People Power

While visionary leaders can help transform an organisation, they need to motivate the people they hire, suggests Chris Field.

Reading time: 7 minutes.

When someone complains about not being allowed bathroom breaks in a retailer’s warehouse, about fake brands sold by an online retailer or about a grubby hotel, the company responsible can easily be found out. An aggrieved Sports Direct employee’s YouTube video can go viral, a guest shot of an insanitary bathroom can trend on TripAdvisor or a real time Twitter storm may kick off, as Starbucks found last year when the CEO had to apologise for racist behaviour by staff. Social media and big data processing power, combined with a general willingness to share the daily details of our lives, have transformed the information available about our experiences and thus the power people have to complain. Our company interactions are much more transparent and more personal, not only for us, but also for those held responsible for any failings. No CEO wants to feature in the next cringeworthy meme — that is not usually the immortality even the most hubristic person seeks.

Business success is a combination of many small decisions, as well as the much-vaunted big strategic ones. Managements who enable staff to sweat the small stuff for customers and feel pride in their contribution are far more adaptable than centrally controlled hierarchies. Every generation complains about the speed of change but now 24 hours is a long time in business. Given that the missteps mentioned above can affect brand perception and then the bottom line, it makes sense to think about what the warning signs are and how we can test what managers tell us. In particular, whether their employees have a sense of ownership of products and services: that is one factor that will determine the customer experience. We look for current insight into the employee view using Glassdoor, net promoter scores and a range of online insight sites.

Rentokil Initial is a pest control and hygiene services company. It provides services in 75 countries and employs 39,000 people. It is a people business. Their employees go into people’s homes and businesses to deal with rodent or insect infestations and hygiene issues which are major sources of anxiety and disgust for customers, and they have to earn their trust. Yet employee feedback records enthusiasm for the work. In fact, Rentokil’s Line Manager Index overall score is not just in the top quartile of Global companies as measured by Korn Ferry Hay Group Consultants, it outperforms the top quartile norm on each of the 10 metrics measured.

The company has a training programme for managers to achieve cultural and behavioural change, particularly for those in businesses acquired in recent years. The integration of what were ‘Mom and Pop’ community businesses is key to sustainable growth. The company also provides apprenticeships offering opportunities to train school leavers, transforming their employment prospects and building company loyalty, which is evident in their testimonies. Rentokil received a positive Ofsted external assessment of the apprenticeship programme, with the first 11 apprentices to complete the 12-month programme the company developed all receiving the highest Distinction rating from the external assessor. In the UK, the company now has 230 apprentices across all lines of business and at group level. Unusually for companies using the UK apprenticeship scheme, Rentokil has achieved a run rate recovery for the Apprenticeship Levy which is exceeding the rate of payments it is making.

In 2017 and 2018 Rentokil was ranked by its employees in the top 10 best places to work out of 800,000 UK companies, with the CEO approval rating given by its employees that positions Andy Ransom 6th in the UK. Of course, awards are only transitory measures of success. And employee engagement is only one measure of management competence. However, the company’s investment in workforce training gives Rentokil a capacity to adapt, enables employees to meet customer demand and service needs with a sense of ownership and contributes to their retention. These social factors will not prevent mistakes or accidents, but they can reduce their risk and in a highly regulated business dealing with vermin extermination and site hygiene, that matters.

What does all this really mean to the investment case of Rentokil? Well, it is a great example of where high employee engagement levels can be a strong contributor to driving shareholder value. Through what they term Project 365, Rentokil is targeting short-term retention of sales and service staff of 90% from 77% and 76% respectively in 2017, driven by developing manager and staff capability. Like many other companies, Rentokil spends a lot of time and money recruiting and training people; the more they can retain after one year, the more productive the workforce and the fewer people they need to recruit and train subsequently. They are already broadly halfway towards meeting an extra £10m in cost savings generated solely from achieving the 90% target. Perhaps more important is the positive impact reduced staff churn has on customer service and contract retention as this has a very direct and high economic cost to the company. This is a strong contributory factor to achieving Rentokil’s 90% customer retention target from the current level of 86%. If this target can be met (we believe it can) and the new business wins are maintained, then the company’s organic revenue growth rate can double to 6-8% and an extra 120bps of margin can be earned. Certainly the high and improving Net Promoter Scores indicate a good chance of success. Empirical evidence suggests that organisations in the top quartile on employee engagement and enablement achieve revenue growth of 4.5 times that of companies languishing in the bottom quartile. For Rentokil, proft growth would not only accelerate through margin expansion and higher revenue growth but investors would also value a company that was growing at such a rate much more highly. Although Rentokil currently trades on 22 times earnings, the business characteristics make it much more attractive than many of its more highly rated Consumer Staples sector peers. In all my time of managing money, I have never come across a company whose top 100 managers, according to its Senior Independent Director, would proverbially ‘die in a ditch’ for their CEO. We are very strong supporters.

Majedie was founded with Responsible Capitalism as one of our founding principles. This phrase combines the goal of making money for our clients and using shareholder engagement to improve the environmental, social and governance signature of the companies we hold on our clients’ behalf. When we meet the Rentokil management team we ask about progress against targets and look for potential slips. We recognise that in order to improve their operational performance companies have to address myriad, everyday challenges which, if done well, can accumulatively produce better results. Leadership teams need a Darwinian ability to adapt and they can develop that by empowering the people they employ. Rentokil rat catchers now use the Internet of Things — sensors linked to a company and customer portal to initiate a response before numbers grow. As climate change and global warming somewhat inevitably increases the numbers of pests, we think the people who know how to deal with them are unlikely to be short of work.

Author

Chris Field