Company ratings don’t stop at credit – they’re also about people and culture

People screw up businesses.

Much is written about the numbers, the financial performance measures are pored over and dissected. But they’re the outcome. The reason the statistics are like that, the fact that the company is deep in the mire, is down to the human beings running it.

Take any corporate failure you like, and it will always be the frailty of a person somewhere in the organisation, frequently at the top, that is to blame. Yet, so little attention is paid to analysing the workforce – how well they’re governed, managed, motivated and developed.

The financials will be studied ad nauseam. What won’t be examined is the human resource. But it’s this that has the ability to bring the whole show down – and so often does.

Late in the day, as bosses worry more and more about reputation, and those three letters ESG are suddenly thrust higher up boardroom agendas, they are waking up to the fact that the culture of the place, and that means its staff, really matters. If their firm is to meet the environmental, social and governance standards increasingly expected of it by investors, and stakeholders, then they must ensure everybody working for it is conducting themselves properly and following sound ethical practices.

Part of the reason why human risk has always been disregarded in favour of say, credit risk, is that the former is much harder to calculate. It’s much easier to apply a rating based on financial criteria than it is to one focusing on something less tangible, like quality of personnel.

Which is why a system devised by the Maturity Institute is so fascinating and growing in demand. Co-founder of the institute is Stuart Woollard. Formerly of Arthur Andersen, he runs the London-based, not-for-profit body’s commercial arm, Organisational Maturity Services. He’s pioneered OM30, a questionnaire comprising 32 questions, used to produce a mark from AAA to D, similar to the grades used by the Standard and Poor’s and Moody’s credit ratings. “Essentially, they analyse the financial strength of a business, we analyse its people,” said Mr Woollard of the ratings agencies.

The first question OM30 asks is, does the organisation have a clearly stated purpose? What’s important here, in the context of ESG, is benefit to society: “does its societal value have clear primacy?”

In 2015, Mr Woollard and his colleagues surveyed the FTSE 100. Of the 100 biggest UK listed companies, 65 responded. Of those, just six had an articulated purpose. Think about it – every company can say it exists to make money, but if it does not define how it sees itself, the business is not offering any distinction or direction. It’s drifting, without purpose, in other words.

So, an airline might say, “we fly planes”. Big deal. But if it says, “we want to produce the best possible travel experience for our customers”, now we’re about pushing and raising the game. No prizes for guessing which one is more likely to produce the bigger shareholder return.

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The importance of a clear sense of purpose cannot be overstated. Time and again, when we research a business or organisation that is enjoying a poor reputation what comes up straightway is that people do know what it stands for. Recently, I told a national body that in terms of name recognition they were right at the very top, but when respondents were asked if they viewed them favourably they slumped. Why? Because their purpose was unclear. Peer organisations were not so well recognised but were viewed more kindly. Why? Because people knew what those bodies were about.

The purpose question is then followed by 29 more, covering human governance of staff, principles to be adhered to, culture, encouragement of innovation, cooperation between staff and internal communication.

Why that word maturity? Because it’s taken from software engineering and that industry’s well-used Capability Maturity Model, a method of judging the level of formality and optimisation of processes in an organisation.

“For decades, it was all about the numbers” said Mr Woollard. Attempts to look at the humans were usually dismissed by managements as worthless, childish even.

Yet the proof was there for them all to see. The Japanese car maker Toyota had a market cap of three or four times the value of Ford, General Motors or VW. Toyota’s operating margin was one-and-a-half to twice theirs. Its financial performance was phenomenal. And, guess what? Toyota measured its human capital.

Of course, there was the possibility that Toyota’s methods would not translate beyond Japan. But the management of Mercadona, the Spanish family-owned supermarket, visited Toyota, learned about its personnel-assessment techniques, took them back to Spain, and within a short while, Mercadona was outperforming the rest of the sector.

And what was the underlying purpose Mercadona gave itself, to spur on its staff? Not “to pile ’em high, sell ’em cheap”, but “to make Spain proud”.

In banking, Handelsbanken has consistently been among the world’s most profitable banks for the last 40 years. It’s regularly been awarded number one or two for customer service in every market it serves. Again, Handelsbanken is an industry leader when it comes to putting in a place a system to measure the quality of its people.

Where ESG is concerned, said Mr Woollard, analysis of the people in the organisation is essential. Funds are asking to know what analysis a company has conducted regarding its staff, their management and governance. They’re looking for a yardstick. Expect the people rating to become just as important as the traditional credit rating.

Chris Blackhurst is a former editor of The Independent, and director of C|T|F Partners, the campaigns, reputational, crisis, and strategic communications advisory firm