Companies routinely ask what the return on investment will be on any stakeholder management program designed to help deliver projects.
Measuring the efficiency of good stakeholder management and community consultation often relies on indicative assumptions within an environment of finite metrics. Juxtaposed against the clarity of engineering absolutes, community consultation often works in parallel, dealing with the more intangible elements of a project – political sensitivities, stakeholder opinions and potential impacts.
Ground-breaking research by a team from the University of Pennsylvania in the United States1 has sought however, to provide a means to quantifiably measure the commercial efficacy of good stakeholder management within a publicly-listed mining environment.
To do this, the authors cross-reference publicly available financial and reputational performance data to demonstrate a consistent correlation between good stakeholder management and commercial success.
Sinclair Knight Merz (SKM) recently identified the potential value of this new thinking across its business and is now collaborating with the University of Pennsylvania research team to explore this theory within the context of its mining, energy, transport and environmental sectors. This model could help redefine the link between social and financial outcomes and help companies further improve their performance.
The need
The team’s research challenges the theory that stakeholder engagement is peripheral to financial gain in the mining industry.
Given the pressures of the modern mining world, the researchers explored the possibility that the financial health of a mining business is proportionate to the health of its stakeholder relationships. To address this notion in a quantifiable and therefore conclusive way, the idea of an empirical approach to stakeholder consultation evaluation was born.
In terms of industry demand, large companies are interested in meeting the challenge of modern day pressures and therefore obtaining a more efficient means of delivery. For smaller firms, it was identified that mines operating as responsible corporate citizens and maintaining good stakeholder relationships had a stronger mine to sell to the market.
The methodology in a nutshell
In summary, the research is based on the analysis of panel data regarding 26 gold mines (relating to 19 companies) in 20 countries from 1993 to 2003. This constitutes all publicly-traded mining firms on the Toronto Stock Exchange that own and operate up to three mines outside the United States, Canada and Australia (that have reached the feasibility study stage). To support the research, relevant information regarding mine finances and operations was obtained using the strict Canadian disclosure requirements.
Manually coded, the stakeholder data was sourced from more than 50,000 events from media reports covering the respective mines. The approach uses a sentence-level protocol to identify tone and used a well-developed scale derived from conflict studies literature to quantify the level of cooperation or conflict amongst stakeholders. This calculation, along with the characteristics of the mine and the price of gold, is used to determine the financial value of the companies assessed.
The empirical measure is constructed using a moving average that discounts the “relevance” of past reports by reducing their weighting in comparison with a current report. Formally, for each mine (j) of each company (i) at time (t) they calculate:
Theory at work
The approach has been applied to the gold mining industry for a number of reasons. However, the volatility of the price of gold and therefore the miner’s vulnerability to external influences such as corporate reputation risk, makes the gold mining industry a good one to test the financial implications of stakeholder engagement mismanagement.
While these risks are commonplace in today’s mining industry, the research team’s perspective on this issue is quite different to the traditional stakeholder engagement perspective. The finite perspective of more technical disciplines such as engineers or accountants are applied to the world of stakeholder engagement, where the events that take place as part of the process (media coverage, community protests, etc) are likened to transactions of a business nature. For example, a traditional practitioner would see favourable media coverage as simply a good thing and perhaps assign a dollar figure on how much that media space would have cost if it were advertising space. However, the research team regard this as reputational capital2.
With this in mind, a number of steps are taken to calculate individual components of the overall empirical equation:
- Financial market evaluation: The authors calculate the market value of the company by multiplying the stock price by the number of common shares outstanding and adding company debt. They then seek to explain variation in this measure across companies and within a company across time
- Resource valuation: This requires using a variation of a valuation model developed by Cairns and Davis (1998)3, which is used traditionally to value hard-rock mineral properties. However, this application uses an additional time dimension and considers the possibility that companies may own multiple mining sites with a resource value that can be assessed independently
- Stakeholder conflict-cooperation: This requires the analysis of media-based stakeholder event data that captures the level of cooperation or conflict between the company and its various political, social and economic stakeholders4. All articles mentioning the mine name and country name in the Dow Jones FACTIVA database5 are included in the corpus to be coded according to a set protocol. The initiator and the target of the comment are determined and then the degree of conflict or cooperation is coded using a vocabulary of over 5,000 verbs or verb phrases. This data is then used in the mathematical formula described above
- Policy uncertainty: The uncertainty of country level policy is then considered using the Political Constraint Index (POLCON) dataset. This includes looking at the number of independent areas of government with veto power over power change6. The researchers identified that countries with fewer constraints have weak commitment mechanisms and therefore a more uncertain relationship between resource valuation and financial market valuation, or one that is more contingent upon stakeholder engagement7.
- Resource versus market value: The research team found that cooperative relationships between the firm and its various stakeholders indicate that the company is likely to continue the development of the mining project without significant planning or operational delays8. At this point, the team then look to test whether the company’s mining resources match its market value. This is done using random parameter, random intercept and fixed effect models. This also explores what investors would be willing to pay for the expected value of a mining company.
- Testing the stakeholder conflict/cooperation measure: Further work is then done to look at the data and other possible influencing variables, such as what was included/excluded at this stage of the research, data relating to other organisations (such as individual service providers) and the effect different impacts may have in differing country environments
- Direction of causality: Further investigation is then done to ensure results aren’t driven by managerial agency or time-related homogeneity
- Schedules: Given risks to projects usually run a course in parallel with a project’s lifecycle, the stage of the projects during the time of research is considered. While projects may have commenced at approximately the same time, they are usually delivered at a different pace due to differing variables such as localised constraints or challenges
Where to from here
The research indicates that there is a direct correlation between stakeholder engagement and fiscal sustainability.
“Our theoretical arguments and empirical results point to the existence of a direct positive and economically substantive relationship between financial market valuation and stakeholder relations.”9
SKM is exploring the possibility of applying this thinking to other areas outside of mining, such as the energy, transport and environmental sectors. Through further application, the researchers will be looking to strengthen the notion that the intangible and random nature of the world in terms of stakeholder engagement can indeed be measured and quantified. Further, this research provides a scientifically validated formula demonstrating the reality of achieving a social licence to operate.
In short, the social licence to operate is more than rhetoric. It is empirically testable and strategically relevant.
1 Henisz, W.J, Dorobantu, S and Nartey, L (2011), Spinning Gold: The Financial Returns to External Stakeholder Engagement, University of Pennsylvania.
2 Henisz, W.J, Dorobantu, S & Nartey, L (2011) ‘Spinning Gold: The Financial Returns to External Stakeholder Engagement’, University of Pennsylvania pp. 16-17.
3 Cairns, R. D. & Davis, G. A. (1998) On Using Current Information to Value Hard-Rock Mineral Properties. The Review of Economics and Statistics, 80(4): 658-63.
4 Henisz, W.J, Dorobantu, S & Nartey, L (2011) ‘Spinning Gold: The Financial Returns to External Stakeholder Engagement’, University of Pennsylvania p. 15.
5 http://www.factiva.com/
6 Henisz, W.J, Dorobantu, S & Nartey, L (2011) ‘Spinning Gold: The Financial Returns to External Stakeholder Engagement’, University of Pennsylvania p. 19.
7 Henisz, W.J, Dorobantu, S & Nartey, L (2011) ‘Spinning Gold: The Financial Returns to External Stakeholder Engagement’, University of Pennsylvania p. 20.
8 Henisz, W.J, Dorobantu, S & Nartey, L (2011) ‘Spinning Gold: The Financial Returns to External Stakeholder Engagement’, University of Pennsylvania p. 20.
9 Henisz, W.J, Dorobantu, S & Nartey, L (2011) ‘Spinning Gold: The Financial Returns to External Stakeholder Engagement’, University of Pennsylvania p. 25.
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