"A regular in newspaper headlines over the last few years, the company’s reputation had taken a hit through its implication in several high-profile incidents, which had aggravated our concerns about group-wide risk oversight and management, effectiveness of internal controls, as well as broader corporate culture.

We believe that G4S’ previous federal business structure had been a key factor in the issues which have impacted it during recent years. The company’s past focus on acquisitive growth and flag-planting has created a security conglomerate, not an integrated company.

We have engaged heavily with G4S at all levels. We met the company’s CEO, chair of the corporate social responsibility committee, as well as non-executive directors. Health and safety performance and employee behaviour were crucial issues that we discussed extensively with the company.

In light of the company’s embroilment in several custodial and detention service controversies, which most notably culminated in the company’s exiting of young offenders work in the UK, we also visited two G4S-run prisons in the country to gain more insight into its operations on the ground. These were largely reassuring, with G4S making significant efforts to ensure constructive relationships between its officers and the prisoners through its focus on prisoner rehabilitation. However, from a resourcing and security point of view, we still have material concerns about the sustainability of the UK prison industry as a whole.

We have seen positive changes at G4S. An important catalyst for this change was the appointment of its new CEO. The new CEO has recognised the need for cultural transformation through the consolidation of the company’s business structure. We have welcomed the centralisation of key processes such as major contracts, procurement and recruitment of business unit executive teams since he took over – all issues which we had raised in previous discussions.

G4S has also realised that health and safety is an important focus of this cultural transformation. It has taken steps to fortify its practices through increased managerial accountability and awareness. These measures, together with its strengthened human rights framework, should help to prevent incidents in the future.

Moreover, acquisitive growth is no longer the company’s main focus. The strategic emphasis is now on organic, sustainable growth and a portfolio rationalisation programme, which has already led the company to dispose of 25 of its business units, with more underway.

Contract discipline has also been strengthened as part of the leadership’s commitment to centralisation. A crucial aspect of this improved discipline has been the explicit consideration of reputational risks. Positively, and in contrast to earlier meetings with the company, the new CEO was able to give examples where he put cultural alignment before purely commercial interest.

With many of its initiatives still in their early stages, G4S still has a long way to go, something which it has openly admitted. Ultimately, however, we are encouraged by the progress made to date under the new leadership and believe that many of the necessary foundations for safer operations have been laid.

Leon Kamhi, Head of Responsibility at Hermes Investment Management and Maxine Wille of Hermes EOS.

This case study is an extract from Hermes EOS Annual Report.