The Winds of Change - Ty Francis
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Times are changing in the boardroom – the new bottom line is that profit isn’t everything. To thrive, businesses need to have a conscience.
“Businesses are increasingly being judged by their values, their culture and their commitment to diversity,” says global corporate governance advisor Ty Francis, MBE.
“And boards that recognise these winds of change and react to them will have the edge on their competitors” he adds.
Francis points to the rise of the ‘socially conscious investor’ – people like Larry Fink, Head of BlackRock, ‘one of the world’s largest passive investors’ – and the part they are playing in steering businesses in this new direction.
A much-publicised letter Fink wrote to CEOs earlier this year, calling on companies to produce not just profits but contributions to society, has been described as a “game changer.”
Fink spelled out those changes. He wrote: “Society is demanding that companies, both public and private, serve a social purpose. To prosper over time, every company must not only deliver financial performance, but also show how it makes a positive contribution to society.
“Companies must benefit all of their stakeholders, including shareholders, employees, customers, and the communities in which they operate.”
And he declared: “Companies must ask themselves: What role do we play in the community? How are we managing our impact on the environment? Are we working to create a diverse workforce? Are we adapting to technological change?”
“Are we providing the retraining and opportunities that our employees and our business will need to adjust to an increasingly automated world? Are we using behavioural finance and other tools to prepare workers for retirement, so that they invest in a way that will help them achieve their goals?”
Francis says these are key questions for all organisations, adding that Fink’s message is a powerful one that boardrooms across the UK would do well to heed.
He says: “Many investors are looking towards the long term. Companies with a forward thinking, socially conscious culture will perform better, and they will keep their employees longer.
“When looking at a company’s worth, a large portion of its value now isn’t on the balance sheet. There are intangible assets such as the company’s brand, reputation, customer relationships and its intellectual property.
“Investors are not just looking at diversity, they are also look at how a company engages with its stakeholders including employees, customers, vendors and the community at large.
“Shareholders are also calling for more transparency around processes that boards use to evaluate themselves, especially in the wake of so many corporate failings where the board failed to investigate or halt a situation, or were not even aware of the issue. Shareholders want to know about the skill sets the board members bring to the table and how those skills translate to corporate governance for the company.”
Board members are now being called upon to establish a corporate culture that is focused on stakeholder engagement.
Francis says: “Diversity in board composition and in succession planning continues to rise in
importance, as well as solidifying the company’s mission and how to create long term value without compromising ethics or being negatively influenced by corporate financial incentives aimed at short term gains. “
Francis also noted that: “It can be a real challenge for directors in the boardroom to balance the need to deliver profits for shareholders while creating a culture that is rooted in ethics, risk mitigation and having a long-term holistic view.”
Summing up the current landscape and how the focus on “social purpose” is effecting boardrooms, Francis says: “There is a new paradigm for how corporate governance is viewed and more importantly, how it is measured.
“People are paying much more attention to the existing cultures of UK boardrooms and how those cultures filter throughout organizations, determining if and how change needs to occur.”
He believes that the investors are demanding more independent thought and direction, which has in turn brought about changes by the regulators.
Francis goes on: “Much of the UK corporate governance code reform has been a catalyst for evaluating transparency, ethics, independence and culture.”
Having worked in both London and New York, Francis has seen the growing appetite for corporate governance on both sides of the Atlantic.
During his time in New York, he was appointed as a Business Advocate for America by the Welsh first minister, The RT. Hon. Carwyn Jones AM in 2014, as a way to help promote Wales as a foreign investment destination.
Francis is also a former executive vice president at the Ethisphere Institute, in New York City, a global leader in defining and advancing the standards of ethical business practices.
Prior to that he was a Vice President at the New York Stock Exchange, helping lead its Governance Services division.
Francis says diversity and transparency has to go further than simply ticking boxes. He adds: “Having an ethical culture is not just about risk mitigation, it also gives companies an edge.
“For instance, Ethisphere found that share price of the publicly traded companies recognised as the 2016 world’s most ethical companies consistently outperform other major indices.
“Similarly, other research has found that portfolio managers today actively review a company’s governance practices when deciding whether or not to invest.”
However, he adds: “None of this change can happen without clear leadership and engagement from the board and the rest of the executive committee.
“The message is clear: Boards must get involved in strengthening their companies’ culture if they want to stay ahead of the game.”