In the third of three op-eds, Chow examines best practice in development of an open business culture

In a recent paper – Institutional Investors: The Next Frontier in Corporate Governance - Benjamin Heineman and Stephen Davis raise several thought-provoking questions about the role of institutional investors in improving corporate governance at investee companies, even while acknowledging the tremendous potential role that such investors can play in shaping investee governance.

Given the variety of what constitutes “institutional investors” (ranging from public pension funds to hedge funds), and the many unknowns about their investment theses and behaviour, the authors pose one central question that is particularly relevant to this discussion. They ask: “...can institutional investors become more effective ‘stewards’ of publicly held investee corporations, and how does that ‘stewardship’ role differ from the role of boards of directors to oversee the direction of companies?”

Heineman and Davis point out: “This issue arises in part from the criticism that institutional investors were passive in the face of problems which caused the credit crisis and the financial meltdown.” This is intriguing as boards of directors have been criticised from time to time as well for their passivity (see for example this article on the Worldcom board’s passivity).

They elaborate on the issue, noting: “...given the complexity of many corporate decisions – and difficulties directors themselves have in overseeing multi-factorial business tradeoffs – what is realistic in terms of time, effort and contribution in the relationship both from the ‘stewards’ and from boards/management? Do the investor ‘stewards’ relate to boards, to management, or to both — and at what level of detail and on what kind of decisions?”

In conclusion, the authors argue that more institutional and academic research needs to be devoted to the questions that they raise before the faith that governments have placed in the role of institutional investors in improving investee governance can be justified.

Followership-orientated culture

A promising direction of research that could help to resolve at least some of the questions raised by the authors would be how the model of a followership-oriented open corporate culture can be further refined and how best practices for evaluating and fostering the openness of such culture can be developed.

Employees should become more motivated in an open culture to voice their values-driven concerns regarding problematic business practices. An open culture, then, could help to counteract any occasional lapse into passivity at the board level or on the part of institutional investors.

Moreover, institutional investors’ support for an open corporate culture could help manage the need for such investors to engage the board or management on the substance of complex corporate decisions (to Heineman and Davis’s last point quoted above) due to potentially higher levels of engagement in the organizations’ goals and risk-management by the employees as a result of such open culture.

In short, Heineman and Davis’s paper, when viewed in light of the potential contributions of the open culture model, suggests an opportunity for institutional investors to introduce a more constructive balance among the interests of employees, senior management, the board and shareholders.

Institutional investors can collaborate on such research on open cultures. Collaboration among institutional investors on common goals is endorsed by the UN Principles for Responsible Investment. The organisation says that it “supports investors in working together to address systemic problems that, if remedied, may then lead to more stable, accountable and profitable market conditions overall”. Similarly, the UK’s Stewardship Code also supports collaboration among institutional investors.

Best practices

Whether in connection with a collaborative effort on the part of a group of institutional investors or an exercise in thought leadership by an institutional investor, the following may be a sampling of useful starting points for researching or compiling best practices for the open culture model.

  • The investee company’s code of conduct for its officers and employees, or equivalent document, should include a provision that empowers officers and employees to raise values- or ethics-driven issues or concerns in good faith with peers or superiors alike. Such a document should also make clear that there will be zero tolerance for any retaliation for such communication. These types of provisions are rarely effective in and of themselves in ensuring an open culture, but do demonstrate a certain level of commitment to such culture by the company.
  • Given that an employee’s trust in his/her employer is largely a function of his/her relationship with his/her immediate superior, performance evaluation of a manager should include feedback from his/her direct reports as  to how much (s)he encourages open debate about ethics and reputational risk issues when warranted and how effectively (s)he addresses such issues when raised by his/her reports. As Barbara  Kellerman states in her book Followership: “I would not underestimate the power of the 360-degree evaluation [as a means for followers to exert impact on their leaders].”
  • Periodic training of management personnel as to how to model an open culture should be required. Such training can build on existing research on how leaders can encourage feedback from followers, but can also be informed by the continuing work on followership in terms of the proper dynamic between leaders and followers.
  • Periodic training of employees as to followership skills should be provided.

Two noteworthy contributors to skill-building in this field are Ira Chaleff and Mary Gentile (although this is by no means an exhaustive list). Through his book The Courageous Follower and other works, Chaleff helps to conceptualise the proper models of followership behaviour and sources of followers’ influence over leaders, as well as learn tactical skills of raising concerns effectively within various organisational contexts.

Gentile, author of the book, Giving Voice to Values, focuses on what to do once a values conflict arises in the workplace. Her orientation is to coach interpersonal and communication skills, and ways of framing questions, which enable followers to become more effective at, and thereby more predisposed to, raising values-driven concerns. These skills also include tactics that help to manage the downside of voicing such concerns, such as framing a concern in terms of objectives that the listener should also find important.

  • An employee’s performance evaluation should include an assessment of the degree of his/her initiative in voicing, in good faith, ethics and reputational risk types of issues where warranted, and decisions about his/her compensation and/or promotion should reflect such performance. 
  • Effective means of measuring progress on openness of the culture (or lack thereof) and reporting thereon should be developed. For example, periodic surveys could be conducted to probe employee perceptions of openness of the culture and where the company falls short in that regard. 

In terms of content, such surveys could build on existing surveys on employees’ perception of how their company is doing on diversity/inclusiveness since diversity/inclusiveness falls on the same spectrum as open culture. Reports of results of such surveys should be made public, along the same lines as reports on corporate responsibility or diversity/inclusiveness, or at a minimum provided to the board of directors.

Companies may differ as to their needs or capabilities in respect of creating an open culture. For example, certain internal information barriers to safeguard confidential information may be required in some cases.

Therefore any final set of best practices presented to investee companies may need to distinguish between general principles or requirements that are broadly applicable, on the one hand, and specific practices that an investee company may either adopt (with suggested modifications where appropriate) or decline, on the other.

However, the reason(s) for the suggested modifications or declining must be explained so that the institutional investors can have a basis for deciding the extent to which they should engage in further discussions with the investee company.

An under-utilised approach

Instilling an open corporate culture under the model advanced here remains a potentially powerful and yet under-utilised approach to sound corporate governance. However, with the support of institutional investors, it may yet fulfil its promise as a useful risk management tool as well as an effective means to engage employees in their organisation’s mission.

Moreover, such support for employees as important stakeholders may aid public perception of institutional investors as responsible stewards of investee companies, especially since many such investors, including pension funds and most if not all mutual fund companies, manage funds belonging to vast populations of employees.

Finally, companies can distinguish themselves in the eyes of investors as well as employees through the degree of commitment and sophistication that they demonstrate in fostering genuinely open cultures.

Wilfred Chow is a US-based lawyer and corporate governance researcher and writer. He previously served as a managing director and associate general counsel at a leading financial services firm in the US.



Related Reads

comments powered by Disqus