CR Leaders Corner: Witold Henisz

An Interview with Witold Henisz, Deloitte & Touche Associate Professor of Management, The Wharton School, The University of Pennsylvania

Witold (Vit) Henisz has spent the past decade developing a methodology that measures the impact of effective stakeholder engagement.  His ground-breaking work offers companies the prospect of determining the value of managing stakeholder opinion in achieving long-term success.  Vit’s research has been featured in numerous international management and business journals.  He’s also served as a consultant to the World Bank, the Inter-American Development Bank, the Conference Board and the Eurasia Group.  Currently, he’s a principal in the political risk management consultancy The Probity Group LLC.

1.  AccountAbility: Why did you become interested in stakeholder engagement?  

Witold Henisz:  A lot of academics studying political risk focus on which countries to avoid and how to define investments and determine the risk-adjusted rate of return. But this finance focus misses the strategic element of interacting with stakeholders. I found there was very little research on the link between strategy and stakeholder perception, so I began to talk to company managers and develop an actionable methodology.
What I saw in the mining and oil and gas sectors was a common conception about relationships with external stakeholders and a desire to win their hearts and minds.  Who’s out there, who’s powerful, who’s connected to whom.  There’s a real parallel between this and work that is going on in political economy and sociology.  I saw the potential to link the two in a way that would be relevant to multinational corporations, to NGOs, and to communities.

And that’s been my research program — to bring in data from both stakeholder databases, and also from the media — to create structured information about stakeholder networks and stakeholder power, and then subject it to analytical modeling in a way that can provide insight as to who you should reach out to, what you should say, who’s the most important stakeholder.

2. AA: What has prevented researchers and practitioners from understanding the value of stakeholder engagement?

WH:  There is a common tendency to try to design the best investment up front from an engineering or legal perspective and think that if you have the right design and plan then the operations will take care of themselves. But it’s the actions that happen over the life of the investment that determine its success or failure. The challenge is how you manage it day-to-day, especially in the face of unexpected shocks and demands from stakeholders, and how you respond, that determines whether you survive and profit over 10 or 20 or 30 years.

3.  AA:  Can you explain the methodology?    

WH:  Sure, the methodology focuses on the identity of the stakeholders and their relative power.  Who has more sway over the final outcome than others?  Who’s strongly connected?  Who likes whom and who dislikes whom?
We triangulate as much information as possible to answer these questions.  We might interview dozens of different people.  We’ll look at the media.  We’ll look at blogs.  We want to get a 360 view on who the actors are, what they want, who they’re connected to, and what they like.

That information goes into a hybrid coalition politics and social network model in which each actor is trying to win the hearts and minds of all the other actors, to come as close to what they want as possible.  Each actor makes a decision whether to join another coalition or not, based on whether doing so will help them get what they want.

4.  AA: How do you code this and derive meaning from it?  

WH:  Instead of just using Likert scales, or asking everybody to rank everything on a one to seven scale, we also want to be able to draw information from any relevant “unstructured text.”  For example, if you have interview notes, media clippings, RSS feeds from blogs, we want to be able to combine this kind of relational information into a single database that we can analyze using our methodology.

We rely on a scale that was developed in conflict studies research—which examines how disagreements escalate into violence and war—to rank verbs and verb phrases on a numeric “conflict-cooperation” scale.

For each sentence of text, we identify the subject, the verb and the object, and then use this scale to code the verb capturing the subject’s behavior toward the object.

This technique allows us to tap into a host of data, beyond just a survey instrument, or other purely quantitative indicators, to assess who likes whom, who’s speaking about whom in a cooperative or conflictual manner, and who’s acting on whom in a cooperative or conflictual manner.

5.  AA:  How do you put together a stakeholder map and derive meaning from that?  

WH:  The stakeholder map is a critical part of the methodology because it’s a way of pulling all the information together to show what’s actually happening.    If all you do is see the report, or see the analysis without some of the intermediate steps, it becomes a black box.

What we do is visualize stakeholders as an interconnected network.  Each stakeholder is represented on an influence map, which is a way of visualizing a set of actors.  Think of it as a series of bubbles.  Each bubble is larger if the stakeholder is more powerful, and smaller if they’re weaker.  And then each bubble is connected to some other bubbles, or some other stakeholders by a tie whose width varies in the strength of their connection.  You can also color-code them to indicate whether they’re positive or negative ties.

We visualize the location of the bubbles in two dimensions.  The left-right dimension is who’s supporting you and who’s opposing you.  The stakeholders who are closer to you, or have more confidence in you, are going to be on one side, and those who are opposed or really want to see the investment destroyed, are on the other side.

And then, on the vertical dimension, it’s an analysis of whether the stakeholders like each other, or are themselves are cooperative or conflictual.

6. AA:  How do you use this methodology to assess the impact of stakeholder relationships and engagement, in particular, the financial impact?  

WH:  In a recent study of the 19 publicly-traded gold mines on the Toronto Stock Exchange with three or fewer mines in emerging markets, we’re able, because of disclosure requirements, to calculate the net present value of the gold they control.  We know what their reserves are, what the fixed cost is going to be to start extracting the gold, and what the marginal cost of extraction is.  We essentially know what the gold should be worth.  We see, however, that the companies, trade at an average discount of 72 percent relative to the NPV of the gold.

When we add to the financial model a metric reflecting how each company has done winning the hearts and minds of their stakeholders—the conflict-cooperation score—we can account for the vast majority of the discount, so that the unexplained variance is now only 13 percent rather than 72 percent.

The ability to win the hearts and minds of external stakeholders is worth twice as much as the gold these firms ostensibly control.  Or put more simply, effective stakeholder engagement is twice as good as gold!

There’s been a very strong moral argument that the world would be better if companies engaged with stakeholders. But we think we’re going to have much more impact if we can actually show you’ll make more money if you do this.  There’s a lot of low-hanging fruit where shareholders can benefit and stakeholders as well.

7.  AA:  When you go to a company, who are you pitching this to?    

WH:  If we go to a company and the only people we can really pitch it to are the finance officer, the risk officer, or the sustainability officer, it’s not going to work.  This is something that has to be seen as a strategic initiative in the company,  that the entire “C suite” is committed to.  It’s got to be a company that takes a more integrative perspective towards risk, and that recognizes that better management of stakeholder opinion is critical to its long-term success.

8.  AA:  What kind of pushback do you get?  

WH:  There are two main objections.  One is a concern that the tool could be used in very opportunistic ways to manipulate opinions.

However, any tool can be used for good or for ill.

But, it’s certainly true that if this tool were given only to companies, there might be a temptation to try to outwit external stakeholders.  In the long term, this sort of manipulation is simply not sustainable as a strategy.

Another pushback is there’s just no way to get this much information, to do this much modeling.  It will take too long and cost too much money.

Some organizations will also push back on the cost of doing this type of analysis.  It’s not an insubstantial cost.  Until people recognize how much value can be tapped using these strategies, they’re reluctant to invest this much up front and figure out what the right strategy is.

9.  AA:  Do you see this applying beyond extractives?

WH:  Absolutely.  Think about a construction project where you’re building a port, a highway, a bridge, a building, a hotel, a power plant, a wireless network, a water distribution system, a factory.  Think about all the same types of issues, in terms of delays, disruptions, permits, and challenges from stakeholders.

Any time there’s a project that’s dependent upon the opinions of external stakeholders, this methodology can allow you to see that, to model that, and to make tradeoffs.

10.  AA:  What are key lessons that managers should think about in regard to stakeholder relationships?  

WH:  First, the tradeoff between the short-term benefit and the long-term cost of allying yourself with powerful but unpopular actors.  Over time, the dislike or distrust of that actor rubs off on you, and you’re seen as being part of that faction. Your ability to deliver the project profitably and on time erodes, so the long-term payoff ends up being negative.  You’re much better off forming potentially expensive ties to multiple popular actors up front, and convincing them that you share certain goals and certain objectives that are important to a wide array of external stakeholders.

In a nutshell, connecting with powerful but unpopular actors may offer short-term benefits, but it is costly in the long run.

Second, stakeholder engagement is more than just what you say and what you financially commit to.  It’s how you do it.  If people perceive you as being driven solely by financial returns instead of a genuine interest in how you can grab those win-wins and deliver them, they’ll never accept you.

It’s critical that you’re not only undertaking the analysis, but that you’re implementing it in a way that’s seen to be genuine and caring.

Third, execution and implementation are as important as figuring out what the right thing to do is.

The tool we’ve developed can actually show you the negative financial returns of links to powerful insiders, and the superior financial returns to someone who goes beyond talk and beyond financial commitments, into working together or joint project development.

These principles are well established among practitioners.  But we can prove that following them actually creates value by using a rigorous, evidentiary-based, scientific approach that would satisfy the CFO of a company.