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FRC publishes report into corporate culture

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21 Jul 2016

The Financial Reporting Council (FRC) has published the results of its study on corporate culture. This has drawn in the views and the expertise of a number of organisations under the “Culture Coalition” banner and has interviewed extensively among chairmen, chief executives and company secretaries. The report “looks at the increasing importance which corporate culture plays in delivering long-term business and economic success”. Other members of the Culture Coalition have also published reports.

In the foreword to the report, the Chairman of the FRC, Sir Winfried Bischoff, comments that “a healthy culture both protects and generates value”.  He also comments that “strong governance underpins a healthy culture, and boards should demonstrate good practice in the boardroom and promote good governance throughout the business.  He indicates that in taking action on culture, those involved should consider:

  • Connecting a company’s purpose and strategy to culture.
  • Aligning values and incentives which support and encourage behaviours consistent with the company’s purpose, values strategy and business model.
  • Assessing, measuring and reporting on company culture.

Through undertaking a project on corporate culture, the FRC aimed to:

  • gain a better understanding of how boards are addressing culture;
  • encourage discussion and debate; and
  • identify and share good practice to help companies.

The FRC focused its attention on the following aspects of company culture:

  • The role of the board in delivering sustainable success.
  • Engagement with employees, customers, shareholders and other stakeholders.
  • How to embed the desired culture.
  • How to assess culture. 

The report highlights that “companies and boards are taking action to shape their culture in order to encourage investment”.  It also encourages those that have yet to take action to consider the benefits action will bring.  Overall it “aims to stimulate thinking around the role of boards in relation to culture, and encourage boards to reflect on what they are currently doing.” 

The FRC has concluded that “culture is key to sustainable growth.” They found that boards are spending more time discussing culture than five years ago. 39% of the FRC’s survey respondents reported that ethics and culture was a full board agenda item at least once every six months. 

Key findings taken directly from the report include:

  • Recognise the value of culture: A healthy corporate culture is a valuable asset, a source of competitive advantage and vital to the creation and protection of long-term value. It is the board’s role to determine the purpose of the company and ensure that the company’s values, strategy and business model are aligned to it. Directors should not wait for a crisis before they focus on company culture.
  • Demonstrate Leadership: Leaders, in particular the chief executive, must embody the desired culture, embedding this at all levels and in every aspect of the business. Boards have a responsibility to act where leaders do not deliver.
  • Be Open and Accountable: Openness and accountability matter at every level. Good governance means a focus on how this takes place throughout the company and those who act on its behalf. It should be demonstrated in the way the company conducts business and engages with and reports to stakeholders. This involves respecting a wide range of stakeholder interests.
  • Embed and Integrate: The values of the company need to inform the behaviours which are expected of all employees and suppliers. Human resources, internal audit, ethics, compliance, and risk functions should be empowered and resourced to embed values and assess culture effectively. Their voice in the boardroom should be strengthened.
  • Assess, Measure and Engage: Indicators and measures used should be aligned to desired outcomes and material to the business. The board has a responsibility to understand behaviour throughout the company and to challenge where they find misalignment with values or need better information. Boards should devote sufficient resource to evaluating culture and consider how they report on it.
  • Align Values and Incentives: The performance management and reward system should support and encourage behaviours consistent with the company’s purpose, values, strategy and business model. The board is responsible for explaining this alignment clearly to shareholders, employees and other stakeholders.
  • Exercise Stewardship: Effective stewardship should include engagement about culture and encourage better reporting. Investors should challenge themselves about the behaviours they are encouraging in companies and to reflect on their own culture. 

Over the coming year the FRC will be monitoring reporting on culture by companies and investors. No changes to the UK Corporate Governance Code are planned as a result of this exercise. The FRC will use the observations in this report, and any feedback received, to update the Guidance on Board Effectiveness, which was last updated in early 2011.  Feedback on the report is welcomed. 

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