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The Not-So-Secret Path to Longevity of Business Success

In September 2019, Sir Win Bischoff, Chair of the UK Financial Reporting Council gave the keynote address at the Governance Institute of Australia’s National Conference on “the not-so-secret path to longevity of business success.”

Below, we summarise the key factors Sir Bischoff highlights in his speech.

Respect and Trust

For a business to be trusted, it must be respected. However, respect is not easily won, especially when politicians, the media, and the public have demanded that regulation be much tougher, and that regulators should be feared by businesses.

Public trust in business is low; many believe that businesses don’t take into account the impact that they have on society and the environment. This sense of distrust stems from the global financial crisis as well as recent corporate failures, heightened by the fact that senior management and executives routinely appear unscathed.

If boards are seen to be effective, they will command respect, and therefore trust. To to run effectively, boards need to manage the conflict between short-term interests and the long-term impact of its decisions, addressing stakeholder interests with the long-term sustainable success of the company in mind.

Trust can be built in a number of ways, such as:

  • Forging strong relationships with key stakeholders
  • Being transparent with pay policies, company culture, and behaviour
  • Ensuring employees are satisfied with how their views have been noted

The Boards Influence – link to success

Boards should actively take account of the interests of all key stakeholders; this supports and emphasises the importance of long-term vision and value creation.

It is necessary for Boards to decide what type of behaviours and culture they wish to promote in order to deliver their business strategy. These behaviours and values must run through the whole organisation, which requires advocacy and monitoring.

A company’s purpose is its reason for existence; the board is responsible for setting and reconfirming it. A well-defined purpose helps companies articulate their business model, and develop their strategy, operating practices and approach to risk.

Company directors should consider the following when developing their strategy:

  • Are we playing an active role in shaping long-term investment plans to underpin delivery of our strategy and value creation?
  • What behaviours are required given the financial targets we set?
  • How competent is our management to deliver the strategy?
  • How does executive remuneration link to our strategy and KPIs?
  • Are we thinking long-term or simply extending budgets to the medium term?

Though companies should consistently review their strategy, short-term changes to satisfy investor preferences is highly discouraged, as business strategy is a long-term investment in and of itself.

The responsibility for corporate conduct and misconduct lies with the board. This requires the board to challenge management and ensure accountability. The success or failure of a company lies with the board of directors and its management.

Environmental, Social, and Governance Factors

Climate reporting and environmental, social and governance (ESG) factors influence the perception of a company. At present investors feel they do not get enough information on how boards decide on their company’s sustainability topics.

Climate change is a defining issue of our time and presents far-reaching financial risks. Boards should address and report on the effects of climate change.

This should include:

  • The resilience of the company’s business model
  • The risks, uncertainties and viability in both the immediate and longer-term
  • How the company intends to respond to climate change
  • How climate change has been considered in its strategic planning

Climate change, working conditions, behavioural issues like sexual harassment and bullying, employee diversity, corruption and aggressive tax strategies are factors which readily destroy the value of a brand, their reputation and trust.

Stewardship

Good governance is essential and can be kept under review through effective investor engagement. Investors should demand high quality stewardship by their fund managers, and managers in turn must respond to that demand.

The new Stewardship Code demands that fund managers not only explain their policies, but also then report on the outcomes they have achieved. This proposed major change, the disclosure of outcomes, rather than spelling out policies only, will be far-reaching and should allow clients and customers to make better informed and differentiated judgements on the distribution of their fund management mandates.

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