FRC gives boards seven tips to improve corporate culture

Trust and the importance of an effective business culture were the primary themes of the latest Airmic Evening Lecture.

In his speech, Corporate Culture and the Role of Boards, Stephen Haddrill, CEO of the Financial Reporting Council, said trust in elites, including politicians, the media and even NGOs was falling – and business was not exempt.

He told attendees that trust mattered to companies “because so much of the value in the business lies in its reputation, in its brand, in consumer confidence”.

With trust in business falling rapidly, Haddrill said the gap between market value and the value reported in the balance sheet was increasing.

“So the system of reporting and governance and investor stewardship needs to evolve and pay more attention to how the company serves the wider community,” he said.

Haddrill cited the UK’s strong framework for ensuring that corporate behaviour could be trusted which was underpinned by a robust legal system.

However, this could not work in isolation – the tone at the top of the company also needed to be addressed.

This, Haddrill said, was the impetus behind the FRC’s 2015 project on corporate culture – which included Airmic among a coalition of partners.

Addressing the findings, Haddrill said it was important to clarify the term culture first.

“Most large organisations will have employees from a wide range of cultures: different nationalities, different social backgrounds, different religions,” he said. “And no organisation can override these differences, nor should it. But it can determine a common set of behaviours that will deliver the reputation it seeks.  So when we talk about corporate culture it is behaviours, perhaps values, that we are talking about.

“Another point is that the culture of a company is to some degree the product of its history, of the nature of its business and the environment it operates in.  As that environment changes so the culture may need to change.  That is not easy and will not be achieved overnight or through a few corporate messages.”

Considering the role of the board against this background, seven key observations were made in the report, Haddrill said, encouraging them to:

• “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. Decisions must be consistent with the desired culture. This includes decisions on appointments, remuneration incentives and mergers and acquisitions.

• “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, engages with and reports to stakeholders. This involves respecting a wide range of stakeholder interests.

• “Assess and monitor: Measures, indicators or proxies for culture should be tailored to the behaviours and include external as well as internal stakeholder views.”

Haddrill added: “Once a healthy culture is in place, the ongoing success of the company and its culture are rooted in diversity and succession planning.”

Looking specifically at risk, Haddrill said the board must ask if the company is clear on its risk appetite and the effectiveness of its communication.

“What risks does the culture create for the organisation?” Haddrill said. “How is risk taking encouraged and rewarded and how are risk events assessed to ensure key lessons are learnt?

“Our research and engagement showed that there is an important role and opportunity for risk professionals to play in advising and supporting the board when considering governance, risk and culture in the business.

“Airmic also provided much valued insight to the project advising that risk culture should be thought of as a way of framing risk and culture in the organisation’s overall culture and management system – acting as a bridge between risk, reward and risk appetite. Risk taking is a fundamental part of growing a successful business and companies must not seek to eliminate risk. They should be ensuring that their approach to risk taking – their risk appetite – is aligned to their values and an intrinsic part of their culture. Companies must also continually question if the culture they have poses any risks to the business.”

He added: “During the evidence gathering part of the project, one risk professional told us ‘that risk culture is not given enough prominence because it is not properly understood’. Others suggested that organisations do not engage because they are reluctant to appoint risk managers who ask difficult questions, and want access to sensitive information.”