By Stephen Haddrill, Chief Executive Officer of the Financial Reporting Council
Since the crisis, trust in business has been dented. The public, media, politicians and others are more willing to call out companies when they see actions that are inappropriate or people fail to live up to the ethics and behaviours expected of business.
Today’s digital age, particularly social media, can escalate a problem extremely quickly, causing damage to a business’s reputation and fortunes. Companies must establish a culture that can prevent poor behaviour, which encompasses all levels of the organisation, so it is embedded in the ‘DNA’ of all staff. This will benefit the business itself, as well as its stakeholders, investors and the UK economy in the long term.
At the Financial Reporting Council we are highlighting good corporate practice through the Culture Coalition, a collaborative project with the IIA (Chartered Institute of Internal Auditors), CIPD (Chartered Institute of Personnel and Development), CIMA (Chartered Institute of Management Accountants), IBE (Institute of Business Ethics) and City Values Forum. The aim of this Coalition is to highlight good practice and promote the importance of a healthy corporate culture in sustainable growth and value protection. We have had a very encouraging response from many individuals and organisations who all fed into our report of observations. This brings together a number of practical, market-led observations designed to help boards and companies establish and embed their desired culture.
The FRC strives to promote high-quality corporate governance and reporting in the public interest. Trustworthy information helps meet the needs of investors, generates confidence in the stewardship undertaken by corporate boards and is an important indicator of good culture in action. High standards of corporate governance and reporting are important for the fair and effective functioning of the capital markets that benefits investors, companies and the wider public interest.
We are custodians of the UK Corporate Governance Code, which, since 1992, has played a strong and positive role in defining and helping companies to set down in practice what good corporate governance means. The Code is not a rulebook and the FRC does not wish it to be viewed as such. The comply or explain approach gives companies flexibility in how they govern themselves. Boards should give extensive thought to how they apply the principles of the Code and consider carefully when they wish to depart from its provisions, providing a clear rationale when this is the case.
“Companies must establish a culture that can prevent poor behaviour, which encompasses all levels of the organisation, so it is embedded in the ‘DNA’ of all staff”
The FRC is aware that strict adherence to the principles and provisions of the Code is not, on its own, necessarily an indication that company culture is completely healthy. Codes set out principles for best practice that, if followed, make bad behaviour less likely to occur; and public reporting can make it harder to conceal such behaviour. But, by itself, a code does not prevent inappropriate behaviour, strategies or decisions. Only the people, particularly the leaders within a business, can do that.
The board must define the purpose of the company and what behaviours it wishes to promote in order to deliver its business strategy. It involves asking questions and making choices that will benefit the company now and in the future. This focus on the longer term was underlined in 2014 when the Code introduced a ‘viability statement’ to strengthen boards’ attention on the longer term and the sustainability of value creation. This will also provide investors with an improved picture of the state of the business and its prospects.
Through the Culture Coalition the roles of the board, executive management, CEO and middle management have been explored. Boards and executives play different roles. The board’s role is to influence, assess and monitor culture while the executive role is to drive and embed culture throughout the organisation. The two are most powerful when the purpose and values of the company are linked to its strategy and business model.
Many argue that the CEO is the single person with the most influence on culture. Boards have a responsibility in selecting, performance managing and holding CEOs to account. It is important to embed the values throughout the organisation through engaging middle management, aligning HR processes – from job advert to training and development – and ensuring appropriate reward structures.
Investors also have a role to play in ensuring a viable culture is in place and should engage with companies to build understanding of their long-term strategy. This is encouraged by the FRC’s Stewardship Code. The Stewardship Code, launched in 2010, has increased the quality and quantity of engagement between directors and investors. Many investors and companies approach engagement in a spirit of trust, openness and constructiveness, which are key elements in any corporate culture.
Focus on investors
Adopting a more stakeholder, as well as shareholder-centric approach, is a vital component of corporate success and essential to building trust. A positive culture is one that seeks to take proper account of shareholder and stakeholder concerns, backed up by incentives, clear communication and training opportunities to promote the delivery of value.
We intend to explore these and other findings in more detail at our annual FRC conference, Culture to Capital: Aligning Corporate Behaviour with Long-term Performance.
When there is a healthy culture, the systems, the procedures and the overall functioning and mutual support of an organisation exist in harmony. Boards need to ask the right questions and make the right decisions that will help foster a suitable culture that can then be entwined into the business model. This will contribute to the overall success of your business and create an environment on which investors can depend and that will continue to prosper in the long run.
About the Author:
Stephen Haddrill has been the Chief Executive Officer and Director of Financial Reporting Council Ltd since November 2009. Haddrill served as Director General at Association of British Insurers (ABI) from May 2005 to November 2009. Previously, he served as Director General at Fair Markets Group at the Department of Trade and Industry (DTI) since January 2002, where he was responsible for the development of the framework within which business operates.