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The uncomfortable truth on Corporate Responsibility

An autumnal October morning, London Underground strike averted, Hoggett Bowers CEO – Karen Wilson, introduced Richard Pennycook to the distinguished guests attending the latest Consumer Breakfast Seminar at The Law Society.

Recently appointed Chairman of the British Retail Council (BRC), Richard’s expanded portfolio also includes: Chairman of The Hut, Howdens and Fenwick’s. Nobody is better qualified to address the pressing issue of Corporate Responsibility, and Richard’s passion for the subject shone brightly through the room. Clearly recognised as the saviour of The Co-op Group, Richard’s tenure as CEO and his leadership of this stunning turnaround was played out under the media spotlight. Richard was not only fighting for survival, but tasked with restoring the reputation of the UK’s most ethical organisation, following sensational revelations concerning the Chairman of its bank, Paul Flowers. This experience, together with 7 previous turnarounds prepared him well!

The financial crisis and subsequent corporate scandals have led to public perception of corporate behaviour to deteriorate to an all-time low. A recent Government green paper on corporate governance hands company boards and shareholders greater responsibility for improving standards. Pointing companies in the right direction is preferable to heavy-handed regulation, but are boards or shareholders really up to the task of driving the required The uncomfortable truth on Corporate Responsibility changes, or is this approach over-optimistic?

Richard opened the discussion with a timeline. The financial crisis started in 2007 and the run on Northern Rock was ten years ago. For the Financial Services industry, this and a number of other events resulted in huge reputational impact. Since then, many in business have associated corporate responsibility issues as isolated blunders. The majority do not associate such conduct with their own business or colleagues, leading to the conclusion that ‘it’s them not us!’

“The System cannot rely on the consumer to keep business honest”

In the last two years there has been a realisation and collective dissatisfaction that has led to Trump and Brexit. We have a Shadow Chancellor, who has openly stated his desire to bring down capitalism. Therefore, corporate responsibility has rapidly climbed up the corporate agenda and has never been more important than now. A significant proportion of the Western population view business leaders as deserving of the same low reputation as journalists, politicians and bankers. Sadly, business is part of the problem and recent issues with Uber, Ryan Air and Two Sisters Food Group, leads to the inevitable conclusion that the consumer cannot keep business honest. Indeed, regulatory intervention is required to challenge the behaviour of business, otherwise consumers will continue to be confused and disaffected.

Will the biggest damage to Ryan Air’s reputation result from cancelled flights or the fact that that they lied to the consumer about compensation entitlement? All brought about through a singular lack of respect for their main asset – the pilots. Uber’s poor employment practices and political mismanagement. Two Sisters desertion by its key customers. All these recent examples of poor practice shine a light on standards and reinforce the need for businesses to understand and value their stakeholders.

Richard reflected that at the Co-op they talked about the 5% of customers who care enough and the 95% who will press on regardless. This is part of a problem that has led the ‘head in the sand’ attitude by business. If corporate responsibility merely focuses on just 5% of consumers, it becomes disproportionately expensive!

It is the responsibility of Government and Regulator to create a level playing field so that business can comply, drive themselves forward and effectively compete. Presented with such challenges, how should business respond? The greatest social impact of business is providing employment. However, business is rarely – if ever – given any credit for this.

“Never waste a good crisis”

Richard then drew deeper on his executive experience with the Co-op group, which he reflected got into trouble in 2013 because it was regulator-led, rather than being sufficiently customer-led. The PRA set a deadline to restore the balance sheet by December 2013, which proved a monumental challenge to achieve. Additional challenges included – a combination of mutual status, scale (£14.5bn turnover, 80,000 staff and 5 million customers) and the need to protect the retail business by ring fencing the bank.

Throughout this six month period, press coverage on turnaround progress was confined to the financial pages. On reaching the deadline the previous week, recapitalisation of the bank was announced, following which Robert Peston on ‘The Today Programme’ announced that “the Co-op was saved!” Thursday that same week, the Queen opened the magnificent new head office in Manchester, with an optimistic speech applauding the Co-op’s successful transformation. The next day, on that fateful Friday, Richard received a call to advise that the Mail on Sunday intended to break a story concerning the Chairman, Paul Flowers. It hit the nation’s front pages, where the story remained for the following six months. Sometime later, at an industry dinner, the paper’s editor put to Richard – ‘what is the likelihood of religion, sex, banking and drugs, possibly come together in the same story?’ This news represented a major reputational crisis for the Co-op – the UK’s most ethical organisation. The story has a happy ending; the business came through it, and in conclusion Richard stated, ‘you should never waste a good crisis!’

The process of reform began with the goal of reconfirming the Co-op’s fundamental purpose and reason for being. While the Flowers story ran there was no reporting or interest in any other aspects of the Co-op’s activities so it became a case of keeping their corporate head down. No good story will replace a bad story. The crisis provided a window of opportunity to review the base layer of regulation and ask what needed to be done beyond their regulatory obligations. There was cost to be borne and customers might not have been grateful, but it forced them to think long and hard. Certainly, it meant that power was pushed back to the 1,500 Co-op stores and highlighted areas where the Co-op could make a positive difference. During this process they rediscovered the good things and realised that their real strengths were not clearly understood by either customers or employees. Increased focus was required and new passions needed to be identified. One significant outcome was the launch of Co-op’s anti-slavery initiative, an issue now being addressed by the government.

It was also clear that confidence needed to be re-established amongst the 65,000 staff, so everybody from Executive to shop floor went through a re-induction process. How had a mutual organisation, owned by its members, got it so wrong?

“Government today needs ‘smart’ Regulators”

Richard is looking forward to starting as Chairman of the BRC. Today, the government needs ‘smart’ regulators as corporate governance legislation is not keeping up. The government must adopt a more insightful and responsive approach to the gig economy, demonstrated by Uber justifying their lack of employee benefits under the guise of self-employment. Richard exclaimed, ‘that’s a Victorian-age problem!’ The fitting of rear seat belts in cars required legislation for the automotive sector to spend the extra money. Effective smoking legislation has resulted in clear benefits to society. The supermarkets and plastic bags – it’s a shame the sector did not push harder, earlier, but legislation is now reaping the rewards.

Richard concluded his address by offering three questions that business leaders should ask themselves when waking up each morning.

  • Is what we do right and is there a level playing field? For example, insurance, each year the customer shops around to be rewarded as a new customer rather than a loyal customer. Is that correct or are we in a race to the bottom?
  • With your business, where do you make a difference in the long term? You are encouraged to find that difference over and above the legislation as positive stories will help counter the negative ones.
  • Millennials ‘get it’. They ask, what is this company for? What is this employer’s purpose, is it clear to me? So if hiring Millennials, go beyond the minimum requirements.

The discussion was then opened up for Richard to answer questions. A Non-Executive Director of a retailer asked: “What’s the future for the mutual; is it still relevant today?”

‘Mutuals are defined by a lack of course to equity. The absence of competition is a disadvantage as without the incentive, it makes it harder to compete. The Co-op has recently benefited by the trend of customers wanting to shop locally, and within their community, but if we were to start afresh today we would not adopt the Co-ops current model. Co-operatives work well, locally, on a small scale and by sharing resource, equipment and expertise. However, it’s harder to make it work on a national scale.’

The Chairman of a consumer brand asked ‘when you left the Co-op, the majority of the Exec Committee were women. What role has gender diversity played in the recovery and what role has the Non-Executive Board played in the changes?’

‘Gender diversity is highly relevant to the corporate responsibility agenda. This is well covered elsewhere so to add, I would ask, to what extent does your board reflect your customer? If not, you will be out of touch and disconnect. Co-op made good progress on gender diversity but less on the ethnic diversity. To the second question, the NED’s role is to challenge the Executive and to pose the direct questions. NED’s have the opportunity to get closer to the regulator to build mutual understanding. I would encourage NED’s to challenge the Pension Trustee by asking where do we invest and what does this say about us?’

The Chairman of an automotive supply business shared how he was concerned that both business and government are overwhelmed and distracted by Brexit. What effect will the Brexit distraction have on UK business?

‘Regrettably I feel we will go backwards as there is no backfill in Governments departments. The trouble with a turnaround is it takes twice the time you predict. Three years to fix and repair and three years to catch-up with the competition. The UK will find it difficult to keep up with other countries.’

The CEO of a Fashion Brand asked: ‘you referred to Trump earlier, Brexit, John MacDonald, and the issue of capitalism being in crisis, particularly in the view of Millennials. What can be done?’

‘It’s difficult to see how to recover and I confess I feel some frustration towards Cameron as he was onto something with the happiness index. The metrics we have used no longer feel relevant or right to gauge progress. But in many ways today’s generation have unimagined wealth compared to previous generations with the access to a personal library with every book accessible, films and information – all via the mobile phone! People don’t recognise a good thing. For example, an insightful colleague of mine, three months before the US Election, predicted Trump would win. He runs a business in the US that employs unqualified depot Managers routinely earning $160,000 a year. Yet they complained they were hard done by!’

The Head of Resourcing of a retailer asked how business should reconfigure to respond to the needs of the Millennials. Richard answered, ‘keep it simple. Do you know why you exist? What are you here for? Many businesses have lost this clarity of purpose. It was alarming what we found at the Co-op. If your frontline are not clear on why you exist, you are in trouble! I recommend that your purpose is communicated in one sentence.’

The MD of a retirement solutions business wanted to understand how the NED’s should respond to a whistle blower? Richard replied, when this happens it usually indicates the NED’s are not talking to the right people. When problems occur with a business the first people to know are the suppliers, customers – the last are the NED’s! It’s important that the NED’s get out of the Boardroom!

The chairman of the Risk Committee of a challenger bank asked, ‘today’s society’s swept with ‘affluenza’. Young people in particular seem to live in a bubble. Do they possess the necessary values?’

‘Business needs to get involved earlier in youngsters lives. We need to play a greater role in education, by chairing school boards, sponsoring academies, and providing experience days. In the work place, engagement can be achieved by creating a youth board, reverse mentoring, or inviting youngsters to shadow board members.

Get younger employees into the board room to listen to the debate, showing that the Board is no longer a scary place.’

Richard brought the discussion to a conclusion by making three general statements.

‘Good corporate governance requires the Board to move as close to all the stakeholders as possible, so they understand the reality, the actual business.’

‘Understand the needs of the millennials and understand the Regulatory Standards but aim much higher, day to day.’

‘Raise everyone’s game and re-engaging with all stakeholders will make for a much healthier society.’