Tags: Corporate governance, Pay, Ethical Values
Read the latest blog by Mark Chambers, IBE's Associate Director (Governance).
The relationship between business and wider society was already shifting before the pandemic. Broad statements of social purpose by companies were in the ascendant but found their moment in 2020 as we all realised just how joined up the world is. As the IBE explored in our recent webinar with Mark McGinn of Edelman, many businesses have enjoyed considerable successes in building trust through these turbulent times by displaying an ethical commitment towards their workforce, suppliers, customers and communities.
As we emerge from the pandemic, companies are faced with more opportunities to make big ethical calls. Decisions on matters like returning furlough payments, restarting dividends and minimising the social impact of restructuring will drive much greater differentiation between companies that are trusted and those that are not.
Decisions on furlough payments will be particularly hard, and the considerations will vary from company to company. Those payments were not loans, so there is no legal obligation to repay, and many businesses will not be able to afford to do so in any event. But those businesses that can afford to repay will need to balance the reputational challenges if they choose not to and must be prepared to explain their decision. Larger companies that have chosen to repay quickly and ahead of their peers have enjoyed a deserved reputational boost and can be expected to make the most of that in their s172 reporting. Choosing not to repay is surely the sort of board decision that also deserves an explanation. Those that don’t report in an authentic way will be found out.
And there is another factor that has to be taken into consideration. The challenges will increase markedly for a company that also plans to reward senior executives at anything like pre-Covid levels. Executive remuneration remains an important backdrop for judging company behaviour and the way its values are perceived, yet here business was already on less secure ground.
Since 2003, the IBE has been measuring trends in public attitudes to business ethics. Executive pay has been in the top three issues throughout that period. There has been a widespread view for some time that executive reward structures are overly complex and do not deliver the right outcomes; rewards appear excessive and often do not reflect shareholder returns, let alone broader societal impact.
Reward structures must be transparent. They have to demonstrate alignment to measurable and representative indicators of both company and individual performance. They must be proportionate and objectively fair. It is also vital to ensure that executives are assessed and rewarded based on how they achieve their goals as well as what they achieve. Doing this requires performance management systems to be designed and implemented in ways that support the right culture and behaviours. The outcome measures must be reflected in a ‘balanced scorecard’ so that they can only be achieved in ways that enhance rather than undermine the organisation’s ethical values. They need to include measurable ways of assessing how well leaders have lived up to those ethical standards.
Going forward, performance management and reward systems will need to reflect two learnings from the pandemic:
- Reward structures need to better recognise the contribution of the broader workforce. The response to the pandemic saw unprecedented levels of empowerment for local management, as top-down rules went out of the window. Many of the successes were down to local teams solving local problems, making consistently good decisions when faced with unprecedented ambiguity and uncertainty. The best organisations are looking to maintain those high levels of empowerment in their post-pandemic ways of working. Colleagues who have enjoyed greater freedom and new opportunities to make a difference will want to continue to work in that way and expect to be appropriately rewarded
- Although extraordinary levels of resilience have been required by everyone, the crisis response has also required leaders to display compassion, humility and high levels of empathy. These ‘soft skills’ were not widely measured or valued in the past. A new model of empathetic leadership is needed to continue to engage and inspire a workforce that is now accustomed to more flexible ways of working
Doing this right, by embedding ethical values in recruitment, performance management, reward and talent development reduces the risk of serious ethical violations. Companies that don’t do this risk ethical and reputational harm and will also find that their reward structures increasingly fail to reflect the wider social purpose that the company aspires to.
Getting these ethical decisions right isn’t just an external matter. The rapidly changing workplace and the blurring of people’s work and private lives also mean that feeling an alignment with your employer’s ethical values will be more important than ever. Top talent will be at a premium and talent always has a choice. Ethical values are an increasingly important part of that choice.
Author
Mark Chambers
Associate Director - Governance
Mark brings 30 years of experience from a successful career in business to help grow the IBE’s interaction with boards, regulators and policy makers.
After graduating in Zoology from Oxford University, Mark re-trained as a lawyer and spent his early years at Slaughter and May in their London and New York offices before moving into business. During his career, he managed world-class global functions responsible for governance, legal and regulatory risk management in large, complex, regulated businesses. He was General Counsel & Group Company Secretary at RSA Insurance Group and at Worldpay Group, and held senior positions at American Express and GE Capital. He retired as Deputy Group Company Secretary of HSBC in 2018 to pursue a second career, which also includes non-executive and advisory work.
For many years, Mark has had a successful career as a non-executive director. He is a member of the board of the Care Quality Commission, the independent regulator of health and social care in England, and chairs their Regulatory Governance Committee. He is also a non-trustee member of the Audit and Risk Committee of Maggie’s.
Previous roles included the Chair role at Amref Health Africa and Audit Committee Chair at WWF, where he also led the Committee that oversaw the development of the charity's exemplar new headquarters building. Mark was a finalist in the 2014 Sunday Times Non-Executive of the Year Awards.
The truth of the matter is that you always know the right thing to do. The hard part is doing it. – General H. Norman Schwarzkopf