Peter van Veen: Hello and welcome to the first of two special 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 that to life. Sandy Pepper, Emeritus Professor of Management Practice at the London School of Economics and Political Science. And Janet Williamson, Senior Policy Officer for corporate governance and capital markets at Trades Union Congress. So hi, welcome both of you.
Sandy Pepper: Hi, Peter.
Janet Williamson: Hi, nice to be here.
PvV: So let’s look at our scenario, starting with a bit of news.
Voiceover 1: One of West Town’s hottest young companies says it’s put the pandemic behind it and is going on a hiring spree. DataDive, which provides predictive software to companies to help them spot potential business disruptions early, employs 150 people at its headquarters near the university. It says a key improvement to its main product has given it an advantage over its rivals, and led to strong sales growth in the last nine months. It’s now planning to hire an additional 30 people across software development, customer service and sales. DataDive says it’s looking for graduates with a background in technology.
PvV: That all sounds pretty healthy, from the outside – but what’s going on inside the organisation? Here, first of all, is a memo to the board from the chief financial officer about the options for funding the next stage of the company’s growth.
Voiceover 2: I wanted to update you with our current view on the best and most cost-effective way to fund the next stage in our growth. As you know, we’ve been looking at a wide range of potential funding, including our equity sponsors, specialist tech debt providers and our banking partners. Of these, the banks are both the cheapest and least dilutive option, but through Covid and our missed targets as a result, they became reluctant to increase our facilities. This has now changed. The new sales strategy with its increased incentives for the top performers, has played a big part in us exceeding our revenue targets by an average of 15% for each of the last three quarters. And my recent conversations with the banks suggest their willingness to lend at competitive rates has increased significantly.
At the same time, the success of DataDive Advanced 3.0 and the problems at Info Stream, our only serious competitor, have left us with an opportunity to consolidate our market-leading position. informal conversations with our three VC backers have left me confident that we could raise more from them in a much less equity-dilutive way than previously assumed. Confidence is the key here. At the moment, we’re walking tall and Covid has failed to dent our “champions of the world” philosophy and our belief that we can do anything as long as we move fast and focus on the prize. It’s a feeling that is once again communicating itself to our financial partners, and now feels like the right time to capitalise on it.
PvV: That’s a great report. But it isn’t all plain sailing. As with many fast-growing organisations, not everyone is enjoying the ride. Here’s a report from the chief compliance officer about morale and safeguarding.
Voiceover 3: After the last board meeting where the resignation of our top female engineer was discussed, you asked me to prepare a report on the mood and culture of the organisation. I should start by saying that from the beginning back in 2013, our business has been built on a strong competitive attitude with a results-driven focus. And that remains the case today. This is particularly so for the longer-standing members of the team who feel very invested in our success and how we achieved it. They rightly feel it’s their success as well. It’s also worth noting that the recent drive towards a more gender-diverse workforce is paying dividends, with 40% of new recruits in the last five years being women. We’re still a very male-orientated organisation at senior levels, but that is a reflection on how the business was started and will take longer to evolve.
Having said that, success can bring its own problems, and it appears to be doing so here. In the last month I’ve conducted a full staff survey, which has thrown up a number of issues, particularly with more junior staff and female employees. There’s a widespread feeling that potentially inappropriate behaviour is being ignored as long as the business is performing well. This includes things like poor people management, bullying, and inappropriate behaviour towards younger female employees. Perhaps most worrying is a feeling that it isn’t worth reporting this to senior management, because people think it will be ignored. This sense appears to be most acute when it comes to the top tier salespeople, and has perhaps been exacerbated by the new Heroes incentive package. There’s a feeling that they can get away with anything. This is supported by two recent calls to the whistleblower hotline, one about the behaviour of two Hero salespeople at a client entertainment event, and the other about how our top salesman behaved towards a female customer support team lead at an after-work drinks. Finally, the staff survey outlines a lack of trust in the leadership of the company, with senior staff not leading by example. There’s also a sense of a lack of delegation, and the top of the organisation being a clique.
PvV: So we have an interesting dilemma between a company that’s going places, but there are clearly some things which perhaps aren’t going quite so well. So let me ask about the company. What do you make about its trajectory to try to be number one in the market? What’s your observations?
SP: So the way I tend to think about issues like these, Peter, is this. First of all, one of the issues that we have just heard is a classic problem of the sort of trade-off between sales performance and behaviours. And we’re also hearing particularly what these days would be called issues of ethnicity, diversity and inclusions – particularly a diversity problem. And then I think about three questions: what’s the best thing for business, what’s legal or not legal, and what’s ethical and not ethical. And so you can see the dilemma here. What’s coming out of the news is, apparently, a very positive set of messages about the business, the sales performance part of the business, but we’re also hearing some quite worrying issues about behaviours.
PvV: Janet, with your TUC perspective, what is your view on the compliance officer’s report?
JW: I think it’s very alarming. I think the company has a really significant problem in terms of its culture. There’s clearly a problem with the behaviour of male staff towards female staff, and also an alarming gap between the top of the organisation and the bottom. And although it’s very, very difficult to forego the opportunity for investment which has been laid out, the company doesn’t sound to me ready to expand. I feel it needs to really take stock and address the problems it has before it tries to expand, let alone taking on more staff, more sales staff. I think it needs to look at how it’s rewarding people. There’s target-related pay, sales-related pay, which is probably driving those behaviours to some extent – it doesn’t excuse them at all. And I would look at reviewing that, and reviewing the culture from top to bottom.
PvV: Isn’t this a typical kind of entrepreneurial small business growth pain as the big business issue? Or is there something more going on here?
SP: I think if we had been discussing this scenario 20 years ago… Janet may disagree, but we might have looked at it in a slightly different way. We might have been more forgiving of some of the behaviours, given the apparently very good business performance. I don’t think today as a director of a company you can do that, frankly. My three questions – what’s good for business, what’s legal and what’s ethical – very often those three things don’t align. I think in this case there’s quite a strong argument to say that they do align, that some of the behaviours that we have heard may not be legal, and actually the company could be putting itself at significant legal risk by allowing things to continue. So the first thing I would be thinking as a director is, have we got the potential for a list of claims here that could do a great deal of damage. Then there’s issues about what is or is not ethical, and ethics is a broader concept than what’s legal. Things that are illegal are mostly, by definition, not ethical, but some things that are not ethical might be still legal. And I think the Me Too movement and that sort of thing of the last few years… if you look at this company through that kind of lens, you would have lots of concerns about the ethics of the behaviours that are being exhibited. So overall, my sense is that, notwithstanding the CFO’s upbeat report early on, actually as a director of a company I would be very concerned about the situation here.
PvV: So, Janet, in your experience, and having worked with so many different companies over these years, how common is this challenge of a small number of rainmakers who generate so much of the revenue exhibiting this kind of poor behaviour in companies, and really creating these issues that are outlined in this particular scenario?
JW: I think it’s quite common where you have incentive-related pay, and in particular, sales-related pay. It’s very common, for example, in the banking sector. The financial crisis had many, many causes, but sales targets and pay being related to those sales targets certainly has been a contribution, and is actually something that unions have been flagging up for well over 20 years without being listened to very much, unfortunately. So yes, I think it is relatively common, but very urgent that it’s tackled before it becomes absolutely cemented. There are lots of examples of companies falling apart where they have these kinds of tensions. Essentially you’re seeing a real breakdown of communication and values and culture between the different staff within the organisation – some very dangerous fractures. I very much get [the impression] that the company is not unionised, or I think those concerns would have had an outlet to be fed to without going to the whistle-blowing channels. Very fortunate the company did have those channels – that’s good. Clearly, there’s not a very effective workforce voice within the corporate governance of the company.
SP: I want to draw a parallel here. One of my heroes is my uncle Mike Brearley, who used to be the England cricket captain in the late 1970s and early 1980s. He’s an interesting man. He was previously a lecturer in philosophy at Newcastle University, became a professional cricketer, and then when he retired from cricket he became a psychotherapist, so a very wise guy. And he wrote one of the most interesting books about leadership that I think I’ve ever read. He talked about if you have a cricket team where you have a couple of players who are exceptional, they’re fabulous individuals but they exhibit bad behaviour that makes the rest of the team underperform and that other people don’t like – he was very clear, at some point they cross a line and you have to move them on and move them out, in order for the overall good of the performance of the team. So he’s actually saying, if you want your team to perform better, you need to allow some sort of scope for different behaviours, you can’t have everybody who’s the same and average. But there is definitely a line that you have to draw at some point and say, notwithstanding this person’s individual ability, their behaviours are actually damaging the whole, and the whole will not survive and flourish unless that person is moved out.
PvV: It’s a difficult one, isn’t it? Because if you have got a small number of people who are generating a large amount of the revenue of the company, it’s very difficult for management to take that leap and say, it’s time to move on and hope that they’re not going to lose all that revenue.
JW: One of the questions that I think arises is have all of the sales been made honestly, appropriately. If these people are exhibiting such disrespectful behaviour towards their colleagues, are they crossing the line in terms of their sales patter and pitch to customers? Has there been any follow-up with customers? I think there were three quarters of very good results – that’s not very long. How has the software, the technology, performed over a longer time? I think the board would probably need to be reaching out to other stakeholders whose experiences of the company may also have been affected by these “Heroes’”, in inverted commas, behaviours. They may be star performers in an immediate short-term sense, but they may not be star performers in a longer term sense, and they certainly are not, as Sandy’s example shows, if they’re dragging other people out of the company, What is it going to do for the morale of other women staff if the top female engineer has left? That’s sending a very, very negative message. They may be building in long-term problems.
SP: While I can’t disagree with anything Janet just said, there is a genuine dilemma here, because the kind of people that make good salespeople often are the kind of people that want to break rules and push boundaries. If you set your framework so tight, that you discourage the imaginative and the creative from joining your organisation, maybe you create a problem. But as I say, we don’t fundamentally disagree. I think this situation is one where, as a director, I would be very clear, having heard the compliance report. I would be very concerned, and I would be wanting some investigations done to find out what the evidence is, what the real story is behind this.
PvV: I think Janet raises a very important point, right? Because if you tolerate poor ethical behaviour of your key members of your leadership team or key salespeople, it may well mean they’re encouraged to do other unethical practices, and unchecked unethical practices. And your point’s very relevant. One of the things you probably need to look at is the client relationships, look at how those deals came into being. Are there hidden skeletons in the cupboards, where those deals could be unwound, or the revenue picture isn’t actually the way it looks, because they’ve gone for the short-term contracts to get their bonuses and targets, but in the long run those deals may fall apart because they haven’t been set up properly, or because they’ve, God forbid, broken the law by paying bribes or such. I guess the encouraging part here is they have a compliance officer, and hopefully they have sufficient remit to do those kinds of investigations. But it sounds also somewhat troubling that if the senior group is a clique, and is a closed shop, does the compliance officer actually have the remit and the authority to investigate properly? And I think that raises a question which I’d be interested to get your views on, Sandy, which is around that short-term drive to bring in revenues versus the long-term health of the business. Clearly we have a classic case here of really aggressively chasing short-term profits at the cost of the long-term health and even existence of the business, potentially.
SP: Yes, another classic business dilemma, isn’t it? It’s quite easy to say, in a quiet room, when we’re having a conversation, of course you should focus on the long term, not the short term. In the heat of the moment, it often doesn’t seem like that. But it is clearly the case. And there’s lots of examples of companies that have chased short-term revenues, written bad business that has come back to bite them subsequently. Investors are quite wise to this sort of thing. So, much better to build up a track record of slower but consistent growth, I think, than short instances of spectacular growth that investors might look at and wonder how substantial it is.
JW: I completely agree with that. To me, what’s trickier about this dilemma is not that the board needs to act – I feel that’s clear, and we’re very much in agreement on that, I think. It’s exactly how you go about making the change which is necessary, which I think is quite tricky, because it does seem to go right to the top or near the top of the organisation, with the managers being described as a clique. And the gap there between the experiences of ordinary staff, if one could put it that way, and their supposed leaders – those things are not easy to change.
PvV: I guess, besides trying to rebuild trust with employees through various means… some of that is clearly within the remit of the board, and very much the responsibility of the CEO / CFO to rebuild that trust with staff, because clearly, the staff are saying they don’t trust leadership. But the other aspect is how do you move an organisation that’s been focusing on short-term targets and incentivised for short term, to a different method of incentivisation of the sales team to think about long term and to think about that sustainable growth of the business? Surely there is a different way of rewarding that kind of trajectory.
SP: Extraordinarily difficult. I guess it is ultimately a top leadership issue. I know there are companies now that have heads of culture and that sort of thing. And I’ve tried to almost outsource from the top leadership team matters of culture, but I don’t think really you can do that without the top management of the company, from the board down, taking a lead. There are clearly some very specific issues here about gender – that’s very topical at the moment. And again, if I was a board member, I would be quite concerned about that. And I would want the top man— I would want to make sure that the leaders of this business recognised how important it is today, having a culture that is respectful of people of different ethnicity and diversity and so forth. Because you almost can’t afford to do business without that.
JW: I think the workforce needs more power and voice within the organisation. I think there needs to be a way for the workforce to come together collectively, without management there, and discuss the situation they’re in and then be able to feed that up to management through representatives of their own choice, where people can therefore speak with complete freedom, because it’s effectively anonymised by the way it will be fed back. I think then, the board will be able to have a more effective conversation with its staff cohort. I do think they need to look at their remuneration policies, and these concepts of “Heroes”. I take your point that you do need good salespeople, but all organisations are actually dependent on all of their staff. That is one of the most important messages I think a board needs to give, to lead effectively. And it’s very much borne out by long-term successful companies.
PvV: We have an interesting challenge, also, from an external relations point of view. We have a CFO, and her report was very upbeat – going to be number one in the markets. Clearly she has put a lot of effort and time with the organisation into that, has built relations with banks, financial institutions, who are investing in the company based on that very upbeat report. And we’re now about to start tinkering or changing or improving, if you like, the culture. But there’s clearly risks, if we take a step back. There’s clearly a PR or investor relations job to be done as well by the CFO.
SP: I think if the investment community heard the compliance officer’s report, they would be very concerned. Investors these days do not just look at financial numbers, they do look at other metrics as well. And having heard some of the things that the compliance officer said, I think investors would be quite sceptical. So I don’t think this is a “we either do the great financial growth thing or we do the ethical thing” – I think the two are aligned. Now, you talked about a rowing back from the strategy, I’m not sure it’s that necessarily. You could think about this as just making the strategy more substantial, rounding it out, making it more holistic. There’s ways of communicating that to the banks and to the investor community. I genuinely don’t think that this is a sort of either/or situation.
JW: I don’t think there’s any reason to think that the company is suddenly going to start failing because it starts to address these issues, and address behaviours, and perhaps listen more effectively to its workforce. It doesn’t mean that, oh, suddenly, it’s not going to be making any sales at all. It just means it’s pausing, re-evaluating the way it works, and then will be hopefully in a much stronger situation to expand. And the CFO, if she’s not been aware of any of these issues in the company, that’s an issue in itself. The fact that the board had that whole discussion with the CFO, which was very upbeat presumably, and then the compliance officer coming along with a very different report – well, that’s a huge warning bell, It should be, for the board: that these two different perspectives are there and haven’t had very much awareness of each other until this point. Addressing that has to be the priority before the company can go forward effectively.
PvV: So just to wrap up, I think there’s a couple of key concepts here – clearly, that the staff feed back, making sure that staff have a voice, but in a way that there’s no retribution. So that anonymised approach that the staff survey provides, I think, is an extremely powerful tool in this context, because I otherwise, no one would be any the wiser of the impact that this particular construct is having on staff. Clearly the remuneration model needs to be revisited, with perhaps a view as I’ve seen in other industries of profitability of the client over a period of time rather than a pure short-term revenue target. And making sure that the salespeople aren’t being rewarded for just bringing in whatever they can, as quickly as possible and never mind the bodies along the way kind of approach to sales, which is what seems to be what’s happening here. And I’m very suspicious that that model is definitely not going to serve this company in the long term, and perhaps not even in the medium term. It’s growing too quickly, and it’s not thinking through the costs of that speed of growth, which clearly is now manifesting itself in the staff reports and the turnover and people leaving. But I think, the final point is that the culture that’s being set by the leadership has to change. The tone from the top has to change, and whether that means they need to bring in some new blood and some new faces, including women perhaps, to the management team to show that they’re turning a page and are really listening to staff and therefore willing to change… I think unless they’re prepared to do that, I think it’s a very difficult situation to remedy and come back from.
SP: Yeah, good summary.
PvV: So thank you both very much for your insights and being part of this. And thank you all for listening. I look forward to both of you joining us for the second in our series of podcasts, and hopefully our listeners will be joining that one as well. Thank you again.
SP: Thanks, Peter.
JW: Thank you.