Why culture reporting's importance is on the rise

Regulatory requirements place plenty of demands on company reporting, especially for listed companies. But no matter the type of organisation, it is becoming increasingly important to report not just on the hard data of revenue and expenses but also on less tangible items such as organisational culture. Culture in this instance can be defined as the environment created for employees and customers through values, traditions, and interactions.

Stakeholders are continuing to seek information that goes beyond the balance sheet or performance in the capital markets. An EY report from 2019, Does Corporate Reporting Need a Culture Shock?, says of the changing demands on corporate reporting: "Today, there is a significant reporting disconnect that requires closing."

The report found that more than three-quarters of finance leaders surveyed said that investors increasingly want more insight into company culture, but only 37% of large organisations, defined as companies with annual revenue of $10 billion or more, report quantifiable key performance indicators (KPIs) in this area.

A much greater percentage of large organisations, according to EY, report on environmental and corporate social responsibility (59%) and purpose and vision (63%).

Regulators, investors, and others are demanding more of such culture information. Some examples:

• The UK Financial Reporting Council earlier this year released guidance for companies on reporting of workforce metrics that include culture. Included in this is "how the desired culture is being driven from the top", according to the regulator's January report. Such measurements include employee engagement, retention and turnover, and other measures that might vary among companies.
• State Street Global Advisors' 2019 proxy letter urged boards to get serious about articulating their companies' culture and about monitoring it. "[F]lawed corporate culture has resulted in high-profile cases of excessive risk-taking or unethical behaviours that negatively impact long-term performance," State Street's letter said.

When one of the world's largest asset managers says culture matters, companies are bound to listen — and not just the ones that suddenly need to repair their image because of a reputational hit.

Organisations should present tangible evidence that they have a culture worth emulating — or at least are taking steps to fix a culture that has been dented by any number of negative events. This helps them stay relevant and appealing to future employees, maintain the engagement of the current workforce, and remain trusted and valuable in the eyes of customers, investors, and other stakeholders.

Proactive organisations have already seen the value of sharing culture-related information with their workforce and the public.

A way to track progress

Unilever is one of the earliest proponents of corporate culture as something that mattered for employees. Related to its workforce, the company's 2019 annual report shares goals for diversity of management, hiring workers with disabilities, and more. Ideas for supporting Unilever's stated goals to be "purpose-led and future-fit" came from employees in 80 countries, and 17,000 employees voted on the ideas that should be implemented.

The company goes beyond simple engagement numbers, such as the percentage of employees who respond to its annual internal survey, UniVoice. While the company reported receiving higher engagement scores on several fronts, half of employees said in the annual survey that Unilever's competitors are faster in responding to market changes. It also shared that one-third of employees were doubtful anything would change in the company as a result of their survey feedback.

"Our employee surveys tell us that Unilever people tend to have a sense of personal purpose and believe they can live their purpose at work — helping them to go the extra mile," the annual report said. "While most employees think we have the right strategy in place to win, they also want to see faster action and decision-making across the business. Our people would also like a continued push towards diversity, particularly at the most senior levels."

Culture: A talent magnet

Regency Centers, a US real estate investment trust that owns more than 400 shopping centres, is one company that has improved its reporting on culture over the years. Regency has published corporate responsibility reports for the past two years, documents that detail the company's approach to talent management, including listing goals for employee engagement and training hours.

For example, the company wants to maintain a goal of employees receiving 22 hours of training each year. In 2018, employees had more than 24 hours of training on average. Regency's report also highlights regional and national recognition for its employee engagement. And the report lists goals and actual results for employee turnover, the gender makeup of its workforce and board, and other information.

The company allows employees up to 52 hours of annual paid time to do volunteer work, for instance. Younger generations have said that working for companies that "make a difference" is something that matters to them. Giving time for employees to devote to a cause they care about certainly qualifies.

Regency's leadership is aware of the critical nature of strong culture.

"Regency's unique culture attracts, retains, and engages talented people," its 2018 corporate responsibility report said. Regency monitors employee engagement annually through a formal survey and other methods.

Potential employees look fondly on companies that have demonstrated a fair and ethical approach to business, said Izabela Probert, ACMA, CGMA, the programme manager of UK consulting firm Viimi Ltd. Such organisations attract a wider pool of candidates, and when more candidates want to be associated with the organisation, "you get the pick of the crop", she said. "Those people are positively motivated to spread the message because they believe in the company, and that's why they want to be part of it."

Standing out in information sharing

Organisations can measure and communicate culture in numerous ways. One metric shared on an annual basis by military technology, weapons, and aerospace company Northrop Grumman is the diversity of its executives. The company's 2018 corporate responsibility report, released in 2019, said that the number of women in executive roles increased from 16% to 33% and that the representation of people of colour grew from 11% to 18% in one year.

Northrop Grumman's corporate responsibility page conveys information on diversity, carbon emissions, and numerous other topics, but it's clear the page itself is designed to catch the eye of future workers. At the top of the page is a colour photo of smiling, parka-clad people in a polar setting and the words "employee volunteerism". Before getting to report data at the bottom of the page, visitors can learn more about Northrop Grumman's culture: employee engagement, corporate citizenship, and environmental sustainability, including the company's 2020 goals in that area. Then comes a section for report links, then mention of diversity initiatives, military veterans' programmes, and ethics and values.

Information in corporate responsibility reports can keep the current workforce aware and engaged. Organisations that communicate about financial performance and nonfinancial initiatives can have an edge on competitors with less structured communication, according to Probert. Also, companies can build a strong culture by having a clear picture in the recruiting process of what makes an ideal employee. "For organisations to make culture an asset, they need to involve employees at all levels," she said. "They want to make sure they recruit the right people, into the right positions, with the right mindset. I think that's where it kicks off."

Probert, who has worked with numerous global companies, including Adidas and Lloyds Banking Group, said she can tell plenty about an organisation's culture as soon as she walks into its office. "Surroundings really matter," she said, adding that an office with the latest equipment and features such as natural light help make employees feel more involved. "They don't mind being at work because their surroundings are promoting a positive aspect of their day," she said.

Culture is about more than appearances, of course. A company that emphasises transparency and continuous internal reinforcement is exhibiting strong culture, Probert said. Organisations should keep working to build their reputations and model behaviours that support the culture they want to promote.

What info to give, and where to get it

To give stakeholders the culture insight they are looking for, organisations should focus first on shifting the culture of finance itself so that the function better supports transparency, and then focus on turning the increasing volumes of data at organisations' disposal into trusted culture reporting. EY cited three strategies executives can adopt to help their companies better report on culture:

• Identify the behaviours, values, and beliefs that make up a culture. This is not always easy, as it can vary by company. "They'd all have a slightly different variation of what they think culture is," Probert said. "Whatever they promote is going to be based on their own understanding of culture."
• Understand what elements of culture you should be measuring. For several reasons, this can be difficult to pare down from the list in the point above. A wish list of ideal behaviours or programmes might not be feasible for measurement, depending on where an organisation stands in its implementation journey. "There's so many aspects to it," Probert said. "It's quite a long list if you start thinking about it."
• Understand how these factors — such as behaviours — affect business performance and the quantifiable measures that will be used to assess and report on performance. For example, a company with higher employee engagement should also have a lower rate of employee departures, meaning the company will spend less on hiring.

Investors and others with an eye on companies today clearly are looking at more than quarterly financial results. Companies that understand this are putting culture specifics front and centre, on their website, in their public reports, and elsewhere. The words of a Latin American financial services company CFO show how that focus has changed.

Ricardo Jaramillo, CFO of Grupo SURA in Colombia, said in the EY report that questions about financial performance are now secondary.

"When I travel around the world with the investor relations team, I increasingly find that the initial conversations are about culture," Jaramillo said. "I was surprised at first because we would normally be used to questions around areas such as financial performance. Instead, people were asking about our motivations and how long we have been with the company. At the beginning, this felt strange, but we now understand that these stakeholders believe that people, at the end of the day, are driving the results. So, if you have good people and they are committed, that is good for the long run. That's definitely a trend that we're seeing with investors."

Neil Amato is an FM magazine senior editor. To comment on this article or to suggest an idea for another article, contact him at Neil.Amato@aicpa-cima.com.