It is a year since Sir Win Bischoff took the helm as Chairman of the Financial Reporting Council and the change that he has instigated is clearly coming through. His long career of running diverse boards of directors in complex businesses has taught him much in the way of how to achieve the goals required. And now we are starting to see the results. One thing is clear. ‘There will be a greater focus on culture’, he says in a video interview. And by that he means the way that culture within businesses needs to and can be changed. It is a long-term change. ‘You can change how certain aspects of the business are run, the way it is administered, perhaps even the business model’, he says. But he knows that changing a business culture takes much longer than most people imagine. ‘Star CEOs can come in and change quite a number of things’, he says, ‘but culture takes longer than that’.
He has started a round of meetings with boards across the country. And by the fourth quarter of this year he is promising the FRC will publish ideas about what they glean from these meetings and what change they would like to see in the future. It is early days but the views expressed so far relate to the elusive quality of ‘tone from the top’. Bischoff said that ‘an important factor was the choice of the chief executive, the attention the board pays to culture, that it familiarises itself with the outcomes of the culture, like customer feedback, behaviours, compliance with regulatory aspects, and so on’.
It is also clear that the FRC’s culture of persuasion rather than imposition will play a part. ‘We would like to come up with some ideas in relation to culture’, he said, ‘not that we would prescribe them, because you can’t prescribe them, but simply to give thought to what chairmen, chief executives and boards might need to consider in terms of culture’.
This is part of an overall change in the FRC’s thinking. ‘Emulation, I’ve found, is far more powerful than hectoring’, he says. The idea that you can provide guidance backed up with what he refers to as ‘bite’ and so change cultures and behaviours is seen as more powerful than laying down the law and producing only compliance-based disclosure. His long experience tells him that the need is to produce heartfelt, long-term change rather than change that only pays the idea lip-service. It is the logical continuation of the principle of ‘comply or explain’ which has been at the heart of UK corporate governance since the days of the Cadbury Report.
And he also wants to focus more on the long-term. This was behind the recent change, when considering remuneration at the top of companies, which removed the objective of ‘recruit, retain, and motivate’ from the Corporate Governance Code and replaced it with a need to promote long-term sustainability. ‘It is a nuanced change’, he says. ‘We wanted to get across the long-term aspect of the company which should be considered, the long-term prosperity of the company rather than the long-term prosperity of the individual. It is the long-term future of the company that ultimately should influence which kind of executives you hire, for what period, or what kind of compensation system’.
It is the same theme of encouraging long-termism which has motivated the idea of companies producing a viability statement which goes much further than the current ‘going concern’ statement. It is another measure which stems from Bischoff’s long experience and deep understanding of how companies work at the top. ‘We know that a board of directors, when it meets at its annual offsite, does not believe that the company is going to go down after a year’, he says. ‘When they talk they talk about three or five year plans. That’s what you do at a strategic offsite. We think that long-termism is a two-way street. One is that companies should give comfort to their investors about their long-term nature and the long-term planning that they do and the investors hopefully will then respond and take a longer term view themselves’.
He knows the idea of a viability statement with considerable leeway left to companies to decide the period on which they will report is, as he puts it, ‘unusual’. It is an experiment. ‘It hasn’t been tried before’, he says. But he is buoyed up by investor support. And it is another instance where the FRC is happy to provide guidance and stand back and see how it works. ‘We are saying to companies: “You, the company, know your business, know the nature of your business, know the business model, and therefore you should decide and then explain why in fact you have chosen the period you have chosen”’.
The same view permeates his thinking about the nature of audit committees, all the other board committees, and the importance of succession planning. He feels that a big change has occurred in that other board committees, particularly risk committees, are now seen as more important and taking up more time and effort than audit committees. In fact he sees much of the power of the traditional board moving outwards to the board committees. ‘I think what it is very interesting that the work of the board has obviously become more embracing overall but a lot of the work is nowadays carried out by the committees, risk committees, audit committees, compensation committees, remuneration committees, and so on’, he says. And as a result the importance of succession planning has spread from the board to include the chairmen of all those committees. For him it is all part of the efforts to move corporate culture towards the long-term. ‘If you are thinking long-term’, he says, ‘three or five years ahead in terms of your business model, then you should be thinking three or five years ahead in relation to some of the most important people in your company, both executive and non-executive’.
There are more changes in the pipeline. But it is clear that Bischoff is steering an FRC course which will move corporate thinking much more toward the long-term.