Letters to a New Chair

TCo-Letters-to-a-Chair-2019-FINAL-web-accessible.pdf (0 downloads)

Response to FRC Stewardship Code

A Question of Investment – why are boards investing too little in British business?

If investment in the United Kingdom is falling, it’s not down to Brexit.

Our analysis (conducted in association with RWC Partners) shows that investments made by the corporate sector had already started to lag behind the rest of the G7 well before June 2016.

The problem is one of an increasingly anti-investment culture in UK corporate boardrooms; if higher productivity is the aim then countries with high rates of employment usually achieve it by investing in new technologies.

In the case of the UK, we should point out that the problem is not economy-wide: so far as entrepreneurs, tech venture funds and family-owned business are concerned, investment levels are up.

So why is it that the big corporates are increasingly erring towards share buy backs and higher dividend pay-outs – thus underpinning share price performance – rather than investing in long-term wealth generation?

It’s no secret that the UK is facing major challenges in terms of infrastructure, skills, health, housing, energy, water, and the environment. And yet the corporate sector is not stepping up.

We need new ideas, the finest minds and serious investment to capture the many benefits of the breakthroughs that are rapidly occurring in technologies such as AI, genetics and new material sciences.

Tomorrow’s Company believe that business has the potential to deliver societal, economic and environmental good.

But any benefit will be adequate at best if there remains a desire for short-term returns.

The country needs the sort of bolder entrepreneurial leadership that has marked our economy out in the past: an appetite for the risks associated with investment in innovation and long-term wealth must be rekindled in the boardroom.

Please download our report (below). We hope that it stimulates discussion and action on what is a vitally important topic.

Norman Pickavance,

CEO Tomorrow’s Company

Is this Progress? Our new inquiry

The Courage of their Convictions – how purposeful companies can prosper in an uncertain world

This report builds on conversations with, and insights from, over twenty companies who think it important to have a purpose beyond profit. Some of them are insurgents, taking advantage of the new opportunities that technology and global markets offer. Some have proved their resilience over decades or centuries.

There is abundant research evidence which tells us that the most successful companies over decades have been those with a clear and enduring purpose that combines financial success with outcomes that are important to human beings and the society in which they live. But what of the future? Companies are facing rapid change and great uncertainty. This turbulence is especially felt in their workplace relationships. Recent Gallup global engagement survey results show that employee engagement levels remain consistently low. This is disappointing and it appears to be linked to the failure of companies to deal effectively with new challenges and opportunities. These include the pace and disruptive effects of the digital world, threats and opportunities in the changing labour market, and short-termism and volatility from social, political religious and environmental forces. We wanted to explore the relationship between constancy of company purpose and the increasing inconstancy of the surrounding world. How could companies so rooted in purpose be sufficiently fast on their feet?

The examples described in this report demonstrate the greater resilience of companies which have a focus on purpose beyond profit and relationships permeated by clear values. A firm and enduring purpose beyond profit is, more than ever, the precondition for true agility in an age of uncertainty. Companies live or die by their relationships. The strength of those relationships is shaped by the decisions that leaders take about purpose and values. Companies with a purpose beyond profit enjoy four potential advantages in the face of change and uncertainty.

There is also the potential for wider benefits to employees and society, in terms of well-being and health, including mental health, the chance to learn and adapt, and the way such companies cut across divides and bring together different parts of society around a shared purpose.

There are five stages which, in one way or another, the organisations we studied go through as they build from a strong purpose to a more agile and enduring organisation. First, they define the purpose in a way that gives the company real personality and makes the connection between the head, the heart, and the gut. Next, they bring it to life in the way that they communicate it. Thirdly, they imbue the purpose and values into the culture and behaviours of the company. The fourth stage is about the way companies encourage – rewarding, recognising and reinforcing the right behaviours, and thereby celebrating and further embedding the purpose and values. Finally, there is measurement and review – checking, auditing, revisiting and being open to feedback to avoid complacency.

The true energy generated by a living purpose flows across and between these different stages and permeates the relationships and processes of the business to the benefit of the bottom line. There is, of course, no scientific proof that this will count for so much in the future. Indeed, leadership has always been about doing the right thing long before you can prove that it will pay off. It’s called having the courage of your convictions.

Better Stewardship – An agenda for concerted action

There is a troubling disconnect between our system of wealth creation, and the society which it serves. The symptoms include public anger about corporate failure and excessive executive pay; the continuing impacts on living standards from the global financial crisis; low investment; poor returns for savers, pressure on pensions, and high levels of debt, especially for graduates. Public trust in the whole system – including governments, universities and the media, not just business and investment – is low. Too often the attempt to tackle these problems deals only with individual symptoms. Effective solutions will only flow from a better diagnosis of the underlying problem, and combined actions by all involved. The wellbeing of savers and investors can only be promoted if the underlying performance of investee companies is improved. Competition between asset managers on relative performance is ultimately a zero-sum game. This is where stewardship comes in. Stewardship means the responsible management of inherited resources so that they are passed on in better condition. Stewardship is the golden thread that can connect, and guide the actions of, all those who play their part in the flow of money from the savings of citizens through wealth creation and back to those citizens.

 

Better stewardship is about a linked set of actions and accountabilities by asset owners, asset managers, and companies, facilitated by the actions of regulators and advisors. Companies need a critical mass of shareholders to hold them to account. Citizens need stewardship by both boards and owners to deliver long-term returns and keep an eye on how companies behave. The test of its success is more effective and more responsible wealth creation in companies. A stewardship code can support and underpin this but the most effective change comes from industry and market leaders.

 

Overall quality of investor stewardship has improved since the introduction of the Stewardship Code in 2010 but a ‘critical mass’ of stewardship investors has not yet materialised. According to a 2016 survey only 68% of asset owners have a stated policy for exercising their stewardship responsibilities. However only 37% set out their stewardship expectations in all their mandates. Asset managers reported that engagement was excellent with nearly a quarter of all companies and good with 44%. They also reported that they are spending the most time on remuneration at the expense of more important issues.1 Progress is often stalled by the complexity of the investment chain and a tendency to blame others.

 

A pincer movement of leadership and regulation is needed. Each participant in the system can lead by asking ‘how are my actions helping improve the performance of the underlying assets over the longer term?’ Small actions can reinforce each other to form the habits, values and culture of stewardship across the investment chain. In earlier decades a focus on total quality and lean management transformed the working methods of many industries. Success for stewardship will be assured when a similar common language has been developed and adopted for describing and ranking and celebrating investment institutions, advisors and companies on the basis of their stewardship. Drawing on the pioneering work of the Stewardship Alliance of institutional investors, and the work of Tomorrow’s Company on good governance, this report sets out for discussion the concrete actions for each link in the chain.

 

In the UK, leadership by government and regulation is also needed. Government needs to set out its overall policy for long-term wealth creation. Stewardship needs to be central to the terms of reference of the Financial Conduct Authority. The Stewardship Code should start by linking stewardship to promoting the long-term success of a company. It should apply to asset owners, asset managers, investment consultants, research analysts and all relevant service providers and advisors. It should require each investment entity to state its purpose and report against it, and report resources invested in stewardship.

 

 

 

Business over the next decade

Summary from Annual Parliamentary Reception held on 15th November 2017 at the House of Lords, kindly hosted by Lord Haskel and sponsored by ACCA.

Tomorrow’s Company, supported by ACCA, was delighted to be joined by senior business, government and civil society leaders at its Annual Parliamentary Reception to discuss what the next decade may hold for business and in particular how business can adapt to upcoming challenges and opportunities in a way that allows both business and society to thrive in the long term.

Stephen Kelly, CEO of Sage, and John Lelliott OBE, Chairman of The Natural Capital Coalition and Chair of the ACCA Global Sustainability Forum, joined the reception to share their views on how they think business will change over the next decade. They explored in particular the popular contention that ‘capitalism is dead’.

 

 

 

NEDs – Monitors to Partners

Twenty-five years after Cadbury, there is much to celebrate within UK corporate governance. However, it may also be time to rethink some of our underlying assumptions. Corporate governance has become an industry in itself. The focus is too often on how to comply with an overly prescriptive list, rather than choose the structure and processes that help create long-term value.

This report has been prepared in collaboration with chairmen, non-executive directors (NEDs) and executives. In its conversations with them, Tomorrow’s Company has come to some clear conclusions about the shortcomings of our current approach to the role of NEDs and to corporate governance generally.

This paper argues that a new direction of travel is needed that supports innovation in governance structures, greater alignment between NEDs and executives, and a focus on long-term investment with appropriate risk-taking. The primary focus is to provide this critique, and then to pose some questions and actions for how this could be put into practice by boards, investors, policymakers and regulators.

“The length of board packs, board agendas and the background of many NEDs in finance, legal and compliance contribute to NEDs too often seeing their role as ensuring good corporate governance and risk mitigation. This focus is at the expense of contributing to building a successful and sustainable company.”

Mike Wilson CBE, Joint Founder & Life President, St James’s Place

“We applaud this report from Tomorrow’s Company. Corporate Governance has shifted too much to a ‘form over function’ model and indeed an industry unto itself. This is a reminder that a key – and important – role of the Board is ensuring the appropriate focus on the long-term interest of the company.”

Dominic Barton, Global Managing Partner, McKinsey & Company 

“This paper provides a helpful catalyst to allow Boards to challenge themselves, step back and decide what they are there to do and how they add value. This isn’t just more process. It reflects the reality that Boards will have a different focus at different points in the life cycle of a company. The work of the Board will also reflect the capabilities of the Executive team and the dynamic between Chairman/NEDs and CEO. No two companies are alike and governance must address the reality of each individual company. So this paper brings a welcome focus on the dynamic of governance and on form over substance.”

Robert Swannell, Chairman, Marks & Spencer

 

 

 

Response to Industrial Strategy green paper

Tomorrow’s Company welcomes the Government’s green paper on industrial strategy. We support the vast majority of the proposals. We have offered short comments against each question, with a particular focus around pillar IV (Supporting Business to Start and Grow), as the this is the primary research focus of Tomorrow’s Company.

 

 

Response to Treasury Committee on UK Monetary Policy

Written evidence submitted by Tomorrow’s Company in response to the Treasury Committee inquiry – Effectiveness and impact of post-2008 UK monetary policy.

We welcome the inquiry by the Treasury Select Committee. We agree that the efficacy of UK monetary policy in the aftermath of the financial crisis should be scrutinised, particularly at a time when conventional economics is struggling to provide all the answers. Our focus has been to better understand how money has been flowing through the UK financial system and through the activities of its companies, and how such flows have been affected by rising inequality and shifting business models.