Cracking the Corporate Culture Conundrum

The UK Financial Reporting Council (FRC) has just released its much-anticipated report – Corporate Culture and the Role of Boards. Described by the FT as ‘good stuff’, it is a valuable summary of a year-long project capturing the views of market practitioners on the ‘increasing importance which corporate culture plays in delivering long-term business and economic success’. In the Foreword, the Chair of the FRC, Sir Win Bischoff, states that ‘strong governance underpins a healthy culture’, which ‘both protects and generates value’.

The report is 66 pages long.  Set out below are some key take-aways which company secretaries may wish to consider in advising their board on how the company measures up, and next steps.

1. The board needs to agree its role in shaping, embedding and overseeing culture.  Control and command is no longer an appropriate strategy.

2. Boards should devote sufficient resource to evaluating culture and consider how they report on it. Key Performance Indicators need to take greater account of intangibles such as brand and reputation – this is where corporate value increasingly lies.

3. Strong operational performance underpinned by a weak culture creates a strategic dilemma – can the value creation process, and the company itself, survive in the longer-term?

4.Succession planning for, and the appointment of, the CEO is critical – they have the principal responsibility for driving culture in the company.

5. Boards must hold the executive to account where they find misalignment with company purpose and values.

6. Allowing non-executive directors access to the business – ‘line of sight’ – is critical. Though ‘orchestrated royal visits’ have limited value.

7. Consider the level of trust the company enjoys across its wider stakeholder landscape and not just among its investor base. And realise that stakeholders are always looking at the board, the directors and the executive, and how they behave.  The ‘say/do’ ratio of these organisational leaders is what really matters.

8. Despite the emphasis on ‘culture, values and behaviours’, ‘policies, processes and systems’ still have their place.  A good whistleblowing policy, a well-enforced Code of Conduct and a ‘trusted and independent company secretary’ are examples of good practice.

9. The contributions of other functions – HR, internal audit, ethics, compliance and risk – should be strengthened in terms of their ‘voice in the boardroom’.

10. Essentially, culture is about people, and boards should feel comfortable about setting values.  These values should be reviewed periodically and, if necessary, finessed – nothing stands still for ever, and values may need to reflect changed organisational circumstances.

Many of the report’s observations will be considered common sense, but that doesn’t make them easy to implement – we all know the next incident of corporate value destruction is just around the corner.

As the person who led the steering group which produced the FRC’s Guidance on Board Effectiveness – the document on which this review and report is based – I am pleased that many of the FRC’s observations are covered in that publication (though further refinement will now be made).

As the Guidance – and this recent report – make clear, cracking the corporate culture conundrum boils down to two important words – Governance Leadership.