In a recent report, Fidelity International identifies workplace misconduct as a financial risk with systemic implications. The report coins the term 'culture-based financial risks' to define how culture can pose risks for investors and impact shareholder value.
Therein, Fidelity proposes a framework to understand how harmful behaviors can create three levels of risk for investors: operational, societal gap, and systems-level. "[C]ompany-level incidences (operational) can lead to negative perceptions of a sector (societal gap), which in turn impact the sector's social license to operate (systems-level)," the report reads. “They can then lead to long-term and material impacts on economic productivity. The interconnected and additive nature of these risks can then form a vicious cycle for communities and economies.”
"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 Daniela Jaramillo, co-author of the report and Head of Sustainable Investing in Australia for Fidelity International.
The report implores companies to improve their management of misconduct, and to enhance disclosures of such information so investors can utilize it in decision-making and corporate engagement. "Disclosures on issues related to corporate culture are often subjective and difficult to compare," Jaramillo explained. "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."
Fidelity also recommends that stakeholders collaborate on developing best practices regarding workplace misconduct and culture, modeled on the Taskforce on Climate-related Financial Disclosures (TCFD).
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