustainable shareholder value.
“Fifteen billion dollars of gold sitting in a mountainside cannot be transformed into [profits] with financial, engineering and marketing inputs alone,” comments Henisz. “It also requires the political and social support of key stakeholders, including not only members of the economic value chain, but also government officials, regulators, community leaders and members of civil society.”
A quote from the COO at one of the mines in the researchers’ sample puts it another way: “It used to be the case that the value of a gold mine was based on three variables: the amount of gold in the ground, the cost of extraction and the world price of gold,” he states. “Today, I can show you two mines, identical [in term of] these three variables, that differ in their valuation by an order of magnitude. Why? Because one has local support and the other doesn’t.”
The findings are applicable to a number of other industries, according to Henisz, including construction, oil and gas, agriculture, minerals, alternative energy and water – any sector that involves large building projects, substantial upfront investments and long payback periods.
“If companies want to maximize their profits, there is a degree of stakeholder engagement that they have to undertake.” Those able to recognize the need for sophisticated stakeholder strategies, he adds, “will find this to be a source of competitive advantage.”
Applying best practices
Henisz recommends the following best practices for businesses that are serious about engaging stakeholders:
- Change the mindset of the company so that employees across the board believe that stakeholders are important.
- Get the necessary data to explain who the stakeholders are, what they want and who is connected to whom.
- Find a way to link data to operating performance, integrating the information into risk management systems rather than treating it as a separate category.
- Interact with stakeholders in the community in a genuine and fair manner; respond to their concerns and form connections rather than just writing a check.
- Find a way to disseminate information about the ongoing project that is credible and transparent.
The links between perceptions of social responsibility and market valuation vary across industries and countries. Their existence, however, is ubiquitous. Today, the social license to operate is more than rhetoric. It is measurable and strategically relevant.