This post originally appeared in The Economist. It has been republished here with their permission.
Corporations are not islands – they exist in a vast ecosystem of stakeholders, including shareholders, suppliers, employees, regulation, and markets. And when something happens to disrupt that ecosystem, stakeholder confidence is lost which can drastically affect a company's market value and its ability to do business - after all markets are based on trust.Building and maintaining lasting trust in your company is about more than what you do externally. It's about how your company operates; the corporate culture you cultivate in order to weather shocks to the ecosystem that erode trust and credibility.
The 2008 financial crisis was a massive shock to these ecosystems; one that laid bare significant violations of trust between corporations and their stakeholders. Trusted corporations were operating on increasingly risky ventures, and the culture within these companies ignored - or even perpetuated - these risks. The results were not only disastrous in real economic terms, they fundamentally undermined trust in these corporations, the people who run them and the market as a whole. In the aftermath of the Great Recession companies across many sectors have found it necessary to redouble their efforts to restore stakeholder trust and to justify their role in society.
This has led to a series of pressing questions for businesses to answer: Are directors primarily responsible to shareholders, other stakeholders or society at large? How can an organization change its culture and what changes should be made? What are the benefits of reshaping corporate culture?
Changing a company’s culture is no small task. It takes years of work and it only happens when there’s full buy-in, top to bottom, from management and employees. Here are four things companies can do to reshape their corporate culture:
Strive for greater transparency to empower better decisions based on reliable information
You can market your way to trust in the short term, but for lasting credibility your ecosystem needs high-quality, reliable information about the business, its values and how it operates. This information doesn't come from closed, protective cultures. Stakeholders need comparable information regarding a company’s performance, and it’s important to demonstrate how a company’s corporate culture and values align with this. Last year’s accounting scandal at Tesco demonstrates this point. Revelations about the scope of the company’s problems shocked Tesco’s ecosystem affecting stakeholders from shareholders to employees and customers. As part of his efforts to reshape Tesco’s culture, CEO Dave Lewis sent his employees a simple message: “We want to work in a business which is open, transparent, fair and honest. We all expect Tesco to act with integrity and transparency at all times.” I couldn’t agree more with this sentiment. This is what sustainability reporting is all about – a trusted, transparent way to collect information in order to communicate your company’s position around risks, opportunities, and challenges – both financial and non-financial.
Once this information is available it can inform better decision-making within companies. This is what builds trust in the market, and ultimately enhances the credibility of your organization. But the cycle must be continuous, being refreshed through an open, transparent corporate culture to push the cycle along. A breakdown in this cycle, as seen in 2008, can destroy the trust in corporations that took decades to create, often in minutes. Rebuilding this can take years.
Shift your business focus from short-term to long-term
The trend in global stock markets is to reward short-term productivity, often at the expense of long-term viability. This has resulted in a much more volatile market, riskier indices, and a breed of investor that is more focused on earnings rather than long-term fundamentals. A short-term corporate focus benefits only one stakeholder; the shareholder. But long-term, it benefits no one and leaves most of a corporation’s ecosystem looking for answers for long-term risks. These risks are often non-financial and detached from short-term stock performance – major risks such as corruption, human rights, and governance can have a significant impact on a company’s credibility.
Reassess your definition of corporate risk and the fiduciary responsibility of your directors.
It is the fiduciary responsibility of corporate directors to be aware of risks to the corporation, whatever they may be. With the advent of corporate accounting standards, many companies have opted to focus on the financial risks rather than (and sometimes at the expense of) non-financial ones. But in reality, these non-financial risks can become financial risks over time – a hidden human rights issue in your supply chain, a corrupt executive at a subsidiary, an environmental violation within a business unit – all are non-financial risks that could very well become serious financial ones, and it’s important your corporate culture properly assesses what fiduciary responsibility really means. The changing nature of the corporate director requires a change in culture, one that considers both financial and non-financial information in the "basket of risks" that face their organization.
Expand your ecosystem
One of the best ways to build a more inclusive, transparent corporate culture is to expand the scope of stakeholder engagement. It’s not just investors who are important. Labor organizations, governments, civil society organizations, consumers and citizens are also essential in helping your company understand where the risk areas are, what’s important, and where to focus. Directors are accountable to both shareholders and stakeholders and this balance needs to be carefully managed.
Build your ecosystem to include a broader audience and listen to them. They will help guide you.
Michael is the former CEO of the Global Reporting Initiative, Carbonetworks, and other sustainability organizations. He has been an advisor and CEO in sustainability for almost 20 years, and writes about technology, sustainability, and social innovation.