An interview with Lady Barbara Judge: The challenge of rebuilding trust

Attitudes to business are shifting – and IROs have a key role to play, argued Lady Barbara Judge in her keynote address at the IR Society's conference in June. Here is an edited summary of the session, based on Lady Judge’s opening remarks and the follow-up questions from Evan Davis and from the audience.

Where is the world of business today and what worries you most?
The world of business is rapidly moving and faces a multitude of challenges and opportunities. Companies can grow very quickly – think Amazon/Google etc – and while this presents opportunities for investors, it also presents risks.

The speed and availability of information is another area which presents opportunities and risk. Consumers, investors and the wider public have access to more information on a company than ever before; it is for companies to ensure what they see is reflective of the reality. The responsibilities companies have are increasing as they move into new areas and handle larger and larger amounts of our personal data. They will need to set out a clear strategy to investors on how they intend to deal with this.

What worries me is that we are currently experiencing a global breakdown in trust. The historic low levels of respect for traditional media sources have given rise to many accusations of ‘fake news’ by everyone from social media trolls to President Trump. This is a striking example of what can happen when the public stops believing in the institutions around them. For businesses, this decay in trust can impact on their bottom line, it can disenfranchise their workforce, it can scare off investors and it can prompt governmental reform. Furthermore it contributes to the rejection of the current order, it undermines the economy and it is provoking a collapse in the confidence the public has in capitalism.

A comprehensive annual survey conducted by Edelman shows the lack of faith in business, politics and the media. Public trust in the government is at just 26%; for business the figure is 33%, while the media only manages 24%. 

Chief executives are experiencing a reputational crisis too, with just 28% of Britons saying they trust business leaders – 12% lower than during the same period last year, and lower compared with the 37% across the rest of the world.  Over 60% of IoD members said the greatest threat to trust in business was anger at executive pay. 
 
Recent elections in the UK, Europe and America show the impact this lack of trust can have as the public places its faith in untested responses to perceived problems. This is worrying, and business has a key role to play in regaining the public’s trust. It comes down to clear and honest communication with stakeholders.

Another worry is, naturally, Brexit, which at the moment is mired in uncertainty for business. IoD members and businesses across the country are rightly attempting to ‘get on with it’ in terms of the day-to-day, but the longer the uncertainty on what Brexit will actually look like, the longer the impact will be on business and productivity as companies hold off on plans to see what the playing field will be. Business hates inconsistency – but British business is robust and will respond with energy and certainty (when we know the rules).  After all, there was a great trading nation called the UK before there was an EU. 

What is the biggest change we have seen in the role of business in the past five years?
Business is increasingly occupying spaces that were previously the reserve of government. This potentially brings with it a higher expectation on behaviour.

Consumers are more aware and more ethical, as are investors. 

Employees are also becoming more and more critical in their evaluation and choice of who to work for. Of those born between 1981 and 1996, 62% wanted to work for an organisation that makes a positive impact, half prefer purposeful work to a high salary, and 53% would work harder if they were making a difference to others.

Investors are also becoming increasingly more concerned with a company’s impact on society and the environment. Earlier this year industry giant Legal & General wrote to 84 global companies warning that they would vote against chairmen in businesses that failed to prepare for a move to a greener economy. This should act as a warning light for businesses that lag behind in these areas.

The emphasis from all of this comes back to my earlier point, the need for public trust in business.

What does this mean for our audience of investor relations practitioners (UK plc and other companies)?
It will mean a greater degree of expectation from investors and the public on companies. There will need to be a balance of risk and opportunity.

The speed with which information is disseminated has increased a thousandfold. This presents a unique challenge to investor relations and recent examples display the need to get on top of a story quickly. Moreover, investors can now learn more about a company, so the IR community needs to have a strong grip on ensuring this information is clear and up to date.

Setting out a long term strategy in a clear manner is key. Engage with investors and ensure that they understand the reasons behind the company’s strategy.

Are you optimistic about the next five years and what it holds for business?
Cautious optimism is key. The challenges facing the UK and businesses also carry opportunity. Opportunities should be embraced but with full awareness of the inherent risks.

If companies are going to be able to ‘get on with it’, which is essential for the UK to be able to maintain its competitiveness, the government needs to be open and clear on what the situation is. 

How should business address the concerns of the government and the public?
Business needs to be proactive in addressing the concerns of government and the public. If they do not, it is likely we will see legislation being brought in which will have consequences for business. 

The issues which need addressing can be seen from the recent government green paper and the BEIS select committee report on corporate governance. These can be succinctly categorised as executive pay, stakeholder relations and governance of the unlisted sector. 

On executive pay, which as I stated earlier is one of the primary reasons for a lack of public trust, businesses need to be engaging with investors early to avoid revolts at AGM. Make sure that stakeholders can clearly understand the rationale behind pay and ensure they are able to connect it to the performance of the company. 

This feeds into the second area of concern for the government. Businesses need to be engaging with stakeholders beyond just investors. Ensure that all parties who have stakes in the business feel listened to and represented. 

Trust and confidence are key to properly functioning markets – how do we better engage with the public investor?
Trust in business is very low, as can be seen in the annual Edelman Trust barometer. One of the key themes which comes out with regard to trust is executive remuneration; indeed this is a view shared by IoD members, with over 60% them saying it is the principal risk to trust in business.

The IR community has a role in making information around remuneration clear to investors. Ensure that they can see why it is being paid and always link it to performance where possible. Act as the pipeline and ensure concerns are shared both ways.

Can we do more to help ourselves?
Clearly presenting a long-term strategy for the organisation which promotes organic and stable growth, make sure that investors understand the reasons behind the company strategy going forward and manage expectations in relation to potential returns during the period of the strategy. 
Explore new and creative ways in which to get information across to investors. 

There are potentially going to be several changes in the regulatory environment, through the FRC’s reviews of the Corporate Governance Code and Stewardship Code, alongside the publication of the government’s white paper on corporate governance reform. Get ahead of the curve on this by getting to grips with the scope of all three, and relay potential changes to internal and external stakeholders. Game plan for the more likely changes and have a plan in place for when the changes occur. 

Moreover, while annual reports do well to list the risks facing business, there is often little in the way of stated strategy to deal with major threats to business.

I am particularly concerned about the issue of cybersecurity. We have all seen in recent months what can happen in the blink of an eye to a company which is unprepared to deal with an attack and its fall out. Businesses need to make clear to investors and customers alike that they have a grip, that there are plans in place to deal with an event and that they are doing everything possible to mitigate the risk.

Also of concern is the increasing pressure on companies to have mind to the environment. As said this will only increase, both in terms of regulation but also in the expectation from investors, customer and employees. Companies which are able to show real willing in this area will benefit over those who delay. 

As with cyber, there are real reputational risks in not engaging on this issue and, as Warren Buffet sagely puts it, ‘reputations take a lifetime to build, but five minutes to destroy’. In the modern interconnected world, five minutes might even be an understatement. 

If you can leave the audience with one overriding thought, what is it?
Yes there are reasons to be scared perhaps, but by embracing and facing the challenges of today head on there is no reason why these cannot be turned into opportunity. While it can be easy to feel despair when faced with the barrage of bad news through the media, it is important to remember that by almost every conceivable metric, the world is a better place today than it was yesterday. Moreover, with the technological revolution the opportunity is immense. 

So the thought I would like to leave you with is one of cautious optimism. We can either batten down the hatches and hide away in fear, and in doing so pass up opportunity, or we can embrace the winds of change and capitalise on the opportunities that abound. 

Published 31 July, 2017

@InvAssoc review of 2017 AGM voting data suggests better alignment of management & shareholder interests ow.ly/tCaK30ev2EZ #IR #IRChat

Sponsor message