CSj looks at the role that culture and purpose plays in the long-term success of organisations, and at the role of boards and governance professionals in building a sound organisational culture and sense of purpose.
In 2016, an investigation found that employees of Wells Fargo, an American multinational financial services company with headquarters in Southern California, were engaging in aggressive tactics to meet their daily cross-selling targets. According to a report published by The New York Times, from 2002 to 2016, employees of the company opened millions of accounts under customers’ names without their knowledge, signed account holders up for credit cards, forged signatures and even secretly transferred customers’ money to meet impossible sales goals. In court papers, prosecutors described a pressure-cooker environment at the bank, where low-level employees were squeezed tighter and tighter each year by increasing sales goals. The bank later paid US$185 million to settle the lawsuit filed by regulators and the city and county of Los Angeles.
This case highlights the tensions between organisational culture, values and financial goals, and the impact that this tension has on outcomes. Popular opinion has shifted in recent years from viewing the purpose of corporations as generators of value for shareholders towards a more stakeholder-focused approach. Many jurisdictions around the world, Hong Kong included, have sought to give expanded scope to directors to consider stakeholder interests, as well as long-term environmental, social and governance (ESG) factors.
Aligning culture with purpose, value and strategy
Hong Kong Exchanges and Clearing Ltd (HKEX) published a consultation paper on 16 April this year outlining proposed enhancements to the Corporate Governance Code and Listing Rules. In addition to addressing the areas of director independence, diversity, and ESG disclosures and standards, the proposals include new measures aimed at aligning listed companies’ culture with their purpose, value and strategy to deliver long-term sustainable performance.
‘At HKEX, we believe that sustainability is a key factor in determining a company’s growth prospects. A company cannot achieve its long-term goals without embracing corporate purpose and also considering the needs of all its stakeholders,’ says Kelly Lee, Vice-President, Policy and Secretariat Services Unit, HKEX Listing Division.
Gillian Meller FCG FCS, Institute President and Legal and Governance Director of MTR Corporation Ltd, welcomes the increased emphasis on organisational culture and purpose by regulators in Hong Kong. ‘As a company, you need to understand your purpose, and part of that is to understand that the value you are generating is not just for your shareholders, but for all of your stakeholder groups,’ she says.
She cites the MTR’s purpose of ‘keeping Hong Kong moving’ as an example. This dates back to the principal reason the MTR was founded back in the 1970s – to enable the people of Hong Kong to move around efficiently and affordably. ‘We recently restated this as our company purpose, and it sits behind and is aligned with our company strategy and our values and culture. It also impacts the way we think about creating value for our different stakeholders,’ she says.
Including stakeholders in the discussion
Katherine Ng, Chief Operating Officer and Head of Policy and Secretariat Services Department in the HKEX Listing Division, explains the importance of two-way communication to the long-term success of companies. ‘Culture is formed by how people collectively behave and operate. Companies need to listen to not only their shareholders but also other stakeholders, including employees and customers. It’s important to engage constructively with them, innovate for their needs, build a trusted, long-term relationship and understand the changing demands of society. All of these help to engineer long-term sustainable growth of the company,’ she says.
However, getting the balance right between the sometimes competing interests of different stakeholder groups, including shareholders, is not always an easy task. Zoe Lau, BlackRock Investment Stewardship Vice-President, shares her observations regarding the potential for misalignment of interest between the controlling and the minority shareholders in family controlled companies. She notes that, while family controlled companies may be well placed to create long-term value, they will benefit greatly from good governance structures to protect stakeholder interests. ‘BlackRock has been advocating for a lead independent director as a point of contact for shareholders to reach out to and communicate with the board. This will help to ensure that their interests are taken into account at board level discussions. We think that important piece is still missing,’ she says.
She also welcomes the increased focus on corporate culture and purpose in Hong Kong. ‘Purpose is definitely one of the key issues that generates long-term value, alongside long-term strategy, capital management and sustainability,’ Ms Lau says. ‘By clearly defining what a company’s purpose is, it is easier for management to have a more holistic approach to the risks they are managing. Having a clear purpose supported by a long-term strategy can naturally lead to a culture that keeps a company healthy and more resilient over time,’ she adds.
Ms Meller believes there is ultimately no conflict between addressing long-term shareholder value and taking stakeholder concerns into account. ‘I think it makes business sense. It is in a company’s interest to operate in a thriving society and a healthy environment. I think, in some ways, companies are the only entities that have the resources, influence and cross-border presence to really address issues such as climate change that we are currently facing,’ she says.
She adds that the demand for stakeholder-led leadership is now ubiquitous. For example, at MTR, investors ask about carbon reduction targets, and younger employees care about the values and purpose of the company they work for and whether it is aligned with their own values.
Pru Bennett, Partner, Brunswick, agrees that taking a multiple stakeholder approach is essential to generating longer-term returns to shareholders. ‘Your employees are critical; you won’t have long-term returns unless you look out for your employees. The environment is also important. If you are going to dig minerals out from the earth and destroy the environment in the process, it might generate short-term values but certainly not longer-term ones when the cost to repair the environmental damage will be reflected in the profit and loss statement. Taking a multi-stakeholder approach is essential if you want to generate long-term success for shareholders,’ she says.
Ms Bennett also highlights that company culture and purpose are increasingly considered by asset managers in their investment decisions, and that it is critical for companies to go beyond minimum disclosure compliance with ESG requirements and stakeholder engagement.
‘Companies can have the right policies but what investors are looking for is evidence that shows they are effective. Take Macquarie Bank, a very large Australian-based global financial services company, as an example. They disclose the number of misconduct breaches every financial year and their consequences, and that gives investors a level of comfort to show that, yes, they’ve got the policies and there is evidence that they are effective,’ she says.
The roles of boards and governance professionals
The discussion of organisational culture is not always an easy one to have and this is one area where governance professionals can make a huge contribution. Ms Meller points out that governance professionals can facilitate this discussion at the board level and highlight the often complex issues involved.
She cites the decision boards have been facing as to whether to apply for government financial support during the Covid-19 pandemic. Applying for these funds could be seen as natural to a director’s duty to act in the best interests of the company, but some companies have actually benefited from the pandemic as people’s purchasing behaviour has changed – should these companies also apply for financial assistance? Since companies have to confirm that they won’t make any employees redundant to benefit from the financial assistance, making an application would also seem to be in the employees’ interests, but what is the right thing to do? The ultimate decision is for the board, but where directors need to balance different, and sometimes competing, interests of stakeholders, governance professionals can be instrumental in making sure that all relevant considerations are taken into account and that no stakeholder group is overlooked.
Katherine Ng also emphasises the important role governance professionals can play. ‘We see governance professionals, such as company secretaries, as champions of good corporate governance. They need to offer advice to boards on what needs to be discussed and put the issues on the agenda,’ she says. She adds that, as an important bridge between directors and management, company secretaries can also play an important role in ensuring that directors are aware of the culture that exists in the organisation.
As for the directors themselves, Ms Meller points out that the board, as the leadership of the company, has the primary responsibility for role modelling and promoting the desired culture, ensuring alignment between culture and incentives, and conducting regular reviews to make sure the culture remains aligned with the company’s purpose, strategy and values. ‘In Hong Kong, people understand that the board focuses on strategy, but I think it’s important to realise that corporate culture is a very important asset and, if your purpose, strategy, culture and values aren’t aligned, the chances of you really achieving your strategy are diminished,’ she says.
SIDEBAR: Questions for boards
The report published by the UK’s Financial Reporting Council in 2016 – Corporate Culture and the Role of Boards – is a highly useful resource for governance professionals seeking to raise awareness of the critical role played by boards in addressing organisational culture. In particular, the report, which is freely available online, sets out the key questions boards should be asking to ensure their oversight of this area is effective.
How are we demonstrating that the board’s behaviour reflects the behaviour we expect throughout the company?
- Are we leading by example?
- Are we clear about the values and behaviours we expect when recruiting new executives?
- Do we hold the chief executive to account where we see misalignment?
- Are we discussing culture in sufficient depth at board meetings?
- How are we taking account of culture in our board effectiveness reviews?
- How can we ensure we consider the impact on culture in all the decisions we take?
- Do the committees support the board on culture?
- Is there a need for a specific conduct, ethics or culture committee?
- What is the company telling the outside world about what it stands for and how it conducts business?
- Has the company made a public commitment to its values?
- What behaviours are being driven when setting strategy and financial targets?
- What percentage of board time is spent on financial performance management against targets and on behavioural performance management? Is the balance right?
- Is company tax policy consistent with stated values?
- How are we challenging ‘group think’ and testing key decisions for cultural alignment?
- Are we seeing evidence of subcultures or pockets of autonomy in the business that could undermine the overall culture?