Peter van Veen: Hello and welcome to the second of two specialised ICAEW Insights In Focus podcasts exploring the role boards can play in solving difficult dilemmas where there is no clear right answer. I’m Peter van Veen, Director of Corporate Governance and Stewardship at the Institute, and I have with me a great panel to explore a fictional scenario that will bring a dilemma to life. I have Sandy Pepper, Emeritus Professor of Management Practice at the London School of Economics and Political Science, Janet Williamson, Senior Policy Officer for Corporate Governance and Capital Markets at Trades Union Congress, and Leo Martin, Director and Co-founder at GoodCorporation Limited. Welcome.
So, last time we looked at staffing challenges in an organisation that is growing fast. Today, we’re exploring issues around staff retention and well-being in a cost-of-living crisis in our fictitious food and drink manufacturer Zingers. So, let’s start with some news.
Voiceover 1: One of the region’s biggest employers, the food and drink manufacturer Zingers, is rumoured to be looking at a merger with one of its rivals. Zingers, which has a turnover of more than £500m, employs 700 people across three sites in mainly manual jobs. The company is widely seen as too small to take on the major international players and investors have been calling for some sort of strategic alliance. The company wouldn’t comment but the union that represents the majority of workers says Zingers has always been a vital source of first jobs for school leavers in the region, and any deal needed to make sure that didn’t change. Shares in the company rose 2% yesterday.
PvV: And it turns out that those merger plans are quite well advanced. Here’s a board update from the CFO.
Voiceover 2: As discussed at July’s board meeting the executive team feels now is the right time to explore M&A opportunities. Becoming more of an international presence is the obvious next move for the company and can only happen if we join forces with a complementary rival. At the same time, the next few years are clearly going to be a challenge for everyone, with the economic circumstances meaning we can expect lower demand, significant input price inflation and higher interest rates. Joining forces with someone of a similar size to us will both increase our purchasing power and create opportunities for cost saving, making us stronger precisely at a time when our rivals are likely to be getting weaker. We spent the last two months selecting and hiring financial and legal advisors and have now drawn up a shortlist of three potential targets. We’re in a strong position to start approaching them, and as long as we maintain our current focus within the business, we are confident of success. This is going to be a crucial time for the business and we need to be putting our best foot forward both internally and publicly.
PvV: But putting their best foot forward may not be possible when it comes to employee churn. Let’s have a listen to an email from the HR director to the chief executive outlining this problem.
Voiceover 3: John, I said when we spoke briefly yesterday that I was becoming increasingly concerned about our staff turnover levels, and I thought I should put the basics down on paper. As you know, we’ve always been a significant hirer of school leavers into our traineeship programme, and there has traditionally been a dropout rate of about 10%. Some of this is due to a lack of suitability, but a bigger part has always been our trainees finding higher-paid jobs elsewhere. In the last six months, as labour markets have tightened and other employers locally have been able to offer better salaries than us, that dropout rate has more than doubled. At the same time, we’re losing more experienced colleagues at a faster rate for the same reason. I should point out that this issue is by no means confined to us. As a sector that has always been characterised by low margins and low wages, we’re particularly vulnerable to labour market pressure, especially at a time when the cost-of-living crisis is making life hard for a lot of our people. I’m afraid I don’t have any easy answers to this. Whatever we do, it will need the support of the union. I’ve already talked to our reps about the potential for flexibility in our employment terms and possible changes to the traineeship contract, but for understandable reasons, their prime concern is protecting and enhancing current pay and conditions.
PvV: But there’s another issue, this time involving how staff are behaving at and after work. This is a memo from the warehouse manager to the production director.
Voiceover 4: Bill, I wanted to draw your attention to a recent increase in the amount of stock going missing from the warehouse. While pilfering has always been a minor problem for us, we’ve always been able to manage it. But the problem has been getting worse in the last few months, and I think it is related to a new phenomenon I’ve noticed. Since the weather turned cold at the beginning of the month, significant numbers of staff have stayed behind the end of their shift and spent time, sometimes hours, in the staff break rooms. I think people are saving money by not going home and turning their heating and lighting on. The cost-of-living crisis is impacting everybody, but particularly our more junior and lower-paid workers, and I’m reluctant to ask them to leave at the end of their shift, given why they are staying. The increased level of pilfering from the warehouse is a different matter, and something I need your advice on.
PvV: So, I think I’m going to start asking you, Sandy, about the strategy. This company has to merge and move a step up in things. Given the current situation, given all the other context, how wise a strategy is that in the current economic climate?
Sandy Pepper: Well, it sounds as if it’s a survival strategy. This is a company that is kind of somewhere in the middle, and that’s not a comfortable place to be. And by all accounts facing a few difficulties, and in those circumstances, a merger with another company in a similar kind of situation might well be key to the company’s long-term survival.
PvV: And Janet, clearly, there are some challenges here. It’s a significant employer in the region and it’s training lots of young people crucial skills. This is a recipe for a real problem for the local area if this churn continues, surely?
Janet Williamson: I think the company needs to look at its whole workforce management or HR strategy in the round, because it doesn’t seem to be working very well. Clearly, the company does play a really vital role in recruiting school leavers and training them, but large numbers are leaving, and people are leaving higher up the company as well. It seems to me very clear that the company needs to find a way of increasing pay for its staff, perhaps particularly to the lower-paid staff, and it needs to do more, I think, to help its workforce cope with the cost-of-living crisis. I think raising pay has to be part of that mix, but there’s probably other things it can do as well, in terms of advice. It’s a food company, perhaps there’s more it can do in terms of giving staff some free food. At the moment, it’s kind of wasting money recruiting people, training people who then leave, so some of that money would be recouped by better remuneration and management practices. And maybe they also need to look at other sources of increasing pay. Perhaps looking at redistribution from top to bottom, you know, are the directors getting bonuses which could be redistributed elsewhere? They were obviously already talking to the union. They need to go back to the union and have more discussions, deeper discussions, including putting on the table what is happening – the pilfering, people staying late. Engage with the union about what they think they should do to address those problems. And of course, the union would then be talking to the workers as well.
PvV: And Leo, I guess pilfering is never good, if stock goes missing and there’s pilfering. Could this lead to more significant structural, ethical, cultural issues in your organisation if it’s left unchecked?
Leo Martin: Absolutely. Obviously, what you see is where you have one set of ethics go wrong – and theft of stock is obviously an ethics type issue – of course it can lead to other types of behaviours, or it’s giving some soft signal to people that other types of misbehaviour are acceptable or will be tolerated, or we won’t be able to crack down on them. But we have to look at it in the round as Janet was saying, you have to think about what is being pilfered. And if it is basic food items, then we got to think about the cost-of-living crisis and what people are actually stealing and why, and think about wages and working hours and so on and try and look at it in the round. But obviously, from an ethics point of view, you’re trying to think about trying to establish a culture where people are encouraged and empowered to do the right thing. And you don’t want to encourage a culture where pilfering is part of the culture because any sort of petty theft can lead to a change in attitudes towards more serious wrongdoing.
PvV: But there’s clearly a real challenge, right, because, Janet, you mentioned raising pay and that could also mean raising prices of the goods that you’re selling, which may be in the cost-of-living situation quite hard to do if it’s essential food items that people are struggling to afford already. On the other hand, there is clearly also a labour shortage. And clearly these staff have got other jobs they can go to that are paying, one assumes, a better salary. So how do you get out of this circular dichotomy where you don’t want to raise prices to the end consumer, because there’s a cost-of-living crisis. On the other hand, you’re losing staff. So you have to do something,
JW: I think if they have a really honest and open conversation with staff about the challenges that they’re facing, and also are very open to the challenges that their staff are facing, they might be able to come up with some ways of doing things that will actually save money and be more efficient for the company. I think, also, if the company is basically showing understanding towards the fact that the staff clearly do need a wage rise, that will also improve morale and motivation. The turnover, at least, ought to be reduced to some extent. It does an awful lot of good to ask people what they think can be done better, often lots of very good ideas come up, and they may be halfway there, then, to bridging the gap. And that would hopefully not have to all go on to higher prices.
PvV: And are there any non-financial ways to make a place a more attractive place to work? Leo, maybe you’ve got some thoughts on that.
LM: Of course, there are. But I think also you find in Zingers, perhaps you’ve got a cultural challenge. You’ve got lots of young people who are coming through and dropping out of your training. And that would make me think, OK, something’s not quite right. It’s quite legitimate to say, in that sort of environment, we’ve got a great opportunity here to get young people and help them to get their first set of skills and get on to the next bit of the career ladder, which might not be at Zingers, but let’s get that culture of, we can help you to develop some skills and perhaps move on to something better within Zingers or somewhere else. And trying to create a culture where people have that sense of opportunity and progression, maybe starting off with very basic, low-skilled people or people who are coming out of leaving school at 18 or whatever, and trying to help them using Zingers as a starting point can create a culture, I think, that might be a place where you can actually tell people, they can stay there longer. And if they don’t, that’s fine, they’re going to get skills to move on. And that might be a good part of retention. The fact people drop out of a training course sounds like a worry in itself.
SP: That’s the first place I would be looking here. A training scheme where people leave part of the way through is clearly not a very effective training scheme. And there’s ways of accrediting training schemes that can be relatively cheap to implement, but can add hugely to the value that the employee gets out of it. So that’s definitely a good place to start.
JW: I would say a lot of school leavers’ training schemes, apprenticeships and so on, a lot of them are incredibly badly paid. And low pay is quite a big reason for people dropping out. So yes, obviously, it needs to be looked into, and so on and so forth. It may be the quality of the training scheme, but it also may be that people can’t afford to stay on the training scheme.
SP: Yeah, I do recognise that. This is a classic dilemma isn’t it? The tradeoff between keeping costs down and paying people on appropriate wage. And I personally do think the company needs to think about what its position is there. There’s a very legitimate argument, a business ethics argument, that says everyone has the right to an income that is sufficient to lead a dignified life. And the company has to decide whether that’s part of its policy, or whether it’s going to leave that responsibility to government and society as a whole, and solely look at the hard economics of it.
LM: And also working out a part of that story as well, which we haven’t touched on, zero-hours contracts. Maybe Zinger isn’t in that retail world, but trying to make sure that people are actually able to get a guaranteed amount of work so they know what their wage is going to be, so they can actually plan their budgets and so on, I think is really important, and not leaving people in precarious position where they don’t know what they’re going to be earning. But maybe that’s obvious. And there’s also lots of other bits of culture that you can think about, which the training bit speaks to, about trying to think about non-financial reward for people, and trying to create an environment that people to run to on a Monday morning rather than going, ‘Oh, no, another day at work’. And there’s obviously loads of stuff out there about good non-financial rewards for people. Maybe in this environment that’s a particularly important part of that.
SP: Can we just talk about the acquisition thing here though, because pay in mergers and acquisitions is one of the most sensitive issues, I think. When you bring two organisations together, if they have different pay profiles, different pay systems, that can create all sorts of tensions within the organisation, and can also have quite significant cost implications. So, I would have thought, if they’re serious about some kind of a merger here, the HR leader for the company ought to be exploring with possible partners how they deal with these sorts of issues, and see whether anybody’s got any good ideas that might help the situation?
PvV: You would certainly want to benchmark pay. You would certainly want to get a picture of are you paying less than the average in the industry? And surely the union should help be able to give some perspective, whether they believe that you’re under paying staff or not? I assume?
JW: Yeah, I’m sure they can. But there are also some sectors where pay is simply too low, across the whole sector, and just about all the people working in that sector are struggling. So, in that scenario, you don’t really want to be paying the sector average, you want to be paying above it, in order to retain staff, and in order that your staff can actually afford to live. Otherwise, you’re running an organisation which is effectively dependent on the government for their staff to have sustainable incomes, and you’re going to be continuing to have high staff turnover going forward as well.
LM: Janet, you picked up earlier on, if part of the problem is actually our budgets are so low, and we can’t pay any more, that people are stealing because they haven’t got enough food, then obviously thinking as a manufacturer, you might have some really obvious opportunities, with stock that’s going out of date, or whatever, to think of a scheme that helps people. Maybe food baskets within your own company, or something that helps people to get rewarded when they’ve finished their shift or something, which is ‘we’re going to let these lines go as a priority to employees and build that into our thinking about how we reward and look after people’. But we need the facts first, and we need to understand what the pilfering is about what the goods are, and whether that really is a problem for people or not. And even the heating thing, are people staying after work because the heating? Let’s find out, because at the moment it sounds odd that people hang out at work after work, it doesn’t sound like a normal thing for a Zingers-type environment, so to try and understand more about what’s going on would be useful.
PvV: I get Janet’s point. There are industries that certainly pay really low wages, it’s a tough. And some of those industries, because of the products those industries sell, the margins are quite tight, either because the end customer is not willing to pay the proper cost of the product – and I’ve certainly seen it in the food industry with supermarkets, putting a little bit downward pressure on prices – and that then translates to low wages. But look at agriculture as a good example where parts of agriculture relies on migrant labour to pick fruit and veg because they can’t attract local staff to do that ,and local employees, because they aren’t prepared to pay or can’t pay what is required to get those workers onto the ground. But I think the challenge here also is an interesting one, because this particular company isn’t short of cash, it’s sitting on a substantial cash pile, which it’s hoping to utilise for this merger or acquisition. So clearly, it’s a profitable company. This is not a company that is struggling to make ends meet. So, there’s clearly a bit of a disconnect between the strategy and its growth and its financial projections and what it’s paying staff. There’s got to be a bit of a disconnect here, right?
SP: Peter, it’s a well-recognised principle of business strategy thinking that being the lowest-cost producer is not a long-term strategy. Other people will always find ways of imitating you. This is particularly true in this country at the moment with tight labour markets, with the government’s wish to suppress immigration, which is contributing to tight labour markets. So, I think this company needs to think very hard about its business model, and to see what things it can change to allow better pay at the bottom. I’m going to disagree with Janet about the redistribution point. In most companies that never works, there isn’t enough to redistribute to make significant increases possible at shop-floor level. But I do agree that they need to think about the whole structure and the whole model to see what can be done to deal with this situation for the low paid.
PvV: One of the observations here is that clearly its strategy to grow through mergers could actually be a useful move, in that if you increase the economies of scale, and therefore you’re able to reduce the cost of production, there should be more money available to pay staff a higher wage. Or am I being overly simplistic sounding?
SP: No, again, that’s part of typical business strategy thinking. It has implications, economies of scale are reached by maybe reducing the number of people in work in some parts, and the unions may have strong feelings about that. So there are definitely some difficult tradeoffs knocking around here. There’s clearly something going on, there’s some basic economics here. If this company is losing people because they can earn more elsewhere in similar jobs, then there’s something not quite right in their pay policy. But I do think there is a discussion that the board needs to have about its ethical position on pay, and the concept of sufficiency, sufficientarianism, the idea that actually, there’s an ethical obligation that society has to make sure that everybody has the right to lead a dignified life. And I don’t think anybody would seriously argue with that principle. Companies have to decide whether they want to take responsibility for that principle, or leave it to the government to deal with. And I think many companies, if they actually sit down and think about this, will feel that that should be part of their responsibility as well.
LM: There’s also a thought here about the value chain, that thing that it’s sitting in, and it’s all very well to say, OK, let’s try and capture more profit and higher wage rates here. But you’ve got to also be thoughtful, at least from a society point of view, about does that mean that therefore the distributor or the margins are squeezed somewhere else such that you have precarious work or illegal work? You made the point of agriculture earlier Peter, so you’ve got to think about it as from a society point of view about the whole value chain.
SP: Absolutely right. Responsible companies these days don’t just look at the boundaries of their organisation, they look at what’s happening in their supply chain, too. And they take some responsibility for making sure that everybody, all workers in the supply chain are being treated properly.
PvV: And a final question, Sandy you mentioned responsible business practices, and we talked about ethical employers. And Leo in your work with companies about making them more responsible, what are the other things companies need to be thinking about, besides paying proper living wages and thinking about their supply chains? What other things – especially with a view also of the pilfering and some other things happening here – what else should this company be thinking about in terms of being a responsible company and responsible employer?
LM: It’s a huge topic and it gets more and more complex. But obviously, most companies like Zingers you would hope will be moving towards trying to codify a set of values and behaviours they want to see, which we hope would build into their cultural story. And that would then look at all aspects of responsible behaviour, wouldn’t it? It would probably start off with how do we treat our employees, and back to Sandy’s point about dignity of people and wage and fair treatment of employees. But it also might think about data privacy, and it might think about environmental protection, and it might think about fraud, and it might think about its customer proposition and treating customers fairly and all the way round all its stakeholders, as well as its shareholders and trying to make sure that they benefit fairly and reasonably out of its growth strategy. So, what the company should be doing is obviously thinking about all the different stakeholder groups and trying to codify behaviour in some sort of code of conduct, and that should be key to its cultural success.
JW: But not in a top-down way, in an iterative way. Discuss it with the union, discuss it with the workforce, discuss it with its stakeholders. I think that’s how you need to bring about change.
PvV: And on that note, I’d like to finish here. Thank you again, very much for your thoughts on this. And thank you to our panellists, Sandy, Janet and Leo. I’m Peter van Veen, thank you all for listening. If you haven’t heard it already, please do listen to our other podcast on board dilemmas, which focused on culture issues in a growing software firm.