Reporting on Corporate Culture. Abridged version. What we see and what we suggest STAKEHOLDER COMMUNICATIONS

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1 Reporting on Corporate Culture What we see and what we suggest Abridged version STAKEHOLDER COMMUNICATIONS

2 Black Sun plc Communications with purpose We believe that in today s fastmoving and highly uncertain world, successful businesses are those able to deliver long-term value to the people around them stakeholders. When stakeholders are heard, inspired and engaged, businesses are understood, trusted and supported. They perform better. Black Sun is a stakeholder communications company. We enable businesses to become more relevant to the people around them. We deliver inspiring communications that engage and connect with their stakeholders. We stand for communications with purpose. Corporate reporting at Black Sun Black Sun has a long-established reputation as a thought leader in the field of corporate reporting. Drawing from our in-depth insights gained from research of international reporting trends and integrated reporting developments, we are able to support clients in developing and delivering best-practice communications in print and online across multiple geographies. Welcome This is Black Sun s second thought piece looking at how corporate culture is currently reported on by the FTSE 100, and how we recommend companies report on this very important topic in future. If you would like to understand more about how to report on corporate culture, discuss trends in corporate reporting more generally or find out how you compare to the FTSE 100, contact us today. We would be delighted to help you on your corporate reporting journey. We hope you find this research a useful and insightful contribution to the reporting debate. TABLE OF CONTENTS WHAT WE SEE Research: Tone from the top 5 Alignment between culture and business 6 Measuring and evaluating corporate culture 8 WHAT WE SUGGEST Practical recommendations: Culture and value creation 10 Culture by content element 12 WHAT TO EXPECT GOING FORWARD 17 1

3 Reporting on corporate culture Corporate culture has now been firmly placed on the board agenda. Now it is time to look at ways to report on it. How we define culture In the past year the debate around corporate culture has quickly gained momentum and has been firmly placed as a major issue on the Board agenda. In part, this debate has been led by the Financial Reporting Council s Culture Coalition. However, many other stakeholder groups have also contributed as the debate has matured and it has become apparent that more stakeholders stand to gain from it. Also highly relevant to the debate is the Department for Business, Energy and Industrial Strategy Select Committee s UK Corporate Governance inquiry and directors duty to promote the long-term success of the company and what this means for balancing the interests of stakeholders in the light of Section 172 of the Companies Act Much of the culture debate has focused on the importance of corporate culture and the role of the Board in shaping, monitoring and overseeing culture, with many agreeing with the FRC s conclusion that culture should be owned by the Board but driven through the organisation by the Chief Executive. The purpose of this paper, however, is to look at ways preparers of annual reports can improve their reporting on corporate culture for the benefit of shareholders and stakeholders more widely. In doing so, this paper is split into two sections: What we see sets out data and observations from Black Sun s extensive annual research into current corporate reporting practice ( The Complete 100 ticking the boxes, missing the point ); What we suggest makes practical recommendations in terms of messaging and provides examples of how to extend the narrative on corporate culture to each content element of the annual report. For the purpose of this paper we define culture as the way people act when no one is looking. In this context a company s values should be designed to guide desirable behaviour which in turn should support the creation of a desirable culture. From this it follows that if a company desires a distinct company culture to drive value creation for instance a culture of innovation the values need to be designed accordingly and possibly supported by a set of desirable behaviours for each of the values in order to define what success looks like. 2 3

4 WHAT WE SEE Current reporting practice 68 % Companies who set out their values % Companies who set out their purpose % Companies who set out their mission/vision 28 % Chief Executives who in their leadership statement mention culture % Chief Executives who in their leadership statement mention values % Chairmen who in their leadership statement (strategic report) mention culture 13 % Chairmen who in their leadership statement (strategic report) mention values 31 % Chairmen who in their leadership statement (corporate governance report) mention company or Board culture 19 % Chairmen who in their leadership statement (corporate governance report) mention company or Board values Black Sun s annual research project The Complete 100 monitors and analyses corporate reporting trends and best practice among FTSE 100 companies. The results of the research this year show that in the 12 months since the announcement of the FRC s culture coalition, companies have made good progress in terms of reporting on culture. The following will set out the results in further detail through three lenses: Tone from the top, Alignment between culture and business and finally Measuring and evaluating corporate culture. Tone from the top Reporting on corporate culture in annual reports starts with the tone from the top, in the form of expressed commitments to good corporate culture in the leadership statements, and continues throughout the report. When it comes to embedding a culture across an organisation, the tone from the top is critical. The commitments the Board articulates and the values it establishes are essential for creating strong cultural cohesion within a company. Commitment to purpose, values and culture While the discussion on purpose has moved on only slightly from last year, 59% of companies now establish and articulate their vison in their annual report. Together, purpose and vision set the scene for establishing the values the company and its employees should embody in order to achieve the overall mission. We re seeing a substantial increase in the percentage of companies that set out their values or principles regarding how the organisation and its employees should behave (68% this year, up from 48% last year). The number of companies using the Chief Executive s and Chairman s statements to reaffirm commitment to these values is also rising. However, when we look at commitments to values made in leadership statements over a three-year period, this trend has actually decreased, whereas articulated leadership commitments to corporate culture over the same period have gone up substantially. This year, 31% of Chairmen s opening letters address corporate culture compared to only 14% last year. on the culture that the values should help achieve. However, without leadership statements also making the connection between culture and values the operational element of culture it easily becomes slightly abstract. The research also shows that values quite often are fairly generic with Integrity being by far the favourite among the FTSE 100. This suggests that companies need to think about supporting their values with a set of desirable behaviours or beliefs in order for the values to be meaningful and encourage a distinct culture that will support value creation. What does the future hold? If current trends continue, we hope to see companies providing better narrative alignment between culture and values, with companies more clearly articulating their values as a way to steer aspirations in terms of culture. Leaders will be those who are able to express their values in terms of desired behaviours and define success. The tone from the top should set guidelines for aligning values and culture with key decisions, practices and processes. It should also help to ensure a healthy culture in times of stress. As a starting point, clearly setting out a company s values and purpose can be used to steer employees towards desired behaviours. So, what does it mean when more companies than ever are setting out their company values but fewer are making leadership commitments to these values, while corporate culture is increasingly endorsed? It could suggest that thinking has developed on this topic and that the tone from the top now focuses 4 5

5 WHAT WE SEE Alignment between culture and business Aligning strategy with culture, values and purpose can help ensure that performance is achieved in a manner that supports long-term aims. The focus here is to look at how performance is achieved as opposed to purely what performance is achieved. Our research shows that 37% of companies attempt to align strategy and culture/values, and that 19% of companies attempt to align strategy and purpose. But when looking at the results in detail it is clear that these attempts are often fairly weak. Companies regularly claim that their values underpin their strategy without providing much additional information as to why or how and it is a similar story for the attempts to align strategy and purpose. Despite their efforts, companies are clearly struggling to convincingly align strategy and culture/values. Looking ahead, perhaps the alignment with culture is better suited to a company s business model, rather than to the inherently shorter-term strategy of a company. Embedding culture While making commitments to a good corporate culture is easily done, embedding it is more difficult. As a result, companies are less likely to be forthcoming with information on their progress in this area. On the surface, 43% of companies explain how they embed values, ethics and expected behaviours across their organisation. But only 3% report on targets linked to embedding values, only 8% discuss progress made in embedding values, and only 7% discuss how the company is evaluating this process. When we look below the surface, it s clear that the embedding process tends to fall into three categories: safety culture; ethical culture and code of conduct/antibribery compliance; and finally diversity and inclusiveness. All of these cultural performance areas are highly measurable, and therefore allow for discussion and evaluation of progress, training and implementation of desired behaviours. This could pose the question: why do more companies not discuss their efforts to measure, embed and evaluate culture when the relevant data should be readily available? Training and appraisals Along the same vein, 33% of reports highlight an alignment between culture/values and employee training, and 21% report on training relating to ethical decision-making. But the vast majority of the training in question broadly relates to the categories described above; namely safety, code of conduct compliance and anti-bribery and corruption. Further reporting on training includes 10% that report on employee training relating to stakeholder engagement. This training is more varied and company specific and tends to fall into three categories: training to understand customer circumstance; employee engagement training; and training relating to suppliers. Finally, 12% of companies report on an alignment between culture/ values and employee appraisals. Surprisingly, the majority of these companies make a reasonably strong case for this alignment; they discuss the link between behaviours that embody the company s values, bonus awards and promotion opportunities. They also discuss how rewards are consistent with values, and that achievements are assessed against how they were achieved. What does the future hold? Given the number of companies already reporting on embedding culture and the enhanced public debate on this subject, we expect to see companies taking further advantage of low-hanging fruit. By this we mean reporting on processes that are already taking place internally but have not yet been reported on or indeed labelled as culture embedding. Leaders will be those who are able to express their values in terms of actions and progress and are able to align these with appraisals and awards. 33 % Companies who discuss a link between strategy and stakeholder expectations 37 % Companies who discuss a link between strategy and culture or values 19 % Companies who discuss a link between strategy and purpose 22 % Companies who provide a link between risk and business model 19 % Companies who include culture, bribery or corruption risk as one of their principal risks 49 % Companies who disclose their risk appetite or risk tolerance 43 % Companies who explain how they embed values and expected behaviours 33 % Companies who say they align culture/values and employee training 12 % Companies who say they align culture/values and employee appraisals 6 7

6 WHAT WE SEE Measuring and evaluating corporate culture Commitments to values and desired behaviours that drive culture and the initiatives taken to embed these into the organisation are paramount. However, so is the measuring of culture which should provide an early warning system for cultural misalignment. Not providing sufficient information around how success is measured and evaluated also makes the commitments and initiatives appear less credible and can potentially create a false economy externally as well as internally. Overall slow progress As discussed before, our research shows slow progress in terms of companies providing narrative around how they are progressing, evaluating and setting targets for embedding values. This is despite all of the cultural performance areas currently reported on being highly measurable, and therefore should allow for easy discussion and evaluation of progress, training and implementation of desired behaviours. We are also seeing slow progress in terms of companies disclosing KPIs on culture, values and integrity with only 11% of companies reporting such KPIs. These KPIs generally include: employee engagement score; customer satisfaction/net promoter score; accident incident rate; code of conduct breaches; and employee trust in strategy. While the link is occasionally tenuous, measuring cultural alignment is still in its infancy; as such, all of the identified KPIs have at least some touch points with culture. Stakeholder engagement data It is a similar picture when it comes to stakeholder engagement data. Stakeholders, be they internal stakeholders like employees or external stakeholders like customers, are crucial to a company s potential for value creation. The way a company engages with these stakeholders is an expression of their culture and the engagement results should therefore act as a gauge for progress on culture alignment. We ve seen a significant increase in the percentage of companies discussing their stakeholder engagement activities, up from 47% last year to 70% this year, demonstrating a clear commitment to a more inclusive discussion of value creation. At the most basic level, these discussions suggest that more and more companies are recognising that stakeholder engagement is material for value creation. What s more, detailed descriptions of these activities have increased from 17% to 31% as companies go to greater lengths to explain precisely how they involve stakeholders in their performance and strategy review. But once again, fewer companies are moving beyond the initial stages to provide more meaningful insight into stakeholder engagement and how it influences behaviour. For example, only 39% of companies discuss the feedback they have received from their stakeholders, while only 14% publish some of the results they generate from the engagement process. Even fewer companies link this information to action, with just 24% suggesting they have responded to stakeholder engagement findings in any way. And when we look closer, we can see that just 11% of companies provide a clear response to specific stakeholder feedback. It seems likely that meaningful links between stakeholder engagement, strategy and longterm value creation will become an important differentiator of investment propositions in the future. But despite indicating a positive cultural change towards greater stakeholder inclusion, our findings reveal that most companies are still a long way away from achieving this. What does the future hold? As reporting in this area matures, we expect commitments to culture to be matched by measures and evaluation of culture alignment, progress reporting and reassurance. A process which should perhaps take its starting point in companies defining what success looks like. Further improvement is also needed in terms of evidencing the Board s access to and discussion around data points on measuring and evaluating efforts to embed the right culture, which is currently confined to designated stakeholder sections. Leaders will be those who are able to identify credible measures of culture as well as oversight processes, allowing the Board to convincingly execute its responsibility in terms of monitoring and measuring culture for the benefit of stakeholders. 31 % Companies who provide a detailed discussion on how they engage with stakeholders 14 % Companies who provide a detailed discussion on stakeholder feedback 13 % Companies who provide a basic discussion on how they responded to stakeholder feedback 11 % Companies who provide a detailed discussion on how they responded to stakeholder feedback 49 % Companies who provide the results of an employee survey 22 % Companies who provide a response to the results of an employee survey 11 % Companies who have KPIs related to culture, values, integrity or desired behaviours 8 % Companies who set out progress on embedding values and expected behaviours 3 % Companies who set targets for embedding values and expected behaviours 8 9

7 WHAT WE SUGGEST Culture and value creation Having discussed What we see in terms of our research into reporting practices, we will in the following What we suggest sections discuss ideas for consideration and practical implementation. Historically, culture has not been the focus for much of the narrative in the annual report. The vast majority of companies who have discussed culture in their reports in the past have focused on values and how these should guide the behaviours of employees. Culture Message Model Our values are aligned with our purpose and vision and support our culture This narrative has primarily been confined to a people, employees or sustainability section, with culture being narrowly defined as subcultures, such as safety culture, compliance culture and speak-up culture, rather than products of an overall culture. Our values shape our behaviours and decision-making Purpose Vision Values Equally, there hasn t been much acknowledgement of culture as a driver of sustainable value creation in annual reports until recently. As a consequence of this, narrative on culture has seldom permeated into many sections of the annual report. At Black Sun we strongly believe that corporate culture is a driver of sustainable value creation and as such should be discussed throughout the annual report as a natural consequence. When working on how best to report on corporate culture, it can be helpful to use our culture message model which sets out building blocks that together define sustainable value creation and the corresponding message each block should aim to convey. Together these messages should serve as a guide to how cultural elements are connected and should help focus the content writing process. Our business model encourages behaviours that are aligned with our values Business model Our culture helps us achieve our strategic aims while our values guide the actions we take to achieve them Our incentives and rewards are aligned with desired behaviours and achievements are assessed against how they were achieved Strategy Incentives and rewards Our Board and governance systems safeguard our culture and its alignment with our values Governance systems and oversight 10 11

8 What to expect going forward This is an abridged version version of "Reporting on Corporate Culture" If you are interested in knowing more about our practical suggestions for how you could report on corporate culture through every content element of the Annual Report to ensure a consistant and convincing narrative story then please contact Sarah Myles on smyles@blacksunplc.com. It goes without saying that good reporting on culture should reflect good culture, or at least reflect an honest intention to drive cultural alignment. Reporting changes behaviours has for years been one of Black Sun s aspirational taglines. While that may not always be the case, the annual reporting process stimulates debate and serves as an ideal and predictable annual opportunity for companies to take stock and assess how well aligned all parts of the external message are. Furthermore, rather than cooling down, the debate has been further fuelled by Theresa May. In particular, her calls for corporations to cater more to their stakeholders, for more regulation, protections and reform and by the BEIS Select Committee s recent Corporate Governance Inquiry and the ongoing discussions around leveraging existing directors duties around stakeholder interests as set out in Section 172 of the Companies Act. While the FRC had initially promised that there would be no further changes to the Corporate Governance Code within the next couple of years (although the culture coalition s work will inform the FRC s review of the Guidance on Board Effectiveness ), it appears that the FRC may be prepared to make changes to the code after all. Equally, we may see changes from government in regards to enforcement measures to hold directors to account, which in turn may affect reporting. Stakeholder appetite, be that investor, employee, customer, regulator or beyond, is clearly strong when it comes to culture, albeit for often very different reasons. However, one thing they do have in common is the unanimous conclusion that the right culture is paramount for long-term value creation, which in itself should spur companies into action

9 APPENDIX: SECONDARY INDICATORS TO CONSIDER Annual reports give many indicators of culture without specifically addressing culture, such as transparency, accountability and report connectivity. None of these indications in isolation reveal much about a company s culture but taken together they form an insightful narrative on a company s culture. Indicators of culture commitment Indicators of culture measurement Indicators of culture implementation Indicators of culture evaluation Disclosure of a clear definition of values and purpose Disclosure of reference to ethics, integrity, morals and desired behaviours Chairman provides clear commentary and commitments for the organisation in terms of culture, values and behaviours Chief Executive mirrors these commitments from an operational perspective In case of a major breach of ethics and integrity during the year, the Chairman provides a comprehensive overview of how the issue has been addressed and the wider implications for the company culture going forward Chief Executive mirrors these comments and implications from an operational perspective Disclosure of a clear statement on risk appetite Disclosure of targets and progress on processes to ensure appropriate values, ethics, integrity and morals are being embedded Disclosure of the work of the Board and Board committees during the year as well as targets for the coming year Disclosure of the number of calls to the whistleblowing line actioned on as well as number of issues resolved Disclosure of the number of breaches of the Code of Conduct as well as number of issues resolved Disclosure of the number of stakeholder engagements as well as targets stemming from these and progress against them Disclosure of targets linked to strategy Disclosure of targets linked to risk Disclosure of processes to ensure appropriate values, ethics, integrity and morals are being embedded Disclosure of HR policies and performance appraisals, training and rewards aligned with corporate culture Disclosure on succession and diversity planning Disclosure of a clear link between values, purpose and strategy Disclosure of a clear link between strategy and KPIs Disclosure of a clear link between company performance and remuneration Disclosure of a clear link between relationships/ capitals and business model and strategy Disclosure of clear ownership of risk and targets Disclosure of principal risk assessments Balanced view of achievements and progress as well as failures and lack of progress Disclosure of a high quality rationale for noncompliance with the Corporate Governance Code Disclosure of the nature of stakeholder engagements during the year as well as resulting action points, if any Disclosure of any assessment undertaken to assess stakeholders and their impact on the business Disclosure of evaluation process and actionable outcomes of any processes to ensure appropriate values, ethics, integrity and morals are being embedded Disclosure of employee engagement process and outcomes Disclosure of any evaluation process that led to a substantial change in procedures and assessment such as a substantial change in terms of the risk assessment procedure or risk regime Disclosure of the process undertaken to determine material issues for the business as a whole Disclosure of the process undertaken to determine financial and non-financial material issues and how these feed into company strategy Disclosure of the annual evaluation of the Board, committees and Board members 18 19

10 Let us help you The annual report serves as an ideal platform for companies to evidence their corporate culture to important stakeholders. At Black Sun we support clients with reporting on culture by benchmarking their current reporting, assessing their content and providing content opportunities and guidelines tailored to their organisation and level of ambition. Contact us if you are interested in hearing how we can support you in improving the way you report on culture in your next annual report. DELIVERABLES: A benchmarking audit of current reporting on corporate culture against the FTSE 100 and/or a peer group A content assessment of current reporting on corporate culture Content guidelines which identify opportunities for reshaping existing content, developing new content as well as content guidelines for each page of the relevant sections of the report Published by Black Sun Plc London office: Fulham Palace, Bishop s Avenue, London, SW6 6EA Tel: +44 (0) Singapore office: 10 Collyer Quay, #37-06 Ocean Financial Centre, Singapore, Tel: info@blacksunplc.com Contact Anne Kirkeby on akirkeby@blacksunplc.com for further details NEW Limited time offer Contact us for a free benchmarking audit 20

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