Encouraging employee engagement

New compliance regulations created by the Ontario Securities Commission and Sarbanes-Oxley should be considered benefits, not roadblocks

By Archie Thomas, CMA, and Ann MacDiarmid

At a recent forum for directors, two well-known Canadian CEO/Directors lamented how over burdened they and their fellow directors were by new compliance regulations created by the Sarbanes-Oxley Act (SOX) in the U.S. and the Ontario Securities Commission (OSC) Guidelines. Both complained, treated the compliance requirements as nuisances and regarded the new work as bothersome and frivolous.

Unfortunately, a lot of professionals feel the same way. Yet, the recently introduced compliance requirements have the potential to significantly improve corporate culture, two-way communication and shareholder value. Just as speed limits are put in place to save lives, not to improve your car’s engine, compliance guidelines were introduced to save corporations and preserve and build long term shareholder value. Compliance is not the end game. It is a means to the end — increased shareholder wealth and corporate stability.

Many professionals feel over burdened by controls because the new guidelines require a significant shift in corporate culture and behaviours. These shifts can be uncomfortable, particularly for the CEO and management team that feel threatened by open two-way communication and corporate transparency. What they fear varies depending on the organization and industry. It may range from finding large amounts of inventory shrinkage to personal incomprehension of the accounting policies and procedures that became the norm in their enterprise. Those that fear open disclosure and employee input don’t understand the depth and importance of a truly engaged workforce.

However, research consistently confirms that engaged workplaces compared with the least engaged are much more likely to have lower employee turnover, higher than average customer loyalty, above average productivity and higher earnings. These are all good things that prove that engaging and involving employees makes good business sense and will build shareholder value.

Compliance opportunities

With this in mind, let’s rename the so-called whistleblower clauses (Section 301.4 of SOX and Section 2.3 of the Multi-lateral Instrument 52-110 of the OSC Guidelines) to the “employee engagement opportunity.” Providing employees with a secure way to communicate with management and the board may lead to innovative and new ways of doing business. If employees feel they can communicate their thoughts and concerns without fear of reprisals, they are more likely to share other ideas that they feel will improve a company.

But even when systems are in place and technology provides anonymity, the tone at the top is an essential ingredient for success.

“Organizations must appreciate the connection between employee engagement and employee productivity and encourage frequent and open dialogue to create a more productive environment — to maximize corporate potential and enhance profitability,” states Ron Paquette, founding partner of ClearView Strategic Partners Inc.

Paquette, who has specialized in employee engagement solutions since 1997, sees the new compliance guidelines as a formalization of what good workplaces and leaders already embrace to ensure that their employees are engaged and aligned with the corporate strategic goals.

“Senior managers and board members frequently consider their day in the field with front line staff as their most informative and strategic guidepost for future growth,” states Paquette. “Organizations where there isn’t that connection between the boardroom and the employee have difficulty harnessing the true potential of individuals or the organization because they are ignoring the power of synergy. The sum of the parts, all strategically aligned, is a powerful force in any marketplace.”

Management needs to demonstrably value employee engagement and feedback. Receiving anonymous input from employees in plain brown envelopes isn’t enough. Actual dialogue is essential for the success of any employee feedback system. Communicating openly, honestly and frequently will build employee engagement only if it goes both ways.

ING Canada is a good example. The company has had a robust employee engagement system in place for three years, and 95% of its employees now report “being treated with respect by management” — a startlingly high rating.

In addition to being good for the bottom line, employee alignment and engagement are important for creating an environment focused on balanced risk management and more effective internal controls. Even with sophisticated technological solutions, it’s the human side of an enterprise that will create, support and maintain an ethical and truly transparent organization. A clear and consistent tone at the top combined with an effective two-way employee engagement process can contribute to a culture where not only controls are respected, but the appropriate values drive day-to-day decisions. Without the honest participation of an aligned and engaged workforce, the cost of compliance will never be recovered.

Evolutionary processes

Encouraging employees to embrace engagement as part of their responsibilities requires a behavioural shift in many organizations. Be prepared for an evolutionary change, not a revolutionary one in an organization that is just beginning this process. Employees will have to be confident that integrity and high ethical standards are supported and embraced at the highest levels of the organization. Behaviour, not words, must demonstrate this.

Senior management and board members need to refashion the organizational culture beginning first with their own behaviour in senior management and board meetings. These leaders should be comfortable expressing doubt, ignorance and new ideas before their peers. This will help to open up the rest of the organization to dialogue and innovation. Changing organizational culture requires process, rigour and follow up to be successful.

Leaders in an organization should build a sense of purpose and ownership with all employees. The organizational structure and reporting roles need to reinforce openness and dialogue with easy access to tools and forums where employees are listened to without fear of reprisal. Employees that step tentatively into this dialogue for the first time need to be rewarded with action by management, respect for their input and follow up on each and every comment. Things may not necessarily change because of every employee’s suggestions but their comments need to be treated fairly and consistently throughout the organization. Only then will employees understand that it is truly their responsibility and obligation to become involved in the success of their organization.

Study after study confirms that recognition and respect are more motivating than money. One of the best ways to show employees that they are valued is to listen to them.

Power of employee engagement

The Hewitt Associates Employee Engagement and Best Employer Database of 1,500 companies shows that companies with high engagement levels have markedly higher total shareholder return (TSR) than those with low employee engagement. Specifically, companies with 60% to 100% employee engagement achieved an average TSR of 24.2%. With engagement scores below 49% to 60%, TSR dropped off to 9.1%. Companies with engagement below 25% suffered negative TSR.

In a September 2003 look at 5,460 U.S. companies, Professor Lawrence Brown and PhD student Marcus Caylor from Georgia State University concluded that firms with higher governance scores had higher long term profitability, higher return on assets and higher return on equity. The study also indicated that firms with weaker governance are riskier, experience greater share volatility, lower interest coverage on debt and pay lower dividends.

Shareholder value, ethical behaviour, and trust in our financial institutions are valuable and fairly easily quantified objectives. Senior leaders who are playing a check mark game with external auditors and annual reports because of new compliance rules are missing one of their organization’s greatest opportunities. If they aren’t already espousing employee engagement as a valued part of their organizational culture and business, they may be surpassed by their competitors that are. 

And beyond individual organizational improvement, transparent communication throughout the corporate world has the potential to restore some confidence in public and private institutions and thereby increase the foundation of shareholder value throughout the economy.

Capitalizing on regulatory change to effectively engage employees is an opportunity not to be missed. The letter of the law is completely insufficient. The spirit of the law will build corporate success and add real shareholder value.

Ann MacDiarmid (raptor.comm@rogers.com) is an independent marketing and communications professional. Archie Thomas CMA, CIA, CFE (arthomas@sympatico.ca) is an independent consultant and a past director of the Institute of Internal Auditors. Both sit on the Advisory Council of ClearView Strategic Partners Inc.

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