Philippa Foster Back: Even if it is legal, is it right?

Wednesday 16, May 2018

The director at the Institute of Business Ethics discusses consumer backlash against misbehaving companies, how boards shape culture and UK reform of corporate governance

Phillipa Foster Back

What is it you think that businesses owe the societies in which they operate, beyond providing goods and services?

Business’s role in society is crucial. Businesses are made up of people and people have home lives as well as work lives, so there has to be an awareness about how business is operating.

Businesses need to provide goods and services to good quality, to time, good price and so on. But they need to recognise mutual benefit to themselves and to everybody they deal with, including suppliers, customers and shareholders.

You cannot do business in isolation. A successful business will be all the more successful for taking into account its role in society and its relationships with all stakeholders. The shareholders will get a higher return if a company is trusted, gets repeat business and has a happy workforce that is productive.

Some firms try and ignore all of those good things, pay their workforce the minimum and ignore the high churn rate and low productivity. If a business starts having that attitude, it is not going to be trusted. In the short term, it might make a good return for shareholders, but not in the long term.

Turning to the IBE’s recent Culture Indicators report, is it a problem that you cannot measure culture precisely?

It is not, in a sense. I fully agree that measurement of culture, per se, is difficult. But what you can measure are various symptoms of culture. One always quoted is the number of calls to the speak up line, the number of times people raise things – that is an indication of an open culture, or a closed one.

Another indicator is what people say in employee surveys. But there is a lot you have to look at in how the survey is done. If it is done internally and you ask whether you can speak up to your manager, few people are going to say no.

The assumption is it will come back to you. That is why companies need to now and again run an external survey where the results are sent to an independent party for analysis. You tend to get more truthful answers.

“A successful business will be all the more successful for taking into account its role in society”

There are also companies looking at exit interviews, staff turnover, the number of tribunal cases, or customer complaints. There are a range of indicators that can start to tell you a bit more about what is going on inside the organisation.

One of the problems is that most of those indicators are coming through different functional silos. Some are in HR, some might be in security, some might be in customer liaison – a whole variety of different places. And they are not always brought together to be viewed holistically.

If these indicators could be brought together and plotted on a dashboard, that would begin to show you how the organisation works. For instance, what is the gap between what we say about how we do business, how we live up to our values and how we prove it?

Companies identify their purpose, or what they are going to do. We would say that sitting alongside that would be ethical value words with descriptors about how they are going to do it.

People also use a whole range of different words, such as courage, responsibility, honesty, fairness. They need to try to instil those words and their meaning into their workforce as guidance on expected behaviours, how they make decisions and how they do business.

If the senior managers have the larger role in setting culture, what is the board’s role?

The board’s role is to make sure senior managers do that. They have an oversight role, so they need some mechanisms to ask what the indicators are that are used to monitor the culture of the organisation. It is about keeping executives’ toes to the fire, to make sure that they are fulfilling the role that they are expected to.

It is similar to their role across most business functions, but culture is difficult. As we said earlier, it is difficult to put your finger on, but you know when it is not quite right. If you have a culture of bullying or something like that which is not being addressed, you would anticipate it will emerge as you start looking at the indicators.

Behaviour is a matter of people making choices, and when you start making choices ethics come into play. Some assume you are behaving legitimately if it is within the law, but there is still often a question. Even if it is legal, is it right? How you approach these decisions and choices comes back to the culture.

Are you taking the aggressive approach of asking can we get away with that? Or do you think: ‘If we do it this way we might make less profit, but we know we will get the repeat business.’

What would you say to a shareholder who is happy for legal but unethical behaviour because they are only interested in short-term returns?

We have certainly seen that in companies. One example cited is share buybacks, which can be good in the short term. But what are the long-term effects? You are deciding to invest a surplus, not in the business, but in giving it back to the shareholders.

You have to be sure about why you are doing that and if it is really the best decision for the long-term success of the company.

It is too easy to make that quick decision because that is almost what the market expects. It is tougher to make long-term investment decisions. But I think those are the discussions that need to be held, not only within the boardroom, but also between the board and its shareholders.

“If you cut a corner
once, it is difficult to backtrack and re-focus on the long term

They may get differing responses depending on which shareholder they talk to. Some are there for short-term gain, therefore they want the share buyback. Others are there for the long-term and think that it is not right. But they always have the option to sell, unless they are an index tracker.

Ultimately if shareholders want to get the highest return for whatever their end game might be, then they will want the company to do business in the best way, because they will make the most money. Doing business ethically makes for better business – that is the IBE’s motto.

There are obviously some cases in which companies did not behave ethically and they made a lot of money.

In the short term, yes. But if they do not behave well in the short term they are more likely to be on the ‘for sale block’ sooner than later. If you cut a corner once, it is difficult to back track and refocus on the long term.

We have seen it with companies taking short-term gain, with how they report their profits. Carillion has just gone bust as a consequence. Tesco did not go bust, but it still had problems.

They are not the first and will not be the last examples, because sometimes the pressures, as interpreted by the management, lead them to misreport results.

Boards and management need to have more courage. They need to make better decisions and not massage the books. There is so much evidence now that if you do alter the figures you will get caught. It is just not worth it, but people are still learning those lessons.

Some companies seem to be able to misbehave and stay alive. For instance, Amazon was criticised for poor working conditions, but remains successful. How do you explain that?

It is among the biggest companies in the world because its business model is lean and mean. But people are aware of those poor practices. It has been called out and arguably Amazon cannot survive continuing with that behaviour.

However, the problem with Amazon – and this is one of the things about the big tech companies – is who else do you turn to for that convenient shopping experience?

That is an area of concern for me. Companies like Amazon are almost getting too big, with too much power. When Starbucks had its tax problem, there are hundreds of coffee shops that you can go to, so Starbucks addressed its issues around tax quickly because the footfall into its shops dropped immediately.

That said, I do not think Amazon is protected from loss of market share and reputation, because these things are being called out. So people might think twice about going to work at Amazon because of what they have read on [jobs review site] Glassdoor. Companies do need to be aware of what is being said about them by staff.

What is your view on the gig economy more broadly?

Where we take a view on this – and there are similar issues across all types of companies – is around workplace ethics. This includes how companies are treating employees, the work-home balance, duty of care and how companies are expressing their values.

That is true whatever system of employment there is. But if you are on a zero-hours contract, you are going to have a different relationship with the employer than if you are fulltime employee.

The employer needs to be just as honest and frank with a person who is on the zero-hour contract and have it fairly written from both sides. In today’s environment it is difficult for firms to give a contract that is take it or leave it.

Larry Fink of BlackRock’s letter to CEOs about corporate responsibility is part of a growing trend for ethical investing. How do you feel about the fact that Fink can write a letter influencing investment that way?

A lot of what he says I would agree with. It is good to hear mainstream investors recognising that doing business in the right way will bring you better results. Taking this subject about how you do your business and giving it much more prominence is healthy.

A critic would say Fink is answerable to people who invest in his funds and whose money he manages, but he is not answerable to society.

No, but do you have to be, to say something like that? He has got enormous investment and corporate power that he needs to demonstrate he is using wisely. In taking this stance he is demonstrating he is doing that more wisely than he perhaps was in the past.

“Once you get to unlisted and smaller companies, I am unsure many directors have taken on board that section 172 actually exists”

I am not sure he is making ethical decisions. He is just pointing out what he is going to be looking at it. The companies still have to make the decisions and he will then decide whether he is going to stay investing in them.

There could be an implicit threat, but I think that will come back to the individual dialogue he is having with companies in which he is investing. He has made the grand speech, but there are still individual corporate discussions about what they are doing.

What role should the UK Corporate Governance Code have in influencing ethical behaviour in the businesses it applies to?

It is having a greater influence that it used to, partly because the Financial Reporting Council’s (FRC’s) culture coalition is bringing it more to the fore.

The board effectiveness guidance is recognising and using more language around culture, ethics, behaviour, and values, all at the top level. That is positive. It is good that the code is principles-based and that they have kept comply or explain. I look forward to seeing the next draft.

That said, it must not lose its clarity and get ahead of the legal position of section 172 [on directors’ duty to promote a company’s success], which if used rightly is a powerful instrument. Directors have not taken enough notice of it – indeed some are ignorant of it.

That the code is now coming under the spotlight through the consultation is good. It needed a root and branch review, and it is getting it.

Why do you think directors have not taken sufficient notice of section 172 duties?

There is a difference between the responsible companies where you have good company secretaries who are constantly bringing to directors’ attention what their duties are and other firms. I have heard of one or two boards whose boards packs every month or every meeting have section 172 stated there.

A lot do not have that drawn to their attention. Once you get to the majority of companies, which are unlisted and smaller, I am unsure many directors have taken on board that section 172 actually exists.

It is easy to set up a company, but I do not think people recognise the responsibility that comes with it. I do not think people understand what limited liability means. In the government’s corporate governance review it said limited liability is a privilege. If it is a privilege, it can be taken away.

Do you think the corporate governance code should apply more widely than it currently does?

I am sitting on the coalition committee that BEIS and the FRC have set up to look at corporate governance in large unlisted companies.

So I cannot comment on that other than to say that the better large private companies, family-owned companies and employee-owned companies already look at corporate governance and the code as being best practice and run themselves along those lines. It is those companies whose boards do not think about these things that might be surprised at future reporting expectations.

Interview by Jimmy Nicholls, deputy editor of Governance and Compliance

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