CEOs must drive cultural change to tackle the Great Resignation

It is clear the pandemic has dramatically transformed the way employees now view the workplace and employers must adapt to the new normal, ensuring mental wellbeing, flexibility and fair pay are at the forefront of their approach.

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At the same time, the battle for talent has intensified, with companies across sectors seeking employees with similar skills as the world becomes increasingly digital. Company culture and employee engagement have never been more critical to attract and retain the very best in human capital.

Are companies walking the talk?

With very few exceptions, all the companies we speak to state that their people are their most valuable asset; yet many fail to retain or get the best out them.

Presenteeism and absenteeism collectively cost companies billions a year (more than £50bn in the UK alone in 2020-2021) as dissatisfaction with inflexible employers, poor cultures and burnout continue to prompt workers to quit in droves.

Today’s employees and prospective employees want to work for companies with responsible business practices and a culture that engages and enables. And that, in turn, creates productive workforces: companies cited as being great places to work typically outperform the broader market by 2.3% – 3.8% on average pa. It is no coincidence to us that our some of our best performing portfolio holdings such as Kainos, the UK-based IT company, and Bytes, one of the UK’s leading providers of software and cloud services, have strong employee-first cultures.

Whose responsibility is culture anyway?

As sustainable investors, we love to hear a CEO being passionate about culture. We know one who carries a ring binder with employee surveys in it – he calls it ‘his bible’. Often, though, we will meet a CEO and they will delegate employee or wider ESG questions to the head of sustainability. That is a concern because it raises doubts about the commitment of the business to embedding the right culture.

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Other conversations can be even more revealing. The CEO of one company recently admitted to us he was having to hike salaries and benefits dramatically to retain staff. To our minds, this was an admission that a poor culture had been allowed to develop, and he was trying to compensate through remuneration. Bytes, on the other hand, is an accredited Living Wage employer that is clearly a great place to work: more than 12% of people have been there more than 10 years, with women accounting for 43% of the workforce, well above the industry average of 25%.

Making it happen

If CEO buy-in is essential to fostering a healthy culture, then companies, particularly large organisations, need the right frameworks in place to drive change and maintain good practices.

Employee networks are valuable because employees are the ones who spot issues and are thus best placed to offer suggestions on how to fix them.

ESG committees are also a good sign of companies doing the right thing, particularly when the CEO sits on them and offers leadership. Alternatively, we like to see a board member engage with the ESG committee and provide that vital link to the C-Suite.

The best companies go much further. Kainos, for instance, recently set up a Global Diversity and Inclusion Council to drive the delivery of its D&I programme. Sponsored by the chief people officer, it comprises colleagues at various levels from across the entire business. The D&I Council receives support from several employee network groups (encompassing LGBTQ+, gender and ethnic diversity), each of which is sponsored by a member of the executive team to ensure representation at all senior decision-making forums.

Companies like Kainos offer the gold standard (its employees have voted it into the Top 100 in the Sunday Times ‘Best Companies to Work For’ survey), but more flexibility can be afforded to smaller companies where resources are scarcer. Information can flow better in smaller organisations and formal frameworks are less necessary.

Do your homework

Nuances around company size are partly why investors should not make judgements based on ESG data scores. Companies in the small- and mid-cap space often have little awareness of the necessary disclosures, which means their annual reports – the basis of most ESG scores – will lack the information that will improve their standing with the rating agencies.

To us, this information is not necessarily that useful in any case because it is backward-looking – it will not tell you where that company is going to be in five years’ time. Nor will it capture, for instance, the fact a new CEO may have joined with clear ideas about cultural progression.

Ultimately, the determination to improve is the critical factor. Companies with antiquated practices may not only suffer high staff turnover, they could find themselves with compromised supply chains with links to firms with poor working conditions or environmental problems.

Nigel Yates is a portfolio manager at AXA Investment Managers