This article was provided by McGill and Partners
Move over Polymerase Chain Reaction, there’s a different PCR that ought to be drawing in time and attention now. That is according to Francis Kean (pictured), partner in the financial lines team of McGill and Partners who has highlighted that investors and regulators alike should be exploring Purpose, Culture and Resilience (PCR) as the most effective building blocks for strong and responsible corporate performance.
While other more fashionable acronyms command more attention at the moment, he said, some of them invite quite different application by companies - making meaningful measurement and comparison difficult. Though it can also take many forms, PCR contrasts these acronyms as it needs to be deeply embedded in each company’s operations.
A company’s identity comes from having a clearly articulated purpose that goes beyond maximising profits and shareholder returns and pays due regard to all relevant stakeholders, Kean said. When an organisation clarifies its strategy and redefines its value proposition it differentiates itself. A strong purpose, therefore, can act as a magnet, attracting like-minded stakeholders and repelling those who take a different view.
“That in itself is a worthwhile undertaking in somfar as it reduces the scope for friction and dissent as the company adapts and pursues its corporate strategy,” he said. “Clarity of purpose helps polarise stakeholders to engage or disengage and not just hang around wasting efforts. Purpose should not be confused with the company’s business plan (also of key importance) which is (or should be) concerned with the implementation of strategy. Directors (and in particular new appointees) should seek to validate the extent to which the company’s purpose is understood among its stakeholders. “
It is no surprise that in the aftermath of the 2008 financial crisis, regulators have latched on to the importance of culture, Kean said. He cited the example of the Financial Conduct Authority (FCA)’s executive director for consumers and competition who said in a recent speech: “Culture is at the heart of how we supervise firms. We expect senior leaders to nurture healthy cultures in the firms they lead.”
But how should directors set and measure culture and guard against the “do as I say not as I do” pitfall into which some companies fall, he questioned. Again, validation and the active seeking of feedback from the executive and from all levels within an organisation is part of the task. Do people understand and can they play back the nature of their roles and contributions? Do they feel listened to?
“In considering tone from the top, which is a key part of culture, the composition of the board itself is worthy of care and attention,” he said. “What is the balance of appropriate talents, experience and perspectives required in order to best pursue a company’s purpose? Is there a danger of confusing a representative role on a company’s board with the requirement that each board member is held accountable for the company’s success?”
Culture is alignment of purpose with business objectives, Kean stated and needs to be considered within the wider context of the company’s place in the value chain. If a company is excellent at delivering a small part of a solution to climate change or cyber-security, how should and does it collaborate with others elsewhere in the value chain to benefit the wider objective?
The need to take steps to strengthen a company’s future resilience was identified within the reforms recommended in the Government’s report on Restoring Trust in Audit and Governance published earlier this year. The chosen method of enforcement is “to sharpen personal accountability through new reporting and attestation requirements”.
As with purpose and culture, Kean said, the areas in which resilience most requires strengthening will vary from business to business. Also critical for evaluation is the timeframe within which resilience needs to be addressed. Whereas financial resilience is typically examined over a relatively short term time horizon of one or two years, viability is considered over three years or more and longer-term issues, such as the environment, for up to 10 years and beyond.
“There is also a temptation at board level to take the eye off the ball and focus, for example, on topical issues such as the environment, or diversity and inclusion, or geopolitical risk, at the cost of ensuring that the company can continue to deliver its core products and services to its customers,” he added. “Ultimately, the aim is to ensure the board feels confident that the commitments made to relevant stakeholders will be delivered.”
There are significant personal liability risks for directors who preside over companies that sustain serious financial and/or reputational damage, Kean said. Moreover, stakeholders, including shareholders, are increasingly alert to hyperbole. They want authentic progress and reporting and they are becoming more sophisticated and more adept (aided by an active plaintiff’s bar) at holding directors to account.
“The phenomenon of event-based litigation, in which a significant accident or incident sparks a liability suit on the basis that the board should have foreseen and prevented the relevant harm, is becoming commonplace,” he said. “How can boards follow good PCR practice while minimising this increased personal liability threat?”
Kean stated that boards need to feel safe to be brave. Feeling safe comes from having support from a variety of sources that allows them to make good decisions and act wisely. A clear and robust directors’ and officers’ liability insurance programme should be one of those sources, he said. Directors should take some responsibility as part of their on-boarding due diligence to inform themselves of the nature and limits of this protection.
Resources such as the AIRMIC Guide to D&O liability insurance, compiled in association with McGill and Partners, are available for this purpose. Another valuable resource in assessing corporate risk, thereby creating assurance around a company’s future resilience, is the Risk Coalition Gabi tool.
