CORPORATE CULTURE: FROM THE INSIDE OUT

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1 August 2016 CORPORATE CULTURE: FROM THE INSIDE OUT Why effective stakeholder communications is key to build and manage corporate cultures The Financial Reporting Council (FRC) has recently published a report of observation entitled Corporate Culture and The Role of Boards. The report concludes a period of consultation with key stakeholders who can influence the culture debate in the UK, including FTSE CEOs and Chairmen, think tanks like the Institute of Business Ethics and Tomorrow s Company, and other organisations that helped shape the debate along four streams: the role of boards, people issues, stakeholder issues, embedding and assurance. To discuss this topic: Andrew Worlock Lead Employee Communications Consultant Jeremie Guillerme, Lead Reputation Consultant Sallie Pilot Head of Research and Strategy Alex Annaev Lead Sustainability Communications Consultant Chris Gurney Lead Investor Engagement Consultant Anne Kirkeby Lead Corporate Reporting Consultant

2 The way companies create and sustain value is directly linked to the debate about the role of business in society. takeaways from the report The report calls for UK businesses to recognise the value of culture, which should be determined by the board, and embodied by the CEO. A good culture is evidenced by openness and accountability at every level, which means external stakeholders should be engaged and their interests taken into account in the way the company conducts its business. Company values need to shape behaviours internally, and the relationships with external partners. To ensure values actually transform behaviours and relationships, incentives need to be aligned with values, and culture needs to be regularly assessed, measured and ultimately reported on. Finally, companies and investors need to exercise stewardship over corporate culture. How to drive tangible culture change? Black Sun s point of view. Corporate culture defines both the behaviours of people within organisations and the way they handle relationships with external stakeholders. We believe a sound culture should start from within, by defining and embedding meaningful purpose and values. It then needs to be extended in the ways companies interact with the outside world. Because culture is all about driving change in the way people behave and interact, we think effective stakeholder communications will be a critical enabler to help companies build a positive culture. In our recent brochure On The Culture Trail, we have created a communications journey with five steps that can help companies build a positive culture: 1. Diagnose: get a clear sense of the culture and spot potential issues 2. Define: clearly articulate a company purpose, values and business model 3. Embed: make sure the purpose and values affect behaviours and relationships 4. Measure: have the right KPIs in place to track progress 5. Report: disclose relevant information about culture We have looked at the FRC report through this lens, and extracted some of the challenges from the report where we think good communications can really make a difference. We have asked different experts from Black Sun to comment on them.

3 Obtaining a realistic view of the culture at the coalface is a common problem for boards across all sectors. 1. Diagnose: get a clear picture of a company s culture and spot potential issues Andrew Worlock Lead Employee Communications Consultant It is always difficult for leaders to see what is actually happening on the ground. There are inevitably too many filters. Leaders may well say that the organisation regards people as its most precious asset, invests in only the best talent and allows people to have a voice in the business. The reality from the coalface can be very different. The key is to reduce this perceptionsreality gap is to ensure that leaders live the values of the organisation on a daily basis and are seen to exhibit the desired behaviours that then become business as usual. It s also important for the employee voice to be heard at the most senior level, and responded to quickly with real actionable feedback, not just a thank you and holding statement. Employees need to feel part of the solution and be empowered within an organisation. Several chairmen told us that a clear purpose why the company exists and what it is there to do is the starting point for a successful company and closely tied to culture 2. Define: clearly articulate a company purpose, values and business model Jeremie Guillerme Lead Reputation Consultant I share the view that a clear purpose is the starting point of a successful company. When done well, a company purpose does not only explain how the business contributes to society, it also acts as an engine of positive change in employee behaviours and stakeholder relationships. The key to success in articulating a clear purpose is to ensure it is rooted in stakeholder needs and expectations on one hand, and the company s talent on the other. Our recent research shows that only a minority of companies consider the needs and expectations of external stakeholders when shaping the desired behaviours of their employees. I would recommend companies in the process of defining their values or purpose to consider both the inside and the outside perspectives: make both employees and external stakeholders part of the journey, and create inspiring communications that resonate beyond the walls of the organisations to change behaviours and relationships going forward.

4 Boards and executive teams need to have a good understanding of the company and how it makes money its business model in order to have a clear line of sight between the decisions they take and how these impact on the company s culture. 2. Define: clearly articulate a company purpose, values and business model Sallie Pilot Head of Research and Strategy Although there is no one size fits all when it comes to culture, what is critical is the internal alignment between company purpose, values, strategy and business model. This in my view can by encouraged by focusing on a more holistic reporting model, as advocated through the FRC s strategic report guidance and the International Integrated Reporting Framework, both of which emphasise the importance of an integrated model to capture how a company operates and creates value and profit today whilst also capturing the long terms sustainability and value creation capability for the future. Middle managers are often cited as not being receptive to change, yet this may be because they are not effectively engaged at an early stage. 3. Embed: make sure the purpose and values affect behaviours and relationships Andrew Worlock Lead Employee Communications Consultant Middle managers are often seen as being exposed to information cascades from above and getting comment and rumour from their people below, hence the creation of the term concrete middle. Middle managers receive too much mixed information and not enough time to match message and actions coherently, let alone decipher the real issues and impact. Ideally, this is where solid well planned communications becomes the enabler, with specific messaging that is easy to digest, utilises various channels and provides a direct channel for feedback. Then, middle managers can manage, become the rapier to cut through the chatter and get to the key issues either within the structure and processes of the organisation or through interaction with employees, inform the leadership s views, filter information and provide actionable solutions, not spread rumour.

5 A challenge for companies is how to ensure that supplier culture and behaviour meet the standards that apply within their own group. This can be difficult because suppliers may have their own set of values and working methods and they may be supplying a number of different companies, each with its own set of requirements. 3. Embed: make sure the purpose and values affect behaviours and relationships Alex Annaev Lead Sustainability Communications Consultant With the right incentives in place, suppliers can be effectively engaged on values, especially larger buyers. Companies can select and reward suppliers that demonstrate putting shared values in practice. Joint leadership statements, collaborative knowledge exchange platforms and awareness raising initiatives on sensitive issues, such as prevention of modern slavery, health & safety or anti-corruption can also contribute to suppliers alignment with your values. Buyers should expect suppliers to adhere to critical values, such as integrity. They should require ESG information from their largest suppliers, raise concerns and ask for action plans to fix material problems identified. Suppliers should be aware of sanctions for severe incompliance with critical values. In short, the two ways to ensure the right cultural fit exists between a company and its suppliers are the right incentive structures, and the right supplier engagement activities. The key issue for shareholders is how culture impacts and underpins performance. 4. Measure: have the right KPIs in place to track progress Chris Gurney Lead Investor Engagement Consultant The inconvenient truth is that the link between cultural failure and corporate valuation is tangible and material. Recent scandals which have afflicted VW, Olympus and Tesco s for example show that where the wrong culture exists, misconduct can result in significant reputational damage which not only impacts earnings and changes business models but can result in a failure of trust, and in some cases, represent an existential threat. For companies the area of challenge is how they can effectively communicate their culture both internally and externally. Through no fault of their own and in response to regulatory demands and best practice, companies have invested in complex reporting processes which are fixed to a very prescribed way of publishing and disseminating mainly financial information. This is particularly true in large organisations, where to bring integrity to the process, a rigid framework has to exist in order to effectively co-ordinate resource and mitigate potential errors. If investors truly value culture and its role in corporate value creation, they must revisit their approach to engagement and help companies devise ways in which they can disclose wider information that would help demonstrate the transmission between culture and performance.

6 There was strong consensus among investors that there is a need for companies to improve reporting on culture and communicate openly about the impact of culture on the business. 5. Report: disclose relevant information about culture Anne Kirkeby Lead Corporate Reporting Consultant As a provider of strategic corporate reporting consultancy we take a particular interest in how elements of corporate culture are portrayed in terms of reporting. Our recent research shows there is still much to be achieved when it comes to reporting on culture. Only 37% of FTSE100 reporters attempt to align strategy and culture. Only 3% report targets linked to embedding values. The key difficulty is that no indicators in isolation reveal much about a company s culture. However, when the right links are established between relevant indicators, they form an insightful narrative on a company s commitment to culture and its ability to implement measure and evaluate it. Best-in-class reporters are those who demonstrate a clear link between culture and performance, focusing in particular on how reward and remuneration supports positive company behaviours. Our team of specialists is here to guide your organisation through the opportunities and pitfalls on the way to building a positive corporate culture. Let us hear about your culture journey and we will share our perspective based on the latest trends and insights we have identified. Please contact Sarah Myles who will put you in touch with one of our culture experts: Sarah Myles Business Development Manager smyles@blacksunplc.com