Jan 23. 2020

Internal Audit and the Emerging Stakeholder Capitalism

Internal Audit and the Emerging Stakeholder Capitalism

Various global trends such as: growing inequality, negative effects of climate change, corporate scandals due to erosion of corporate cultures etc. all point to a widening gap between the current model of emerging stakeholder capitalism and its expected or assumed social benefits.

If the current World Economic Forum in Davos is any indication, a slow shift from shareholder to stakeholder capitalism is emerging in the worlds’ largest organizations.

What this shift would entail and how corporations can ensure that stakeholder capitalism is for real and not Just for Show (JFS)?

In a nutshell, currently companies articulate their corporate vision, mission and strategy in alignment with their ultimate goal is to maximize shareholder value (MSV). The board, who ultimately represents and defends shareholders’ interests, through corporate governance structure ensures oversight of business and risk strategy, organization, financial soundness, regulatory compliance as well as management of the principal-agent conflict.

The entity’s three lines of defense:

  • Function that owns and manages the risk
  • Risk Management & Compliance
  • Internal Audit

along with various committees play a key role in the enforcement of proper corporate governance.

Evolution towards stakeholder capitalism

Stakeholder capitalism would mean that stakeholders’ like: suppliers, customers, employees, creditors, the community as well as environmental sustainability etc.; interest would be considered in corporate decision making beyond MSV. Ultimately, this evolution toward to stakeholder capitalism would require a rethinking and reshaping of the corporate vision, mission and strategy.

It is one thing that an organization makes bold statements about a systematic transition toward stakeholder capitalism. It is another thing, whether the board can sign-off with high level of confidence that these revised corporate goals, objectives, frameworks and policies are in place, aligned, effective and efficient.

Who else, if not Internal Audit should attest whether this change is for Real?

Internal Audit (IA) would play indispensable role in the validation of the various frameworks such as: revised corporate strategy framework, revised HR policies, modified capital project impact assessments etc. considering the organization’s expanded stakeholder base. In order to accomplish this, IA should work closely with the Board, the Chief Risk Officer and Senior Management to identify areas of the transition that pose highest risk and having the highest impact.

If IA does not get a leading role in the actual assurance that an effective and efficient transition toward stakeholder capitalism is under way within the organization, it is highly questionable whether the public does not see these claims as JFS.

What are your thoughts about IA’s role in the emerging stakeholder capitalism?

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