“In the current environment, [the] stakeholders are demanding that companies exercise leadership on a broader range of issues. And they are right to: a company’s ability to manage environmental, social, and governance matters demonstrate the leadership and good governance that is so essential to sustainable growth, which is why we are increasingly integrating these issues into our investment process.”
Larry Fink, the Founder, Chairman and Chief Executive Officer of BlackRock, wrote these words in his annual letter to CEOs.
BlackRock is the world’s largest asset management company, with $6.3 trillion in investments. Mr. Fink’s letter speaks to the changing face of investor’s focus – not simply from quarterly returns and financial performance – but to governance and the long-term profitability of corporations that focus on ethical behavior and corporate culture.
Expectations are Higher
Investors and asset managers care increasingly about corporate culture for good reason: it drives profitability. For example, before the firing of one CEO in a high-profile case last year, it was reported that staff turnover in the organization was 30-40 percent per year. When employee churn is that high, the cost of recruitment and business management goes up substantially, draining profitability, which can lead to unrelenting pressure on sales and tolerance of misbehaviour of high-financially-performing leaders.
In an article titled, “Sexual Harassment is Becoming a Serious Investor Risk,” Barron’s cover story noted, “Companies that tolerate or cover up sexual harassment, perpetuate a culture that fosters it, or fail to provide proper avenues for employees to report concerns and offenses, could pay in multiple ways, from difficulties in attracting, retaining, and motivating talented workers to customer defections, ruined business deals, and lost revenue and profit.”
Barron’s reported that Eve Ellis, a portfolio manager with Morgan Stanley’s Matterhorn Group, generally avoids investing in companies facing class action or individual lawsuits dealing with gender. “They might cost a company money, and lead to reputational risk,” she says.
The World is Watching
Make no mistake, social media is making it near-impossible for toxic corporate cultures to stay hidden in the shadows. Indeed, Susan Fowler, a former Uber employee, began the ultimate take-down of Uber’s CEO Travis Kalanick with a single post on her blog detailing her year working at Uber.
The #MeToo movement has seen the destruction of moguls such as Roger Ailes, Harvey Weinstein, Matt Lauer, Charlie Rose, and Bill O’Reilly. The culture in those companies that allowed such behavior to continue has been put on display, with employees and former employees giving interviews to international media outlets. The time for attempting to quietly pay off the harmed and saddle them with non-disclosure agreements is clearly up.
It Always Starts at the Top
I have worked with numerous companies that have changed CEOs and board membership. When this happens, the changes in corporate culture come fast and furiously. In one company I worked with, the former CEO had focused on compliance, ethics and corporate culture. When the board appointed an aggressive new CEO to take his place, the culture morphed within weeks to cut-throat, with managers emulating the style of the new leader. Training and values statements can’t combat the internal truth of a company’s culture. The leaders are the critical lynchpin showing everyone else how to behave.
Concerns about sexual harassment, bullying and corporate culture should be top-of-mind of every CEO, c-suite executive and board member. Corporate ethics and culture can’t be delegated to the HR and Compliance functions. It is the responsibility of the leaders to own it, not just for the good of their employees, but for the good of their shareholders and stakeholders. As Larry Fink said in his letter to CEOs, “To prosper over time, every company must not only deliver financial performance, but also show how it makes a positive contribution to society.”
This piece originally appeared in the NAVEX Global Blog as part of their “You Can’t Delegate Ethics” campaign. It is available at https://bit.ly/2IHzNS0.