BEIS consultation on the Green Paper on Corporate Governance Reform

Institute of Customer Service response to the Department for Business, Energy & Industrial Strategy’s Green Paper on Corporate Governance Reform

The Institute of Customer Service is an independent not for profit professional membership body, with over 500 organisational members. Our purpose is to help organisations strengthen their business performance by focusing on raising the standards of their service delivery which in turn will improve their customers’ experiences. We welcome the Government’s focus on improving the public’s trust in businesses by looking to improve corporate governance. The Government is right in its assertion that good corporate governance is about more than the relationship between senior players within an organisation and there is growing evidence to suggest customer satisfaction is intrinsically linked to organisational reputation and the trust consumers have in organisations.

Research by The Institute of Customer Service demonstrates that customer satisfaction, loyalty, recommendation and trust are highly correlated. For example, our most recently published UK Customer Satisfaction Index (UKCSI) demonstrates that of the customers who score an organisation between 8 and 9 out of 10 for customer satisfaction, 48% give that organisation a 9 or 10 out 10 in terms of trust. This rises to 96% if the customer scores between 9 and 10 out of 10 for customer satisfaction. The implication is that the highest levels of trust and satisfaction are highly related and that there is a clear link between trust, customer loyalty and recommendation. We therefore think that the government’s corporate governance reforms should look to ensure organisations and their boards pay appropriate attention to customers in their governance structures. Specifically, we think that the bonus element of remuneration packages for executives should in part be directly attributable to customer satisfaction and also that organisations should be required to report on their customer experience measures.

Executive pay

We note the focus in the green paper on ensuring shareholders can hold executives to account and ensure that pay genuinely rewards performance that delivers long term value. However, we also note that the green paper mostly focuses on the use of financial outputs to judge performance. We think that organisations should look to wider measures of success including long term measures of customer satisfaction. Given that customer experience is so important to the trust and reputation of an organisation, the long term trends in customer satisfaction give a different perspective on underlying performance and the possible future direction of financial performance. We think that use of these measures will help corporate reporting move away from looking at short-term measures so that performance can be fully planned for, measured and assessed. Therefore, we think that part of the bonus element of remuneration packages for executives should be directly attributable to the long term trends in the organisation’s customer satisfaction.

Strengthening the employee, customer and wider stakeholder voice

The green paper rightly notes that ‘good companies have a relentless focus on their customers.’ What is often lacking in many organisations is a focus by the board on the views and experiences of customers so that they can properly understand the performance of the organisation and the success of their strategy to engage their customers. We do not think there is one simple solution to this and each organisation must take an approach that best suits its needs but we do think that better corporate reporting on a basket of customer metrics will be part of the solution for all organisations. We address the questions and proposals in the section on strengthening the employee, customer and wider stakeholder voice in the green paper below. All our responses are in reference to improving the customer voice.

Q7. How can the way in which the interests of employees, customers and wider stakeholders are taken into account at board level in large UK companies be strengthened? Are there any existing examples of good practice that you would like to draw to our attention? Which, if any, of the options (or combination of options) described in the Green Paper would you support? Please explain your reasons.

Option (i): Create stakeholder advisory panels. We think the creation of customer advisory panels could have value, depending on the nature of the business, but only if it provides a route for the board to hear the voice of the customer. An organisation creating such a panel would have to be very clear about what the panel was to do, how it was to interact with the board and mechanisms to ensure it was listened to. It would also be important to ensure it was distinct from other customer consultative groups that had other purposes – for example to test products.

Therefore, clear terms of reference would be essential to this proposal. We suggest that the key areas which a stakeholder advisory panel could focus on are professionalism, quality and efficiency, ease of doing business, problem solving, and timeliness.

Option (ii): Designate existing non-executive directors to ensure that the voices of key interested groups, especially that of employees, is being heard at board level. We do not support the proposal of appointing a designated non-executive director to represent customers. We think this would be merely tokenistic and might lead other non-executive directors to pay less attention to this fundamental group. All non-executive directors need to be considering the needs of the customer. Service excellence risks failure if it is regarded as the domain of one individual, team or department and all organisations should be cultivating the idea that service is everyone’s responsibility. We do, however, think that as part of ensuring there is a balance of experiences across the non-executive directors there is value in ensuring some have relevant customer experience or understanding. For example, this requirement could be included in some job descriptions. We also think organisations should consider the development needs of non-executive directors to ensure that they can effectively understand the customer base of the organisation and their needs. Option (iii): Appoint individual stakeholder representatives to company boards. We do not support the proposal of appointing individual customer representatives to company boards.

Similarly to above in Option (ii), we think this would be merely tokenistic but it might also lead to an organisation to focus on one group of customers as represented by one individual rather than trying to better understand the diversity of customers they have and their needs.

Option (iv): Strengthening reporting requirements related to stakeholder engagement. We strongly support strengthening reporting requirements to more explicitly specify that organisations must report on customer experience measures. Ensuring boards understand the needs of their customers and are striving to improve customer satisfaction is, as noted above, an essential component of improving trust in business. However, the key to success lies in how any changes are delivered in a sustainable manner over the long-term. Too many organisations look at short-term results, with relentless attention on quarterly reporting, and reform should therefore focus on the key measures which drive long-term success. Overall a balanced approach to reporting is needed but it should include customer experience as a vital measure of business performance.

Therefore, we suggest that in order to ensure boards are focused on understanding their customers and looking at a broad range of measures that indicate long term performance, all organisations should report on their customer satisfaction metrics. Boards and shareholders should be able to regularly review a report on an organisations customer satisfaction: how they have measured it, what the results are, what the impact is and what will be done as a result. We suggest that the key aspects of service excellence that should be reported on are professionalism, quality and efficiency, ease of doing business, problem solving, and timeliness.

In addition, reports should provide context to customer service measures by also referring to benchmarks for customer satisfaction both in the same sector and across all sectors.

8. Which type of company do you think should be the focus for any steps to strengthen the stakeholder voice?

Should there be an employee number or other size threshold? We think that all organisations can benefit from a greater focus on their customers at board level. However, we do not think the additional requirements should be too burdensome, especially on smaller organisations, and therefore would support consideration being given to applying a size threshold to the changes.

9. How should reform be taken forward? Should a legislative, code-based or voluntary approach be used to drive change? Please explain your reasons, including any evidence on likely costs and benefits.

We think the most appropriate way to take this reform forward would be for the Financial Reporting Council to update the Corporate Governance Code to set in place the principle that organisations should report on customer experience measures and that it is the responsibility of boards to examine them. When considering changes to the Corporate Governance Code it will be important to ensure that requirements focus on what is important to customers and not simply on what data is easy for organisations to collect and report on. We think that leaders should be free to run their organisation but this should be within the context of operating against measures that customers believe are important and periodically reviewed to ensure they remain relevant and robust.

Therefore, the Financial Reporting Council should set out guidance that best practice would be for there to be basket of measures and that reports would examine both the quantitative data and the qualitative feedback from customers. The Institute of Customer Service, UK. Customer Satisfaction Index – The state of customer satisfaction in the UK (January 2017), p7