Putting flesh on the bones of your corporate culture
One of the main challenges for IROs is to monitor their corporate culture and advise if issues are starting to emerge that would affect the business’s reputation. Nick Bastin sets out the problems and some solutions.
‘Corporate culture does not emerge overnight. The chronic lack of accountability and professionalism now evident in Carillion’s governance were failures years in the making. The board was either negligently ignorant of the rotten culture at Carillion or complicit in it.’ Work & Pensions Select Committee enquiry into the collapse of Carillion
High-profile cases of company crisis in recent years have tended to reveal deep-seated problems with corporate culture. The Parliamentary Select Committee that reviewed the failure of Carillion in 2018, identified its ‘rotten culture’ as one of the reasons behind its demise.
Other high-profile ‘scandals’ have also set the tone: at Volkswagen the diesel-gate failure of corporate culture led to costs and fines in excess of $30bn. More recently, the collapse of the IPO ambitions at WeWork, where a personality-driven culture at the top, compounded by over-expansion, excessive pay and other governance missteps prompted a slew of negative media coverage questioning the nature of corporate personality.
Finally, the ESG movement has brought an overlay of purpose, vision and values to the corporate culture debate and all public businesses (as well as private organisations) are under relentless pressure to justify, explain, defend and support their position.
So how does this affect IROs? What should they be doing to help support the board and the executive?
A growing need
The revised UK Corporate Governance Code 2018 has given rise to a greater range of more qualitative and subjective characteristics around corporate purpose, values and culture on which companies and boards are responsible for reporting. The boards needs to show it is not only alive to these issues, but also actively managing them by aligning company purpose and culture, and ensuring that it is dovetailed with corporate strategy. This all then needs to be communicated effectively with investors, to ensure openness and accountability.
Sir Win Bischoff, in his foreword to the Financial Reporting Council’s 2016 paper on corporate culture and the role of board, states: ‘The strategy to achieve a company’s purpose should reflect the values and culture of the company and should not be developed in isolation. boards should oversee both.’
Be a racehorse, not a camel
There is no handbook or reference bible for the definition of corporate purpose. Every company’s response should be authentic. In Montfort’s experience a good place to start is the IR and comms/ consultancy functions (holding the sustainability team, if a company has one, in reserve at this stage). The process can be painful. A first draft approach from IR and comms should be able to kick off a lively debate at board level. We then aim to bring a peer group analysis and lessons to be learned therefrom. This approach helps avoid a committee approach designing the proverbial camel instead of a racehorse (apologies to Sir Alec Issigonis).
A template then needs to be reviewed by the executive directors for authenticity, clarity and sense of direction, and to run a draft through the sustainability lens. At this stage specific outside expertise will cover important specialist areas such as slavery, climate change, diversity and – crucially – metrics, to measure progress and point to future intentions and direction.
From face-to-face through to AI
For decades, investors have consistently stated that meeting management is the single most important factor in their decision-making process. Alongside the face-to-face test investors now use other third-party sources to cross reference what they hear direct from companies. Glassdoor gives investors the opportunity to look behind the shiny façade and see what insiders really think is going on.
A host of other players from the proxy agencies through FTSE 4 Good and MSCI to the Tortoise Responsibility 100 Index are vying to develop useful, usable measurement systems to drive the ESG and purpose-driven investment model. None of these relies on face-to-face interaction with the company. IROs need to be aware of the plethora of metrics and take a view as to how to respond effectively and time-efficiently.
Non-executive directors will increasingly be drawn into the culture and sustainability debate and the process. They need external verification for any website or annual report statements that are made. The IR team should be able to ensure that independent, corroborative advice helps the non-execs become confident in the company’s statements in this regard.
Soft issues have hard edges
In the same way that governance roadshows and capital market days are becoming more common, it is possible that culture, purpose and values days many not be far behind. With ESG and its exigencies moving to the very heart of corporate sustainability and investibility, companies must ensure that their corporate culture is robust, transparent and able to withstand increasing scrutiny. After all, the recent past has shown us that they have very real, hard-edged financial impacts on a company’s licence to operate, and even its very existence.
Above all, neither a ‘herd’ nor a simple compliance approach should prevail. Companies need to take a bespoke route to ensure authenticity.
Nick Bastin is senior consultant at Montfort.
This article was first published in the Winter 2019/20 issue of Informed, the IR Society's quarterly journal.
Published 20 January, 2020