Investment in culture boosting financial performance of FTSE 350
9 June 2016
Culture is fundamental to the business performance of UK PLCs with over half (55%) of FTSE 350 companies surveyed stating that that investing in culture has increased their operating profits by 10% or more. Yet the majority of boards still need to take greater responsibility for defining, shaping and monitoring culture in their organisation, according to a new report released today by EY.
Based on a survey of 100 board members from FTSE 350 companies, the EY report says that a strong cohesive culture helps organisations to deliver long term growth and reduce risk, and that this ‘intangible asset’ is increasingly part of how businesses are valued by investors. 86% of survey respondents said that culture was fundamental or very important to their company’s overall performance and strategy and 92% said that investing in culture had improved their financial performance.
Benefits of investing in culture extend beyond the bottom line
The amount invested in culture varied depending on the size and complexity of the organisation. While 27% of respondents said they had invested over £1m in culture, this rose to 48% among FTSE 100 companies, compared to just 6% among FTSE 250 companies. The most common response - cited by 35% overall and by 56% of FTSE 250 companies - is between £100,000 and £500,000.
In terms of outcomes, 61% of respondents said they has seen a reduction in breaches of organisational standards and 61% saw improved employee performance as a result of their investments.
Kevin Hills, EY’s Head of Integrity and Compliance in the UK comments: “A 10% or more increase in operating profits is the kind of improvement that makes shareholders and potential investors sit up and take notice. However the rewards often extend far beyond the bottom line.
“Many of the businesses we spoke to didn’t fully anticipate the range of additional benefits that they accrued from their investments in culture. Some of these were unrelated to the issues they set out to manage, but nevertheless had a positive impact on the business. For example, even though respondents did not specify it as a driver, 32% cited fewer regulatory issues or legal actions as one of the top three benefits of their investments.
“The lessons are clear: culture generates value for organisations willing to invest in it, encompassing both improved performance and reduced risk. You may not always get what you expect, but that’s not necessarily a bad thing.”
Boards need to take greater responsibility for oversight and monitoring
Despite its importance, only 19% of survey respondents felt that primary accountability for culture sat with the board. While over two-thirds (68%) of respondents said that they actively and regularly try to promote and control culture at board level, 51% think the board should take more responsibility for shaping and measuring culture and 47% say there is little or partial consensus at board level on what company culture should be.
Kevin continued: “There will always be multiple sub-cultures within any one organisation, each of which influences how employees make decisions. However it is the board’s responsibility to set the tone from the top and to have oversight, accountability and responsibility for monitoring.
“History has shown time and time again the corrosive impact that pockets of ‘bad’ culture can have on a business. But where people are aligned around the organisation’s purpose and values, they are more likely to make the right choices when faced with a difficult decision, even if it may not always be the easy thing to do as targets may be missed.”
According to the report, 98% of the FTSE 350 survey respondents said culture is a focus for their stakeholders including regulators and shareholders. Furthermore, over 83% said they believe that shareholders factor organisational culture into their investment decisions, clearly demonstrating the links between culture, company value and attractiveness to investors. However despite this, only 12% of respondents provided a detailed overview of their culture and how it is managed in their public filings or annual reports. Most (84%) only mention it in brief, while 4% don’t mention it at all.
Hywel Ball, EY’s Managing Partner of Assurance, UK & Ireland, concludes: “Shareholders, regulators and investors are hungry for new and greater insights on a much wider range of non-financial matters, such as corporate culture. But, despite being fundamental to a company’s performance, the risks it faces and how the business is valued, culture is largely absent from most corporate reporting.
“Companies that seek to close this expectation gap are likely to be at an advantage when it comes to attracting investment. And since shareholders and investors may be seeking proxy information on organisations’ cultures from other sources, they also likely to regain some control over how their company is perceived.”