A crisis always hides a lesson. In the case of Wells Fargo, we see that once again what gets measured gets done – and Wells Fargo measured the wrong things. Cross-selling was touted as a key driver of company performance. While employees were measured at times hourly, executives were handsomely rewarded on short term financial results.
It was short-termism at its most dangerous. To keep their jobs, many employees did what was expected – even if it was unethical and harmed customers, the industry and, ultimately, the company.
Is Your Company Measuring the Right Things?
How can we learn from this? Many executives across industries have taken a closer look at what their companies measure and incent – and how that affects culture and the bottom line. Those two concepts are not in opposition to each other; as data and research have shown, ethical behavior is also good business.
We’ve found that firms that rank among the World’s Most Ethical Companies outperformed the S&P 500 last year by 3.3 percent. Companies that differentiate themselves by being good global citizens have more engaged and productive employees, an easier time recruiting high quality employees, and more resources to devote to growing their businesses. That translates directly into better business outcomes and higher shareholder returns. As executives seek to build profitable and sustainable organizations, they are taking a fresh look at radical transparency. They recognize that an open, accountable culture that measures the right things can be good for business, people and the planet.
It’s been said before but it bears repeating: Culture eats strategy for breakfast. It’s essential to get culture and measurement right.
1. Understand your Culture
The first step is to establish an accurate baseline for a company’s culture. It can be difficult for a company to evaluate its culture independently. It’s like taking an objective look at your own family. You’re too close, you have too much invested and it’s easy to either be told what you want to hear or overlook what you don’t want to see.
A well-designed and executed third-person survey can get below the surface level of holiday parties and charitable endeavors. Companies must venture beyond what they think their culture is, to how employees actually perceive it – at all levels, and in all locations. Are employees willing to speak up? Do they trust what the company will do when they raise their hand? Are managers good leaders, people to whom an employee looks for guidance on what to do? And when they give that guidance, is it the guidance the company wants them to be giving?
Surveys can also uncover, for example, whether the culture promotes long-termism or short-termism. The good news is, the debate over this concept, first introduced by Peter Drucker, has captured attention at the very top levels of corporate America.
Short-termism vs. Sustainability
Whether a company is focused on the long- or short-term dramatically shapes its culture. Many of the companies that have violated the law or ethics were focused on short-termism to the detriment of all its stakeholders.
In Silicon Valley, the extreme rise of short-termism has led a group of prominent investors and business leaders to develop a new U.S. stock exchange – the Long-Term Stock Exchange (LTSE) - designed to reward long-term business strategies and shareholding.
Culture doesn’t just happen by itself. The data from companies recognized as World’s Most Ethical shows a marked increase in ethical leadership and role modeling for middle managers. Actions do speak louder than words.
2. Choose the Right Metrics
The corporate malfeasance that has played out over the past several decades has made it clear that short term profits cannot be the only measure of success. Each company must determine what really matters and select measurements that support those goals.
Here are some concepts and metrics we feel are leading practices of companies that outperform:
- Invest in front line managers as they are the lifeblood of any business. 90 percent of companies recognized by us are providing significant training for front line managers on ethical decision making and leadership, and how to hire effectively and ethically.
- Encourage Diversity and Inclusion. More diverse companies perform better. A recent Mckinsey report identified a 15 percent outperformance for companies with more gender diversity and a 35 percent outperformance for companies with greater ethnic diversity.
- Invest in the communities in which you operate. Companies we recognize have a far higher level of community and stakeholder support and are seen as winning the talent battle for the best and brightest employees.
3. Commit to Firm Standards, Ongoing Transparency and a “Living” Culture
It’s essential to establish the right corporate ethos and monitor the behavior of employees and leadership. People react to what they see around them; actions drive culture. Incentivize people for the wrong behaviors and bad practices will proliferate.
Encourage employees to come forward and make it easy for them to do so. For example, GE has established an “open reporting environment” as an essential part of its organizational approach. Employees are encouraged to report concerns without fear of retaliation. GE backs up the program with 600 ombudspersons around the globe, and increases transparency around the program by publishing stories and statistics to show its stakeholders that it is working.
Employees are the first and best way to surface integrity concerns and rewarding openness creates a culture of trust and innovation.
“Common Sense Principles” to Drive Accountability, Transparency
The drive for transparency, accountability, and ultimately, the financial health of America’s public corporations and financial markets -- has similarly taken hold in the “common sense corporate governance principles” espoused by many of America’s top corporate leaders, including Warren Buffett, Larry Fink and Jeff Immelt.
Among other principles, the guidelines call for independent and diverse boards, truthful reporting, and meaningful engagement between shareholders, management and other.
Those common sense principles, particularly when it comes to increased communication and openness between boards and employees, and boards and shareholders, have already taken root. More and more companies are varying the location of their board meetings to make them more accessible to employees and key clients, and to expose the board to more of the business and to high-potential employees.
In just three years, from 2013 to 2016, the percentage of WMEC that varied their meetings rose from 70 to 82 percent. Nearly half vary the location at least twice a year.
Ongoing Pursuit of Radical Transparency
Companies and their management need to pursue radical transparency by delving into their organization’s real culture; choosing the right measurements; inspecting how the culture rewards or penalizes behavior; continually monitoring for compliance; and making necessary adjustments. An organization undermined by internal contradictions simply cannot thrive.
Today’s corporate executives have everything to gain by building a unified organization where every aspect of the business is aligned, and it all starts with measuring the right things.
Follow Timothy Erblich on Twitter: www.twitter.com/Ethisphere.