If ethical culture is so important, why is measuring it such a challenge?

Businesses have long focussed on financial analysis as a means of measuring success and demonstrating value to shareholders. While this undoubtedly provides useful information it is not necessarily the best or only indicator of long-term corporate sustainability. Harder to measure, but fundamental to any organisation’s longevity is the manner in which a company goes about its business; its culture.

Following the publication this summer by the Financial Reporting Council of Corporate Culture and the Role of Boards and by Tomorrow’s Company with the City Values Forum of Governing Culture: Risk and Opportunity, GoodCorporation asked Mark Goyder, founder and chief executive of Tomorrow’s Company to lead our autumn Business Ethics debate on the challenges of measuring ethical culture.

Mark began by emphasising the importance of purpose: companies need a clear purpose and strong relationships in order to deliver long-term shareholder value. To do this, they need to understand their human purpose and the relationships they have with their different stakeholder groups; customers, suppliers, partners and employees as well as shareholders. The most successful brands have clear links to human needs and human purpose.

This is underpinned by corporate law. Under UK law directors have a duty to promote the success of the company for the benefit of its members as a whole, but must do this with regard to the interests of employees, and by fostering good relationships with suppliers and customers, by protecting the environment and by maintaining high standards of business conduct.

Directors should see themselves as stewards, temporary custodians whose work should enhance an organisation, ready to hand it over to the next generation of management. Very often, the best stewardship is seen in well-run, successful family businesses.

An organic image of good corporate governance was given describing the company as a living system: employees are the life blood; management the heart; strategy the brain; communication the central nervous system; leadership and entrepreneurial energy the soul and spirit, governance and accountability its rhythms and disciplines, the means of keeping the organism fit and lean. Within this organism, culture is the DNA, the fundamental characteristics and qualities of the organisation and ethics the spine.

Without culture and ethics at the core of business there will be failures as Enron, Tesco, VW and Toshiba have clearly shown.

Mark Goyder stated the importance of measuring culture, but warned that organisations should always see measurement as the servant of leadership, not the master. It is dangerous to assume that because KPIs are in place, things are under control. ‘What gets measured gets managed. But what gets measured also gets manipulated.’

Following Mark Goyder’s introduction, the discussion began by asking if ethical culture is such a good barometer, who is measuring it and how well is this being done?

While few disputed the importance of ethics and culture, few participants in the discussion were engaging in regular measurement and a number of challenges were discussed.

• Short-term versus long-term business models: businesses need to understand what sort of business models they have. In a short-term business model, investors are more interested in dividends and less keen to focus on ethical strategies that are more aligned to a long-term business model. To build businesses with ethical values at the core, there needs to be a shift away from the short-term model and a greater commitment from investors to building businesses for the long term
• Changing the short-term mind set: this could be achieved by giving Boards greater flexibility to take decisions for the long-term benefit of the company rather than short term shareholder returns. Beyond their formal accountability to shareholders, boards needed informally to exercise clear accountability to employees and other stakeholders
• What is the measure of success? For many shareholders the only measurement of a company’s success is how much money they make. One of the challenges business face is how to give the measurement of ethical culture equal value. Businesses need to find a way of developing the right KPIs for their own organisation; indicators that are linked to ethical culture and can demonstrate how values are embedded in the organisation and how this adds value and supports the sustainability of the business.

So what is critical to measuring ethical culture?

If the measurement of ethical culture is about how you do business rather than what you do, what should be measured to demonstrate this? Forty to fifty per cent of businesses claim to collect ethical management information, but in fact only about a third actually do this. The following possible indicators were highlighted:

• Employee satisfaction
• Employee behaviour and decision making – clearly linked to sanctions, businesses need to hire and fire against their values, possibly using a behaviour framework linked to the contract
• Rewards and incentives linked to ethical conduct and decision making – part of performance objectives
• Customer satisfaction
• Relationships with stakeholder groups

How to live out those values and create an ethical culture

A strong ethical culture must be driven from the top. The board needs to act as the conscience of the organisation, determining purpose, values and culture; articulating clearly the expected standards. More importantly, it needs to live out these values through its own conduct and decision making.

Such values need to be properly embedded throughout an organisation to facilitate agility and the ability to respond to inevitable challenges without resorting to compromise.

An external perspective was also felt to be necessary to give a real understanding of how the ethical culture is being lived out. Non-executive directors can play a pivotal role here, but often are quickly ‘captured’ and fail to obtain an independent understanding of the organisation’s culture.

Businesses need to develop ways to measure culture that is credible and easily understandable by the board.

The GoodCorporation Perspective: How can ethical culture be measured?

To measure ethical conduct, GoodCorporation begins with the code of conduct to identify statements that can be audited by looking at the procedures and talking to stakeholders to assess how well the code is actually working. These interviews, undertaken by a neutral third-party, are crucial to measuring ethical culture. We will often interview over 100 stakeholders in a two-week time period, covering managers, employees, contractors and even cleaners inside the organisation. We also interview customers, suppliers and regulators to get a good external understanding of an organisation’s culture. By cross-checking in these interviews the statements in the Code of Conduct, we are able to provide a board with concrete measurement of culture.

Such an analysis can be turned into a ‘grade’: we offer a five-point scale from ‘commendation’ where the policies and systems are working extremely well to a ‘non-compliance’ where the policy and system are largely not working or have broken down.

The grades can be used to measure and assess performance, which can be tracked over time to show improvement, providing the board with crucial insight into the company’s culture and its position relative to other companies. We also offer benchmarking against our Business Ethics Benchmark.

Boards looking to provide investors with meaningful information about ethical values and culture can use these results to provide evidence of their organisation’s long-term viability.

Posted November 2016