Since 2010, Relational Research has been developing the application of Relational Thinking into the corporate world, where the most significant interest has been for analysing stakeholder relationships. Below is the rationale behind it.
Click here for a more detailed account of our methodology and how it grew out of our engagement with corporate governance in South Africa.
Why measure corporate stakeholder relationships?
a) Corporate governance
Stakeholder relationship management has at last become an issue of intense international interest in the corporate world. This is evident from the new focus on ‘integrated reporting’, which includes not just an evaluation of the financial and environmental impact of a company’s operation, but also its political and social impact. Measurement of social impact is the missing piece of the jigsaw in ‘triple bottom line’ reporting – to measure a company’s social impact only on the basis of its corporate social responsibility (CSR) spend is clearly inadequate. Good corporate governance requires an understanding of the impact of a company’s operations on the well-being of all stakeholders, as set out in the new South African corporate governance code, King III.
b) Business improvement
The business improvement case arguably is even more compelling than the corporate governance case. The importance of customer relationship management (CRM) has long been recognised. Sales levels and sustainability depend on the quality and strength of relationships with customers. So, too, supply chain relationships are understood to be a key factor in long-term corporate profitability. ‘Industrial Relations’ between management and staff are a major factor in employee motivation, rates of shop-floor innovation and labour productivity. Relations with shareholders determine whether they stay with the company through the tough times as well as the good times. Relationships with regulators often determine the speed with which it is possible to introduce new products, pricing levels and thus profit margins, especially in the health sector.
c) Future performance
A third factor driving interest in measurement of stakeholder relationships is investor concern to value companies accurately and estimate a company’s future profitability. A major element in a company’s value is generally ‘goodwill’. Technically ‘goodwill’ is rationalised as the difference between the book value of a company and the future value shareholders believe it should achieve. It is now widely recognised that ‘goodwill’ is a proxy for a company’s relational capital, i.e. a measure of the strength and quality of the relationships a company has with its stakeholders. As such, measures of a company’s stakeholder relationships become important in the context of merger and acquisition discussions or negotiations. At the same time, investors increasingly realise that statements of past financial performance are not always a good predictor of future performance. To forecast future performance, knowledge about key stakeholder relationships is crucial. This has been a major factor in Warren Buffet’s successful investment strategy in the United States.
Weaknesses in the current arrangements
If all these relationships are so crucial, why are they not measured more frequently and systematically? Of course, there are already many measures being used, e.g. customer and employee satisfaction surveys, and shareholder engagement surveys. However, these suffer from several weaknesses:
• they do not cover the key relationships a company has with all its stakeholders
• they lack a consistent underlying framework applicable to all stakeholder relationships, so results from one survey cannot be compared directly with another
• they only ask those on one side of the relationship (e.g. the employee or customer), rather than looking at both sides of the relationship
• they often fail to pinpoint where exactly the problems lie in the relationship, and thus give only a vague idea of how to improve them if they are distant, weak or unsatisfactory.
So there is good reason for exploring new and simpler models and methodologies to examine the quality and strength of stakeholder relationships.Introducing Relational Proximity®
The Relational Proximity Framework® is a comprehensive methodology for measuring stakeholder relationships, which has been extensively tested and proved its value. It was developed initially by our sister organisation Relationships Foundation, a think tank which specialises in understanding and recommending policy change for issues connected to relationships. First applications were in the public services – the prison system – and in the health sector. The tools were developed further in the 1990s for application into the commercial sector, with use first in a leading City of London law firm and then into a range of commercial applications. Most recently, the tools were used with five major corporates in South Africa to help them meet new corporate governance reporting requirements under King III.
The key challenge has been to quantify relationships. While the relationships themselves may not be directly quantifiable, the behaviours and outcomes associated with relationships clearly are; what is required is a systematic framework to organise them so that all facets of the relationship are assessed. The Relational Proximity Framework® provides the required language and categories of thinking, and in doing so enables decisions to be made on those behaviours and outcomes. The ability to identify and quantify relational issues is a huge asset to senior management who, after all, spend almost all their time dealing with relational issues with their various stakeholders.
We can therefore help companies and communities to address some of their most pressing concerns – a widespread realisation that they need to measure and manage relationships – by offering a framework and tools to do just that. Relational Research is committed to finding ways to equip companies and communities to achieve greater sustainable profitability and wider social benefit.