Workplace misconduct and the underestimated systemic implications

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Shifting societal expectations and social movements, like #MeToo and #BlackLivesMatter, have raised the stakes for companies with poor workplace culture. A new report from Fidelity International highlights that the impacts of workplace misconduct can extend beyond the individual company involved and can have a far worse financial effect than traditionally considered.

The whitepaper, Workplace Misconduct: The underestimated systemic implications for investors, explores how the risks and financial impacts of harmful behaviours in the workplace, such as bullying or sexual harassment, are not isolated to an individual company but can create a contagion effect across a whole industry and generate negative externalities for the broader economy.

The report coins the term ‘culture-based financial risks’ to define the multiple ways in which culture can pose risks for investors and impact on shareholder value. It proposes a framework to understand how harmful behaviours can create three levels of risk for investors: operational, societal gap and systems-level.

Daniela Jaramillo, co-author of the report and Head of Sustainable Investing in Australia for Fidelity International said, “One of the areas of material risk for investors arises when there is a gap between a company’s accepted internal culture and the regional cultural norms where it operates. Not keeping up with societal expectations can negatively impact a company’s reputation and meaningfully destroy shareholder value.”

Further, when companies use Non-Disclosure Agreements (NDAs) and financial settlements to cover up misconduct committed by a ‘key person’ or senior individual, these employees can create latent risks for investors and eventually become ‘stranded assets’ in the organisation, the report finds.

"For investors, excluding companies that have poor workplace culture is no longer enough to mitigate culture-based financial risks. Poor public perception of workplace misconduct can spread across multiple companies and affect an entire sector, impacting its ability to hire the best talent and increasing red tape for everyone. When it comes to social license to operate, you are only as strong as the weakest link in your sector,” said Ms Jaramillo.

The report urges companies to improve their management of workplace misconduct and enhance disclosures so investors can incorporate these risks into investment decision making and corporate engagement activities.

“The approach to managing culture-based financial risks needs to shift beyond human resource departments to the enterprise risk level, with greater visibility and accountability from chief executive officers and boards,” said Jaramillo.

“Disclosures on issues related to corporate culture are often subjective and difficult to compare. They also rely on companies having strong ‘speak up’ cultures for employee responses to be accurate. Therefore, the paper encourages third-party independent assessments of workplace culture, in addition to board and C-suite level oversight of culture, and potential linking of these issues to remuneration.”

The whitepaper makes other recommendations on disclosure and company action based on collaborative research undertaken with several other asset owners and managers about company best practice, using a framework inspired by the TCFD (Taskforce on Climate-related Financial Disclosures).

From December 2023, Australian businesses will have a legal obligation to take a proactive approach to prevent unlawful workplace misconduct. Changes in the Sex Discrimination Act will impose a ‘Positive Duty’ on businesses, which will increase the legal implications of mismanagement of these types of issues. 

Elizabeth Broderick, Principal at Elizabeth Broderick & Co, who served as Australia’s Sex Discrimination Commissioner, commented, “Fidelity’s paper serves as a bridge between human rights, corporate culture, and their effects on businesses, the economy, and, consequently, investors.

“By introducing the concept of 'culture-based financial risks' and proposing a framework to comprehend them, the paper underscores the importance of recognising and addressing these risks by highlighting their implications for countries and economies. It encourages us to view these challenges as opportunities for forward thinking initiatives. For business leaders and investors committed to fulfilling their fiduciary duties while simultaneously upholding their ethical responsibilities to their workforce, clients, and stakeholders, this paper offers an inspiring and insightful read.”