#17 Vernon Dennis: Why every business failure is really a governance failure

In this episode, Philippa talks to Vernon Dennis about why he has come to see governance and culture as the real reasons businesses succeed or fail, why ESG is not a separate compliance exercise, and what directors actually need to do to discharge their duties in a world where "non-financial" misconduct is anything but.

Vernon Dennis is a partner at Howard Kennedy Solicitors, where he leads the firm's business advisory practice and specialises in restructuring, insolvency and corporate turnaround. Over 35 years advising boards, creditors and businesses in financial distress, he has had a front row seat to what happens when governance succeeds and when it fails. His book, Directors' Duties, ESG and Sustainable Strategies, argues that ESG belongs at the heart of good governance, risk management and long-term business success - not on the periphery.

Most businesses that fail blame the outside world: Brexit, war, energy prices, unforeseen events. Vernon's argument, after three and a half decades of watching them fall over, is that the outside world is rarely the real cause. Underneath almost every failure sits a failure of governance and culture - the way decisions get made, the way rules line up with the vision and values, and the way businesses behave when they think no one is looking.

In this conversation, you'll hear about:

• Why Vernon came to ESG through insolvency rather than sustainability law, and what 35 years of restructuring taught him about the commonality beneath every business failure.
• The distinction between a business plan and a sustainable strategy, and why a real strategy should look more like a Haynes manual than a five-year projection.
• Section 172 of the Companies Act, and why the director's duty to promote the success of the company is already an ESG duty, whether directors realise it or not.
• Why culture is "like the wind" - visible only in its effects - and why misalignment between values, remuneration and behaviour is what really brings businesses down.
• Why for individuals ESG is about ethics, but for companies it is fundamentally about risk management.
• The rise of greenwashing and transition litigation, and why misleading disclosures are increasingly ending up in court.
• How directors get themselves into trouble: not through irrational decisions, but through decisions they simply never got around to considering.
• Why over-reliance on compliance and box-ticking is one of the most dangerous patterns Vernon sees in boardrooms.
• Materiality: identifying the "emerging strategic disruptive factors" for your business, and why every list looks different.
• The value of external experts and diversity of thought as a defence against boards marking their own homework.
• The Enron and Madoff pattern of "someone else will spot it", and why a real speak-up culture only works where trust is real.
• Vernon's own penny-drop moment: a client case where the incident itself was not the fatal blow - it was how the business responded that caused the reputational and financial damage.

Key takeaway:

Vernon's argument is that there is no such thing as "non-financial" misconduct. Anything that touches culture, values, employees, suppliers, customers or the environment will eventually touch the balance sheet - through litigation, reputational damage or lost trust. The way to protect against this is not more compliance policies sitting in a folder. It is a sustainable strategy genuinely embedded in the board's decision-making, subject to regular audit and review, and honest about the emerging factors that could take the business down. Get advice early, bring in outside challenge, ask what a reasonable director would have done, and treat culture as the default your business falls back on when things get hard.

This podcast is intended to be of a general nature, will not be suitable for everyone, and should not be treated as a specific recommendation. We recommend taking professional advice before entering into any obligation or transaction.

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Transcript

SPEAKER_02 0:02

I'm Philippa Hamm, CEO of Paradigm Norton, and this is Life Matters More, where we explore ESG, sustainability, and the future of business. Welcome to Life Matters More, where we explore how people are using their money, work, and influence to build a life and a world that truly matters. Today's guest has spent more than three decades helping businesses navigate some of their most challenging moments. Vernon Dennis is a partner at Howard Kennedy Solicitors, where he leads the firm's business advisory practice and specializes in restructuring, insolvency and corporate turnaround. Throughout his career, he has advised boards, creditors, and businesses facing financial distress, giving him a front row seat of what happens when governance succeeds and when it fails. More recently, Vernon has become a leading voice in the conversation around ESG sustainability and directors' duties. His latest book, Directors' Duties, ESG and Sustainable Strategies, challenges the idea that environmental, social, and governance issues are simply matters of corporate responsibility or reputation. Instead, he argues that they sit at the very heart of good governance, risk management, and long-term business success. At a time when ESG has become increasingly politicized, Vernon brings a refreshingly practical perspective. Drawing on decades of experience, he asks a simple but profound question. What responsibilities do leaders have, not just as shareholders, but to the long-term health of their organizations in the wider world in which they operate? In this conversation, we explore what corporate failures can teach us about integrity, why governance matters more than ever, whether ESG is evolving or disappearing, and what directors need to understand about their duties in an increasingly complex world. Vernon, welcome to the podcast.

SPEAKER_03 2:04

Absolutely delighted to be here, Philippa. Thank you very much for inviting me.

SPEAKER_02 2:08

Well, and I've been looking forward to this conversation because you don't come to this question around ESG and sustainability from the usual direction of someone who specializes in sort of sustainability or energy law or anything like that. You come to this as an insolvency lawyer doing ESG. Tell me how you got there and why the two go together.

SPEAKER_03 2:41

And the reason for that is, as you rightly say, I've actually been practicing restructuring and insolvency for 35 years and very much looking to why businesses succeed or why businesses fail. And it was within the context of that, looking to see where often businesses ascribe particular circumstances, unforeseen circumstances, things that they never could have foreseen in terms of internal or external happening to them and blaming those factors. Whereas in reality, what I've often found is there is a commonality to all of this. And that commonality is governance and culture. And it was the governance and culture which led me into thinking particularly about ESG, often the G, the very much forgotten part of ESG.

SPEAKER_02 3:27

So when you've been in all your years of experience, when you've been looking at why firms have failed, um, what what governance failures show up the most?

SPEAKER_03 3:39

Yeah. Well, as I said, you know, very often you know businesses point to all sorts of different factors externally or otherwise. And those factors, you can quite put them into all sorts of categories or otherwise, but it's this failure of governance right at the center. It's about how decisions are made, and when decisions are bad decisions, but also when no decision is made. And that is really a question of the review process that a company has, the audit ability that it has to look at itself, it's and how it how it reviews that the factors coming into its business. And where I particularly look at ESG is those are sort of emerging strategic disruptive factors that influence a business. And it has an influence on a business, and the business has impact on environment and people, and people and planet, etc. And so you've got to look at those two things in you know, absolutely as you know, the kind of factors which go towards the business and what actually impacts on that business and how the business impacts. And why it fails is that businesses don't have proper regard to those factors, that perhaps the strategy doesn't take into account the impact it's going to have on its various stakeholders. It doesn't take into account what its stakeholders' views are in terms or it's you know the drive of its stakeholders, whether that's employees or suppliers or customers or the market generally. And that's why there's this big intersection, I think, between ESG and business failure and business success.

SPEAKER_02 5:14

So I as I sit here as a CEO thinking, gosh, yeah, those things are really hard when you're in the day-to-day malay of spinning plates all the time running a business. So is that is that a governance issue? Is that a um the right people aren't thinking about the right things in the right places at the right time because there isn't a there isn't a process for that happening, or is that a failure of strategy? So I've I I I guess you must have seen a lot of firms do a beautiful strategy and then save it into a folder, never look at it again.

SPEAKER_03 5:51

Well, that that's right. And it's interesting, you know, when I've come to write my book about uh and I put the focus, the sustainable strategy, that is how I say directors discharge their duties towards the company and its stakeholders by having a sustainable strategy. And what I mean by that is it's something that's going to ensure that the business can continue. And I think what is often forgotten, and I think this is another element of redefinition, is that when you sort of say, you know, what is often looked at and then put in the in the cut in the uh in the drawer is often a business plan. And I I think a business plan is very different from a strategy. I view a strategy as a sort of like your how-to manual. If you remember the old Haynes manuals, which looked at a car, I think your strategy should be something like that. You know, it's it's in terms of it's setting a direction and a direction of travel, that should be your your part of your strategy, the mission, the purpose. And your strategy should then seek to align the various decision-making processes in accordance with that vision and purpose and direction. And so I think strategy for me has always been this more encompassing uh element of what you need within it, because I think very often business planning and five-year plans, ten-year plans, or even one-year plans are very much, there's often a mixing up as to what that is with ultimately a strategy, a sustainable strategy. So I do distinguish the two, and I think that's sometimes, and that was why I really gave great thought to you know, what is it about governance, you know, when you say about decision making, how does that arise? And and part of the strategy has to be about the audit, you know, the where are we now, the review of where, you know, of any kind of decision you make within that impact or otherwise, and a constant reassessment of it. And that does require, as I said, that kind of you know, audit, review, remediation, and that's strategy, as opposed to a business plan, which might just say we're going to do that this year.

SPEAKER_02 7:57

And how much of that are directors obliged to consider around the economic, the the sort of environmental and the social side of it as opposed to the profitable side of it. So I think about you know, when I think about strategy or business plan, I'm thinking about the long-term sustainable success of the company. We're a B Corp, so I do think about um how we're going to impact the world. We also uh try and work with uh to help people invest their money in a way which aligns with their values. So I guess that's bedded into our company a bit more. But if you're but if you're not a B Corp, if you're not a company that is looking at the sort of environmental, the social, is there an obligation on directors to to think about that uh even if it's outside of the sort of raison d'etre of the firm?

SPEAKER_03 8:49

Yes, there absolutely is. And that and that's the issue. Um, as you rightly say, when I talked about vision and purpose, BCOF is a very good way of saying that, that it has embedded within it the incorporation, sorry, the the constitution of the company will have, therefore, a requirement to give consideration to people, planet, profit in equal measure, etc. And of course, you know, certain businesses may be set up with a vision for environmental improvement or otherwise in particular in a particular sector. But all businesses are subject to statute, statutory and common law uh duties. And it's particularly the statutory duty, the codification of the statutory duty directors, which um really started to pinpoint where I saw the duty lying to have regard to ESG. And just be a little bit legal here, it's section 172 of the Companies Act, and that is that a director's duty is to promote the success of the company. And it promotes the success of the company by having regard to a number of factors incoming to promotion of that sector. And those factors are effectively, guess what, employees, the environment, to have regard to your business relationship with customers, suppliers, to have uh regard to your reputation and business conduct. Those are all ESG factors as far as I was concerned, and that's how I've I've pushed the book. You know, in terms of I looked at the duty of a director to promote the success of the company, and then I've looked at examples within each of those, say for employees to look at you know, DEI policies, discrimination policies, harassment or otherwise remuneration structures, and you look at those within that context of whether they promote the success of the company. So that you know, it's taking apart, I think, not just what you do, but how you do it.

SPEAKER_02 10:44

I mean, a lot of that feels cultural, actually, when you talk about it in those terms, and it and and that's so interesting that that the long-term sustainable success of the company is not within the definition that you've just described there, it's not profitable. It's actually it feels almost sort of relational more than than anything else.

SPEAKER_03 11:02

Well, I'm I'm glad you say that because I I I I'm sort of coming to this, and I was sort of saying after 35 years, I say that you know, all businesses succeed or fail on their governance and culture and nothing more. I sort of gave reference to the fact that you know businesses fail because oh, Brexit's happened, or oh, look at the um the the invasion of Ukraine and the oil price, and that's caused us to fail. Well, actually, what's really caused you to fail is a is a mixture of governance and culture. And why I say that is that governance is that decision-making process, it's the thing I've just said, that you know, the how the business wants to act, how how it's going to behave in certain circumstances, how it's going to review its situation. But ultimately, culture is the personality of the business, it's the thing underneath, it's the uh, you know, my my my big issue about culture, or sorry, my big definition and something I've I've talked about is you know, culture is like the wind. You know, you could you know it exists, you can see its effects, you can feel it, but you can't actually see it. And so it becomes a little bit ephemeral. But what what I what I mean by that in in particular, so that's the effect of it, but also the culture is very much how the business behaves in terms of the governance that is set. So if if you have rules and procedures which are not aligned to your vision and purpose, you know, you will have a poor culture. If you have um rules and processes which no one follows because the behaviors and the attitudes and the and the corporate stories of the business are not in alignment with the processes and procedures, you have a misalignment and you have a poor culture. So um I I view culture as absolutely indistinguishable from governance and culture. And I and as you rightly say, I do provide a lot of the sort of the element of how a business behaves, what it actually does. And that ultimately is why businesses succeed or fail. They they succeed or fail on the back of a governance structure and a culture which is in accordance and the behaviours of a business that are in accordance with that governance structure.

SPEAKER_02 13:10

Such an interesting reflection on you having seen it go go wrong so many times. And I I was reading some research uh recently about the effect of um values congruence in leadership with the rest of the firm. And actually, the research that I was reading uh suggested that that where there is values congruence, and and and what you're talking about there, does do the policies reflect the mission and the values? That's all about congruence, isn't it? Does it make sense? Am I being asked to behave in a way um that reflects the sort of the reputation of the firm and the and the mission of the firm? Um and the the the research was really quite interesting in that it said actually the you get um you get these unintended consequences, these really positive unintended consequences of people actually being more productive, people um moaning less, uh getting on with their jobs more, and choosing to do more within the business because actually it all makes sense to them that what you're saying at all times reflects what happens on a day-to-day basis. It's I hadn't really put put that together before, and it's so interesting to talk to an insolvency lawyer about it.

SPEAKER_03 14:28

Yes. Well, it's got to be embedded, it must be embedded in the culture, and when I say the culture embedded, it's it's it's the values and the processes, or otherwise, they need to be in aligned and they need to be embedded. And that's that's the key. You it's the misalignment, as you rightly say, it's the misalignment is the real problem. Um you know, let's give a very easy example. When you have a remuneration structure which which um perhaps provide bonuses for certain types of reckless behavior, but growth behaviour, you know, in certain circumstances. And you know, you can see that through you know a company as it's as it's growing very often at the early stage, it needs to it needs to grow very quickly. It needs, therefore, to get money out of the door. If it's a lender, it needs to get money out of the door. But you know, the kind of procedures that or sort of that kind of remuneration which encourages that kind of you know, getting out of the door, can be reckless. It can be to the wrong people, it can be without regard to the reputation of the firm or otherwise, if it's an investor or otherwise, you know, you can you can see why. So if you're remunerating people of just get it as quickly as possible, just get your investment out of the door, that is a very different one from remunerating in accordance with you know uh the values that the firm might uphold. And that's another element you see is that if you're saying, you know, we are you know, you know, long-term sustainable investors, but actually remunerating on a short-term basis, you know, the actual fund managers or otherwise, you can get a tremendous misalignment. And that's where that misalignment is the real problem and the ultimate cause, I think, of businesses not being sustainable. And when I say they're not sustainable, they haven't got a long-term future. Something will happen.

SPEAKER_02 16:16

Yeah, so that I mean that that word sustainable is an interesting one, isn't it? Because it's it's it's used in in a few different ways. Um, so when you talk about sustainable, what do you mean when you're using that word?

SPEAKER_03 16:28

I'm glad you said that because I think within the ESG community, responsible and sustainable very often kind of mean the same things. It sort of means an ESG kind of uh let's say an objective criteria that you know this sustainable means you know environmentally sustainable. I've taken the environmental bit out of it and use it in a wider context of business sustainability. And when I talk about business sustainability, it's that ability to say that in the long term this business will be profitable, and that's quite important in terms of the way that I look at ESG, that ultimately it's to provide the profitability for the business going forward. You're doing these things not because for the business it's some ethical or value-based judgment. Now, for the individuals, it might be, but for a company it's not. A company doesn't have, you know, it has a legal personality, but it doesn't have a mind of its own. It doesn't have, it's not, a company isn't there to do good, nor is it to do bad. It's just a company, and ultimately it's sustained by you know its trading activities or achieving the purpose for which it's been set up. And I'm I'm sort of mixing my um not-for-profit companies as well in that, but ultimately that's what it's got to do. It's got to sustain itself in terms of its ultimate mission, its ultimate value as to what it wants, and so that's when I talk about sustainability, that's what I keep coming back to is you know, has it has it got the lifeblood of the company? Is it going to continue? Or is there some misalignment or otherwise which causes it to fail?

SPEAKER_02 18:05

You use the word ethical, I think, in that answer there. And so I just want to pick up on that for a moment and ask, is ESG about ethics or is it about risk management?

SPEAKER_01 18:18

Hmm.

SPEAKER_03 18:19

I I think for the individual, I think this is what I was almost hinting at. I think for the individual, it's about ethics and it's about responsibility in that wider context. It's about, you know, and I think in for the individual, you you have your own set of morality and ethics, which are important. In fact, it's absolutely essential for us all to live that way. We all have to have our own value-based elements. But I think for a company, it is nothing more than risk management. And for a company, it's about looking at something and saying, well, does that mean that we in the longer term will not be sustainable? Will it be a threat to us? And if and this comes back to the fact that, you know, it's all about alignment. And I don't think that that you know there is such a thing for a company as having an objective view as to whether some particular action is ethical or otherwise. I don't think that's what a company should do. But I do think it is to do with the fact that if it doesn't act in a way that is ethical or or they that will harm its reputation. It may fall by wayside because of regulatory issues. And we talk, you know, perhaps we might more talk about a lot about that. A lot of business decisions are imposed by laws and regulations. So legislation and regulation is, you know, that's the minimum, that's the compliance. But regulators play a real part, I think, in all particular sectors of the economy, pushing certain value-based judgments in this particular market. So in your market, that this is important, whether it's consumer protection is often the key. But sometimes market stability and regulation. And those are the things that you know you've got to have regard to. And if you don't do those things, then you will not be compliant. And if you're not compliant, then regulators can be um, you know, could take action against you. If you're not compliant as well in the other way, if you're in breach, then that can lead to legal action by your stakeholders, whether you know that's your customers, your shareholders, your employees, or otherwise, if you're not doing something in accordance with effectively the regulator and legislative legislative framework. So it's it's both.

SPEAKER_02 20:33

Yes. Okay, um, and on that point around litigation, where where are you seeing litigation themes? What are you thinking is going to come up? I mean, when you're talking to the directors of the firms that've gone into some form of administration or litigation, did they did they see it coming? Um or has it come as a bit of a surprise to them?

SPEAKER_03 20:56

Yeah, it goes back almost to one of my first comments, which is there are a unique set of circumstances for each company as to why it fails. But ultimately you look and it is very, you know, it will have at its basis the failure to have proper regard to X. And X is often that issue of it's a an external factor, an emerging factor, whether it's um the you know, it's regarding the environment. And I use the environment in terms of it's the community you're in, um, in go in regard to the financial market, sorry, in regard to the market that you're in as well. That's the that's sort of like the the community element of environment, or people, you know, that you've caused harm to people, whether that's to your customers, to your otherwise. And it's that failure, um, I think that goes to the the the root cause of the not having proper regard to them. And you you ask sort of where where will the actions go? A very easy one, and one that has become a very common element of uh ESG litigation. Is greenwashing and transition claims. It's a and why that is because that is an area that has become increasingly regulated. So there are a lot of there's a lot of legislation to ensure that the transition to a greener economy was one that is not misleading the public, is not misleading investors. And why is that? Because you want make market stability. You want market stability because you want people to invest and know if they're investing in something that says we're promoting green X, that that will that's what that business will do. And so I think you you continue to see a lot of a lot of the litigation on that kind of element. Um litigation also from environmental damage, so environmental protection. And and I think as well, one element that you can also look at it from ESG is consumer protection. So uh and consumer protection comes in you know in various very different different ways, but it's often a miss selling aspect as well. So it's coming again from the back back back of saying, well, actually it's about market protection, it's about the ability to do do good business within a chosen market, but the failure of the business to abide by its regulation, but also to mislead. It's not acting ethically. That's where the litigation already arises. So I don't even think it's ESG litigation, it's just litigation, to be frank. It's the it's the it's the preponderance of claims to arise from the misdeeds of the company. And just if I may, that leads to company claim claims against the company. And if the director's duty is to the company, and if it is caused loss to the company, loss and damage to the company, the director is liable. And liable to the company and its shareholders if it's solvent. But often I see it, it's liable to the company and its creditors when it's insolvent. So I actually see this quite, you know, I see most of these things is where we take action, and I say where we, where I'm acting for an insolvency practitioner, an administrator or a liquidator taking action against the company against the director. It's for breach of duty, it's for failing in all of these things to have done XY XYZ, and that's you know, nearly always going to be it's caused loss to someone, it's caused loss to the company, it's caused loss uh to the business, and therefore the directors are liable for that loss.

SPEAKER_02 24:28

And digging into that a bit more, I so uh as you know, I have also just written a book um about ethics and finance, and one of the reflections I had was um actually I believe people are fundamentally good. So when we talk about breach of directors' duties, and we talk about greenwashing, when we talk about um sort of going after profits rather than uh making more sort of, I suppose, sustainable decisions. My own view is that that these directors are not sat in their you know ivory towers with some sort of maniacal laugh saying, Well, I'm gonna do a terrible thing. Um most of them never expect to be on the the other side of the courtroom from you. Um where and I and I but I do wonder whether that's that long-term versus short term when you humans are really bad at looking in the long term, when we're faced with a problem which is quite short term, it's quite difficult for us to view um the consequences in the long term. I mean, do you is that your reflection of the sorts of claims that are being brought against the directors that you're looking at, or is your view slightly different?

SPEAKER_03 25:40

No, uh I think you've got to remember that you know a director to be liable in these circumstances has to show they've fallen below the standard expected of a reasonable director sitting in their shoes. So, you know, it's not but it's what would a reasonable director have done? And that's and that's where you get to why you should have behind you a sustainable strategy, one that takes into account the fact that we reviewed these factors, we gave proper proper consideration. You know, decisions which are made rationally and in good faith are not going to be challenged by the court. It's the irrational decision, or rather, and this is something that catches up, they just didn't think about it, or they didn't review it. You know, it just wasn't in their purview at that particular time. They didn't consider it. And that's why when the business fails, they say, Oh, well, it was unexpected. Well, it shouldn't have been unexpected to be and I mean that you know, after 35 years experience, that's that's my thing. And I do see a lot of bad conduct, you see, and I think that, but it's ultimately it's something that, yes, a reasonable director would have had consideration. And readable director, you know, get advice. You know, that's that's one of the key key defenses for any director. You know, and you know, when when you're facing, you know, the company's facing a particular loss or some particular damage or has caused harm to someone, you know, get advice early. And that's not just legal advice, it can be you know the assessment element to it, the the loss adjustment element to it, the just handling, handling a complaint. You know, there's all sorts of different different ways, whether you know that that you know goes over, say, to health and safety uh legislation in a construction company to um in a financial um finance company, you know, it's about the uh the the the the authenticity or otherwise of its of its practices, whether it's whether it's seeking investment or lending or or or entering into product, it's it's about that. So consistently looking at and reviewing, and that's why I went to the fact of audit where you are, review that, make an assessment as to the impact of any decision, show that it's rational and justified, and you won't be criticized.

SPEAKER_02 27:55

So let's talk about let's talk about the people surrounding the CEO then and the importance of the people that you have there and the type of CEO that that you are. And when I I think it'll be very, I think it's very easy to become overwhelmed by uh the data running, the problems, the issues, the the requirement to have ESG, you know, on your on your mind. Um where where do people get it wrong?

SPEAKER_03 28:26

I think an over reliance on compliance and box ticking. So whereas whereas you know you sort of say, oh, well, this is a problem that I've got in terms of regulation compliance, I'll put it over here, I'll get a team to look at it, and then not have regard to it at a board. And you know, there's some very you know, very big examples of that, and that's something I poured um put into my book about examples where you know that's exactly the problem they've felt fallen into. Is you know, they've had the policy, they've had the procedure, they've had the teams, but then they don't give that true due regard actually at the level of the board. And that's the strategy point, that it needs to be constantly reviewed and updated and embedded. It's not uh it's not detachable, your you know, and let's let's put it this way your EHG policy is not detachable from your business, it needs to be embedded in everything you do, and I think therefore, you know, the CEO can feel overwhelmed by this, but it's actually at board, and this is something I think probably I see you know over my time. The the real issue is that boards very often are very concerned with the minutiae of the operational side of their business on a day-to-day, quite rightly so. You have to have regard to that, but you do need to have whether it's the same board or a strategy board or otherwise, you need something which is oversight of the things that you're doing on a daily basis, are they still in alignment with our purpose, our values, where we're trying to get? Our decision making is it still embedded in everything we do, um, you know, in terms of that. And uh is our business following it, you know, in terms of the behaviours and attitudes of the of the business as it's actually giving effect to you know, CEOs who have provided, or rather, the the board who's provided a particular program that needs to be followed. Um, just as a little aside, you know, I've I've just written quite recently about cultural programs and the importance of cultural programs, but of course where they go wrong, and they go wrong all the time, in my view, and they go wrong all the time because they're viewed as a separate program which sits over there and has nothing to do with the business. It's like, oh, these are the things we ought to do, you know, if in an ideal world. Well, it's not actually embedded within the you know the business itself, it's day-to-day, and so you end up you know with a real disconnect, a lot of good words and a lot of aspirational things, which is sort of sitting in some sort of element between your business, you know, your HR department and possibly a learning department, etc. Whereas in reality, it needs to be embedded within day-to-day decision making.

SPEAKER_02 31:13

And how do you do that, Vernon? How do you do that? Because it's easy to write the policy, isn't it? It's easy to say, we will do this to write, we will be, you know, corporate citizens of the world, and you know, all that lovely language. How do you actually embed it into your day-to-day?

SPEAKER_03 31:30

Materiality is really important because I get that point that you can't do everything all of the time, and certain certain elements of the you know, the impact your business will have will not be as material to your underlying sustainability of your business as others, and you know, you you've got to do that materiality assessment, and that is something that needs reviewing and can so materiality is really important, so it's it's what are the key things? What are the emergency so I sometimes rather than saying ESG factors, and this is we might talk about the the issue about ESG as a term, but what are the emerging strategic disruptive factors of your business? What are the ones that are going to keep you awake at night? What is happening to your business? And the materiality of that needs to be twofold. One, what is the impact of those factors on my business, and what is my business impacting on X? So it's the it's the you know, what what what harm could be caused to my business and what harm might my business do? Or look at it on a positive way. How might my business profit from this? How may my business expand from being involved in a particular decision area or initiative?

SPEAKER_02 32:42

Would you go and get uh are there materiality experts out there? Can you get somebody into business? You can. Yes. And would you recommend that?

SPEAKER_03 32:52

I would, I would. And and part of, you know, and this might be a little bit, you know, as a lawyer, I provide advice about legal duties, responsibilities, the regulation, the compliance. I can talk about governance, and in fact, that's what we're doing. I mean, very much enjoy that element of my practice, talking about you know how you're making decisions and the rationality to that and the minute it, you know, the the boards often forget. You know, that's that's why you have a board. It's like tell why have you made the decision, why have you done it, etc. But ultimately, as you rightly say, there are huge areas where there are experts who can come in and provide you that kind of materiality assessment, that kind of and I, you know, whether it's called sometimes non-financial audit part of your business, so you have an auditor come in and obviously does the finance, but this is the non-financial. But I think actually, even that sometimes doesn't properly describe it because all non-financial activities of the company will have a financial impact eventually. That's the sustainability part, and that's why I don't think it's such a thing. But to be to be, you know, to say very often businesses do call themselves the non-financial audit, uh, the review. Uh, you know, just as an example, uh, you know, if you're in um a retailer, one of the key regards are supply chain, and supply chain in terms of human rights obligations, and certain businesses have suffered tremendous reputational harm for finding out down the bottom of the supply chain, you know, there are human rights abuses, slave labour, etc. And if that's creeping into your supply chain, there is now regulation, there is now legislation to deal with both Modern Slavery Act, but also lots of regulation in different areas. Doing that as a business is very difficult yourself to do your due, you know, your due diligence on your supply chain. There are experts out there who can do that as well. Um, so I think it's it's what's material to your business and then what kind of well, who would you bring in? And if you brought someone in, you know, an expert, a professional in their area, that's going to be the absolute gold standard in terms of providing the director with a defense to any accusation that they didn't do the right thing. You know, they they had proper regard, you know, to to a particular issue, and the the material issue that really impacts their business, they've done something about.

SPEAKER_02 35:13

Um I do I have seen, as you know, I used to be a lawyer. That that element of marking your own homework is such a such a dangerous thing to do, isn't it? I and and I think we're all vulnerable to it because you have your own internal biases around things and you want you we all want an easy life, don't we? We don't like to feel uncomfortable, we don't like to think, oh, I made a mistake or there's a problem that I need to pick up there. That marking your own homework point is is a really good one.

SPEAKER_03 35:44

Well, it's also the psychology um element of it, and you've got to be aware of that. As you rightly say, we're all subject to our own biases, but that comes from all I see is is my experience, my background, the thing, the things that I have seen make up what how I see the world. And that's the same. You've got to think, well, a company has this multitude of different people, and it needs, and I'm gonna use the word, it needs a diversity of thought, and it needs a diversity of experience to be able to properly assess what are true risks or otherwise, because it does, and uh the other thing I think I I sometimes see about companies, particularly in their stages of development, an owner-manager business, which is on a startup, needs very different kinds of governance and thought to one that's an established business in a mature market, and it's sort of good, but it but businesses go through a life cycle, they go through different things, and each time you've got to review those to give that proper regard to this is how I'm seeing things, but that may not be enough. And I think you know, uh something where you we talk about business failures, but business failures can very often happen because that guiding star individual right at the front of the business who set it up, they're brilliant with the vision, they had that idea, but ultimately it becomes can become uh corrupted because as the business grows and they can't see anymore, because they're seeing you know how they how they behaved. What was successful, you know, 10 years ago will not necessarily be successful now. And that's what why you consistently need to have regard to that diversity of thought, diversity of experience within your your business.

SPEAKER_02 37:26

Yeah, and exposing yourself to challenge. One of the repeated themes that comes up during my podcasts is the power of asking good questions. Um, either from a consumer perspective, if you want to see change, asking good questions around, you know, where where do you get your coffee from? Um, what is your net zero policy, etc.? Um, so it it is it's funny. I think every single time I've had a conversation with someone on uh as a guest on my podcast, this question around good challenge is it comes up. So, how how do you go and get good challenge then? How do you recognize when you should get it and who do you go to to get to get that challenge?

SPEAKER_03 38:09

Yeah, well, I th I think it does come from that kind of the board having proper regard to the strategic direction of its company and reviewing that, and that may be that it needs to have a slightly different function, you know, as I said, uh whether it's a strategy board or otherwise, or or setting some time aside for that sort of the blue sky thinking. Uh, which and so so you know, how do you go about it? Make time, and that time seems valuable because you've got the day-to-day issues that we're always going to have, but you must set aside time and uh and you know, probably the most precious resource of any firm, the time to have proper regard to it, to have regard to the materiality of the the factors or otherwise that are going to impact on your business, and have regard and then bringing in, as I said, sometimes external can be internal, but have bringing in people to challenge, to, as you rightly say, ask the right questions. You know, it's that kind of thing, is like you know, just you know, starting again, do not work on the existing assumptions of your business, but consistently challenge them, review them, remediate as well. So it's a constant matter of assessment, review, and reporting as well. Reporting is really important to that whole process. Um, that once you've set a decision, that you must report upon the decision and how it's being impacted, and whether whether that particular decision is being implemented properly. Is it being implemented quick enough? So that review and reporting is really important to your business as well.

SPEAKER_02 39:46

So one of the one of the um things that I've been thinking about recently is how I best use my board. Um I think we have a little bit gone down exactly what you've said there and and talked about the minutiae a little more. And I was looking at how do we spend it lovely to hear you say it actually, how do we spend more time on on strategy and challenge? Would you have any advice for me and any other CEOs out there looking to sort of say to themselves, how do I use my board with the the best of its ability?

SPEAKER_03 40:20

Yeah, I I think I think that's entirely right because you know uh you you very often are down in the minutiae of the particular decision, but it's it's whether you have you know the classic kind of setting time aside for it, you know, dare I set the away day somewhere out of the office can be, you know, the I've seen some really good examples of businesses, very big businesses who do that kind of element of once a month, right? We're gonna meet so and so, we're gonna meet here, this is how, and we're not gonna bring you know the laptops, etc. We're not gonna look at the figures, we're gonna, you know, those kind of elements. Sometimes bringing in uh external facilitators of those. Um, and that that truly isn't lawyers, it's you know, we you know we have a role, but that's you know, there are people who can you know facilitate that kind of strategic review element. And I keep I keep using the word strategy, and I do that all the time because it's not about a business plan, it's not about your short-term commercial decision making, it's about this longer-term vision practice, and whether the things that you're doing and the processes and procedures continue to align to that vision and purpose. And that vision and purpose, you know, kind of kind of can change all the time as well. That's got to be reviewed, and it will change through different elements and different causation of the uh different stages of your business as well. So, yeah, that was a very long way around of saying, you know, finding the time, whether it's a way day for using a facilitator, um, having excellent non-execs can be another way of doing it. You know, that's you know quite a common way of ensuring that either you have um, you know, um you have your boardroom guests, etc. You can bring people in, you know, to sit on the strategic strategy board, or alternatively, you you know appoint someone for that particular purpose as a non-exec. And I think they can provide a really useful role as well. In my world, as I said, we're very often seeing distress as financial distress and and crisis, and there are uh untold you know people in the industry who who provide those kind of you know, CRO roles, chief restructuring officer roles, or non-exec roles coming in to provide advice and guidance and experience of when you're going through that type of crisis. But there are similar elements of non-execs who can provide assistance of all stages of your business, of that different ones as to you know what is the what is the factor. Bringing in external knowledge is really important.

SPEAKER_02 42:56

Yeah, I mean I've seen that done really, really well. And and I guess that you can be a little hit or miss, can't you? And if it's if it's not right being brave enough to say, actually, I don't think you're right for us.

SPEAKER_03 43:07

I think I think that's that's very true. And it's you know, I've seen a lot of non-execs, some brilliant people, but you're right. Sometimes the non-exec, particularly, and I I'll I'll I'll put my comments on the non-exec side. I think there can be a lot of the box-ticking element of the non-exec, you know, that that you want them to do everything, and then they actually don't bring too much to the party. Because I think you've got to have regard to what's material to my business, what do I really need at this particular stage of my business, what kind of expertise? Let's put it around another way. You know, sometimes businesses, you know, we talk about culture, the behaviors of your business are misaligned. That can be because of you know the employees. There's something going wrong with the there's a disconnect between the management and and the employees. That the you know, the trust and confidence may well have broken. Down for reasons, multifarious reasons. So actually bringing someone in who's a sort of a people person, a HR thing can be a really important way of looking at your culture and looking at cultural audit and thinking about how do we address that? Um, because it culture is so much more, so much more than just having programs or wellness programs. That's not culture. Um, it really isn't. Um, you know, and I think it you know, businesses have to be very careful to it. So I'm going off a bit of a tangent here, but the you know, about culture is sort of viewing culture and all profit, and these are you know ones that you make a make a call on, you know. Well, actually, yes, you know, we've been far too nice to our people, um, we're not making enough profit to make them work harder. Well, in reality, we all know that you you know you get people who have trust and belonging within an organization, and if you have trust and belonging, you will act in accordance with that, and your behaviors will align with your business because you belong to your business, and that's you know, that's fundamental. That was a very long, again, a way round of saying bringing in external people to have a look at that misalignment of your culture and your business can be absolutely invaluable.

SPEAKER_02 45:22

Yeah, yeah. One of the one of the conclusions I drew when I was writing my chapter on how to build a business of integrity is that the people in your business are asking two questions at all times. One is, what does good look like around here?

SPEAKER_01 45:39

Yeah.

SPEAKER_02 45:39

Uh, because if good looks like behaving badly, because you get rewarded for behaving badly, then that's how you will interpret that. And number two is can I trust what you say? Um, which goes back to that congruence point that we were talking about earlier. It's it's interesting.

SPEAKER_03 45:57

It does. I I I think, and I think you're absolutely right. Um, the other thing about culture is you know, it's the default, it's what when no one's looking, how do you behave? You know, it's the thing that you know, it's it's the thing you fall back on to. And and we talked earlier about the fact that we, you know, as humans, we make shortcuts. We make shortcuts because you know, there's the the world's complex or otherwise, so we we go to those immediate biases or otherwise, you go to how the business performs or behaves in certain circumstances, and it truly behaves, you know, when it's under stress or whether it's in crisis, that's when the culture truly comes out. So you may have lovely values and you know elements that you want to promote, but actually, when things get tough, if you misalign, that's when it can go seriously wrong, because that's when the true culture of the business comes out. And you rightly say, you know, it's that misalignment if you're encouraging behaviors through the rules and you know, but maybe the rules or the remuneration structure or just the way we do things around here, yeah. Um it can it can be a real problem. And one of those, um, and we haven't spoken about this as well, but I think it uh yet, but one of them is about a speak-up culture. And the speak-up culture does come from an element of trust. Well, in fact, it entirely comes from trust to be to me. You have to have trust that one, if you speak up, you're gonna be listened to, um, you're not gonna be ignored, or worse, you're not gonna be ostracized or viewed as you know not being loyal, you know, and that's the very worst. And you get to the circuit, or you get to a situation where someone else will speak up, you know. That's the other one that you might see misconduct or otherwise, but you don't, you know, you don't because someone else will. And that arises in in businesses that have too much of a structure around um complaints or or regulation, that actually you think, oh well, no, the system will deal with that. Whereas in reality, it requires the individual to deal with that. The system never does. It's a the system is no more than uh the congregate congregation of all the individuals. So an individual always must, you know, ultimately whistleblow. And you know, when when you go back to say um Enron and how quickly I don't know if you ever studied the Enron, it's really fascinating case study, you know, there's been books written on it, and I you know how long the fraud is perpetuated. Madoff, another one, how long these things are perpetuated, because you kind of think, well, someone's gonna spot it. In fact, um Bernie Madoff, very famously, when he's eventually caught, blamed the regulators. You know, yeah, it's well, they should have spotted me earlier. And truly, this becomes this thing, the reliance on systems and processes can you know take away from the real importance of the individual to call something out, and that calling something out, we saw, you know, we've seen in the sort of me too elements to it, and you know, elements of racial discrimination and discrimination generally. These are again major things that need to be spoken up, and it goes back as well for me. Those kind of things are non-financial, but have a massive reputational risk and can destroy a business. And so financial failure comes from not the incident, but the way you've treated that incident, the way you've dealt with those incidents. And it's actually how I came to ESG. Goes right around back again, but it's how I came to it by looking at non-financial causes, um, you know, in terms of the failure to investigate properly, the failure to listen to the um to the allegations that were made causing reputational harm and ultimately financial distress. And it was at that point I suddenly went, ah, right, there's a not just a governance issue here, this is a culture, this is governance and culture, it's about the way our business behaves, and it's that. So it's not the incident, but it's how you deal with the incident, is the key problem.

SPEAKER_02 50:07

Was there a was there a particular trigger when the penny dropped for you that you saw?

SPEAKER_03 50:14

Yeah, I I think it probably was, and uh uh you know, I have to be careful in terms of you know revealing client confidentiality, but um uh the one I'm thinking of in particular was a racism scandal. Uh a racism, you know, so racism was was uh was identified in an organization, they carried out their usual process of procedures, investigations uh were carried out, and a result came to the business. But fundamentally nothing had changed, and that then led to uh actually an external campaign, and it was very much on the basis that you know you haven't listened, you haven't changed. And while they were treating the you know the element of who said what where and sort of attributing blame or otherwise, what it really was was a systemic failure of governance, it was a failure of their processes and procedures to align to what they said they were going to do. They're saying that they were diverse and you know that they everyone's free in our particular organization, or um, you know, and uh these were but it was misaligned, it wasn't. And it was and it was a real that was a penny flop because it the the scandal got and it was a scandal, it became it became you know front page news, etc. for for a while, and it was and that then had this financial implication, which is why I got involved. So I'm involved because there was a financial consequence, but it was putting it together and going, well, actually, this is a failure of governance, this is a failure of culture. So that was my penny dropping a few, you know, a few years ago. Um, but it was how I saw those non-financial um misconduct having obvious financial conduct to the extent I don't think there is such a thing as non-financial misconduct. I think it is, I think it's all the same. Because it always ends up in your pocket at the end of the day. And it's a business, you know, and I think that's keep coming back to it. You know, the corporate is different from the individual. The individual, yes, you know, we can, you know, there are offences that an individual can commit, and they can have criminal responsibility for those kinds of things. There's legislation, there's also ethics around that. But the business, it's all about its continuation as a sustainable, you know, uh commercial entity. Uh, and that can only come from making sure that those threats that you have or the emerging strategic factors that are coming to your business are constantly evolving. And actually, social, social morality or social, you know, the you know, what people think at the moment is constantly changing. And it it, you know, this conversation in terms of ESG and otherwise is probably a different one than you had had three, four years ago. Um, you know, it the whole the landscape is changing, and you know that and but but that's that's that's that's what happens. It's what happens to you know the fact that these sometimes are are social movements, which will you know be in an ascendancy in one way, or something else will become very important. And you the business just needs to keep abreast of that. And I I think as well, it's very difficult for a business, and I think CEOs got very, very confused for a number of years, thinking they had to tackle all of social ills or you know, things that are happening in society and have policies regarding that, or statements or otherwise. And I don't think they do. I I think as a business, as an individual, I think you definitely should take a stance, or otherwise, I think that's well, it's for you to make your own judgments on these, but as a business, I I think it's only those that are material to your business that you should have regard to and think does you know what's material to my business? Will this make an impact on my business?

SPEAKER_02 53:59

Okay, I want us just uh finish up talking a little bit more about your book, which I I have on order. I'm looking forward to reading it. Um, what I mean, what message do you really want people to take away from from the book? Um, when they, you know, a CEO or someone in an executive position or someone on a board reading that, thinking, oh my goodness, this whole world of ESG that I have to think about and do stuff, and how do I be sustainable in any way that you want to define that? What message do you want people to take away from your book? Why should they go and read it?

SPEAKER_03 54:35

Yeah, um, I very much viewed this as trying to bring a fresh perspective to ESG, and I think I'll hopefully bring a fresh perspective towards directors' duties. Um, it's it's it's a way of saying, don't worry, these are things that are pertinent to your business, have proper regard to them, take a rational, rational and uh justification to the decisions that you're making, and looking at each of them. So it's not as tricky as it first appears, and it's not something which is distinct from your business activity. And I think that was part of it, is you know, uh, as I was writing the book over the course of probably two years, there was definitely a sea change of ESG to the point that I was even at one stage, you know, toying with the publishers about saying, well, should we have ESG in the title anymore? Should it be a fresh perspective on ESG as a part and make that very clear? But I think it remains a useful piece shorthand. And and and I think hopefully it's sort of the perhaps having a new regard to the ESG in a changing circumstances, this is something that you know will draw in, I hope, you know, professional advisors and anybody and and particularly directors, you know, anyone who's running a business or providing advice to a business as to how to have regard to ESG, but at the same time, how to promote the success of your business and avoid criticism, failure, loss, you know, and crisis. And so, you know, it's what I hope to do is set ESG in in the context of an embedded part of business decision making, talk about governance and the risk element to uh and culture uh as effectively the decision-making processes and how you impact those within what I call the sustainable strategy of your business. Those are you know, effectively that impact assessment, the materiality assessment, the dual materiality assessment on that, uh, and then the decision, the governance, and then how you implement it, the reviews. That is a strategy, that's how you deal with it. And I hope, therefore, that you know anyone reading it can can find their way through what appears to be so many complicated elements of compliance, regulatory compliance, legislative compliance, plus also, as I said, stakeholder pressures through litigation, through your cons customers and consumers moving away from you, you know, etc. What why is that? And so it's all part, I think, of a continuum. And it's all, and I think if you view it in that element of it's all part of discharging my duties as a director, as a board, how to promote our success, I think you know that will I hope provide a little bit of a manual to how to ensure you you're in breed, sorry, you've complied with your duties and obligations and how you're going to promote the success of the company.

SPEAKER_02 57:36

Fan and I have found this conversation so useful. Thank you. From uh the the brand new perspective, as you say, of ESG being just part of good business practice and and the future belonging to those businesses that can that can really spend the time understanding that materiality, can spend the time actually thinking about those those risks, benefits, and opportunities for them, um, and challenging themselves to ask themselves, am I looking in the right place? Am I thinking about the right things? Am I asking the right questions? Thank you so much for joining us today. I have no doubt that everybody has found it as useful as I have. I hope they have.

SPEAKER_03 58:24

Well, absolute pleasure. Um, yeah, very much enjoying our conversation.

unknown 58:28

Thank you.

SPEAKER_02 58:29

As always, thank you, my listeners, for joining us. If you have found this useful, uh, please do subscribe and send this on to anyone else that you think would find it uh interesting and useful. And as always, keep asking good questions. Thank you.

SPEAKER_00 58:47

This podcast is intended to be of a general nature, will not be suitable for everyone, and should not be treated as a specific recommendation. We recommend taking professional advice before entering into any obligation or transaction. Paradigm Norton Financial Planning Limited is authorized and regulated by the Financial Conduct Authority.