In his latest report to the U.N. Human Rights Council, John Ruggie, the U.N. Special Representative on Business and Human Rights, highlighted the significant costs associated with stakeholder challenges and resistance to company operations. The report noted that one company consulted by his office may have experienced a US $6.5 billion “value erosion” over a two-year period as a result of non-technical factors, including stakeholder opposition.
The Special Representative’s report stated that stakeholder challenges to company operations, which are typically on environmental and human rights grounds, may result in:
- delays in design, siting, granting of permits, construction, operation and expected revenues;
- problematic relations with local labour markets;
- higher costs for financing, insurance and security;
- reduced output;
- collateral impacts such as diverted staff time and reputational hits; and
- possible project cancellation, forcing a company to write off its entire investment and forgo the value of its lost reserves, revenues and profits[.]
The Special Representative noted that current evidence for these costs comes largely from the extractive and infrastructure sectors, but suggested that similar concerns are likely to be a concern for other industry sectors. He reported that a recent study of 190 projects operated by international oil majors found that “the time for new projects to come on stream has nearly doubled in the past decade, causing significant cost inflation” and that major factor in these delays was “stakeholder-related risks.”
These findings should raise serious questions for corporate management in many industry sectors. Many companies do not have adequate internal systems in place to assess the total costs associated with poor stakeholder engagement practices. For certain industries and companies, depending on the nature of their operations, these costs may be significant. This is especially true for companies whose operations depend upon land concessions as well as companies operating in conflict-prone areas.
Failure to assess the costs associated with stakeholder resistance may leave companies ill-equipped to evaluate the effectiveness of existing stakeholder engagement programs and to develop sufficient internal training programs and accountability mechanisms. High-level standards on stakeholder engagement are often developed at corporate headquarters, but the costs associated with failures to develop and implement sufficient stakeholder engagement plans will first be reflected in project-specific costs and delays.
Furthermore, in our experience, poor management of stakeholder relations often undermines a project’s objectives at the very earliest stages of project exploration and development — often before an adequate community relations staff, or budget, is in place. Unless companies have systems in place to evaluate the aggregate costs of poor stakeholder engagement practices, insufficient incentives may exist to ensure that these risks are assessed and mitigated.