Edward Houghton, Research Adviser - Human Capital and Metrics
The news that Sports Direct has lost over £400m of stock market value due to concerns about the way the organisation treats the welfare of its workforce should come as a stark warning to the world of business. This highlights the importance of good people management and culture practices - not just for the sake of financial performance but also for the health and wellbeing of the workforce.
It seems that not a few month goes by without a governance or cultural issue rocking some of the biggest brands in the world; late this summer Volkswagen was shaken by an emissions-rigging scandal which involved the deception of US regulators by some of its workers regarding greenhouse gas emissions, and at the end of 2014 Tesco was hit by an accountancy scandal, thought to be the cause of poor corporate governance and ineffective leadership. The financial effect of such events are clear. For Tesco, 2015 has seen average price of its shares tumble – they now reside at 153p, their lowest level since October 1997. Volkswagen’s brand and financial position is also bleak and following a similar trajectory. The commonality between these events? They’re inextricably linked to people and culture.
Built of the very tone and purpose of the organisation, culture is one of those concepts that whilst incredibly hard to conceptualise and measure, it is surprisingly very easy to talk about. Most employees will be able to describe the culture of where they work; whether it’s one based around trust and autonomy, freedom to act and accountability, or one of central structures of command and control.
We all know when we are working in a team or an organisation with a good culture. It’s both the cause and result of the way employees interact with each other and crucially their work, and is interwoven with the health, wellbeing and performance of individuals. For this reason, it should be the top of the agenda for every senior leader and member of the board: one of the top things keeping them awake at night (or, if set correctly, helping them to sleep more soundly).
To help tackle some of these issues the CIPD is feeding in to an important and ground-breaking piece of work by the Financial Reporting Council (FRC) to build a ‘culture-coalition’ across the business community that will champion effective board action on culture. Recognising that it is from the very top of businesses where culture is set – this work will encourage leaders to understand the importance of effective cultures, and learn good practice techniques for building positive working environments.
We’re drawing on our extensive knowledge of the importance of good business culture, to inform the coalition on the best way to help set effective and engaging workplaces. Our partners in the collaboration are also contributing significantly, drawing on their extensive knowledge and helping to advise the FRC. The Chartered Institute of Management Accountants, the City Values Forum, the Institute of Business Ethics, and the Chartered Institute of Internal Auditors have all joined with the FRC to help improve the approach of boards to business culture and ultimately drive effective and sustainable performance.
The breadth of expertise and interest in this topic shows how important it is now for organisations to really take notice of the very way in which they drive performance through their people. Until businesses take account this, there are likely to be many more governance issues which come to the fore and cause significant damage, not just to the pockets of shareholders, but also the health of our employees.
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I'm not sure that the link between the failings at Tesco and Volkswagen can fairly be said to have their roots in "people and culture" in the same way that the LIBOR and FIFA scandals can.
In both cases, it seems that individuals - yes, senior leaders - made operational decisions to lie about critical aspects of the business. But it's hard to argue that those decisions were made because the culture supported and encouraged corruption and dishonesty. On the contract, the prevailing corporate cultures at both were positively (in business terms) focussed on quality excellence, customer service and efficiency.
If there is a cultural issue at the heart of this, it isn't one that concerns corporate culture but, rather, a separate culture that pervades the highest echelons of the business elite. It can be seen in the way that executive and board members move or are shared between FTSE400 companies that share nothing culturally, technologically or commercially except a desire at the highest level to make as much money as they possibly can. As a result, strategic decision makers are insulated from the prevailing culture of their own corporations, and reside in a separate culture of London/New York boardrooms, restaurants and business class lounges.
The FIFA scandal is an example of how this operates in its most extreme form: where you can have a positive, passionate organization with staff motivated by their love for something beautiful, but the whole thing is rendered corrupt by an isolated, elite layer of management whose sole interest is personal enrichment.
To throw up a contrasting example where it genuinely was the prevailing corporate culture that led to an organization's downfall, I would point at Kids Company, whose culture of "the kids come first" led the charity's frontline workers as well as their managers to vastly over-commit their spending out of all proportion to measurable or quantifiable results.
16 Dec, 2015 09:37
Im not quite sure how you can compare & measure, Sports direct loosing 400m of stock market value and relate it with the treatment of their people and culture within the brand. We all know good ethics / practices are needed and respected. Yet, there are brands who do not do this and have no-good people practices whatsoever - and they still seem to survive in their relevant markets.
A good product, with good pricing will always win. Look at Primark, ,McDonalds and Pizza Express for example.
22 Dec, 2015 15:46
Anonymous is missing the point surely. Sports Direct has become a cause celebre because its management culture is widely seen as unacceptable. McDonalds had the same treatment a few years ago, and was forced to do something about it, Primark also. Whether what they did was real or just a costly PR effort I'm in no position to say; the point is that customers don't like buying from brands that become toxic in the media, and companies who treat their staff/customers/suppliers/the environment badly always take a financial hit when word gets out. Quite right too. Product and pricing might mitigate the damage, but the VW example shows clearly that it isn't always enough.
23 Dec, 2015 11:15
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