UK regulator report on corporate culture
The UK Financial Reporting Council (FRC) has released Corporate Culture and the Role of Boards, which addresses how boards and executive management can steer corporate behaviour to create a culture that will deliver sustainable performance. Adding to the increasing regulator focus globally on the importance of corporate culture, it specifically addresses the role of culture in long-term value and the role of the board in shaping, monitoring and overseeing culture.
Referencing the concept of the ‘social licence to operate’ and the UK Corporate Governance Code (the Code), the report is clear that it is the board’s role to determine the purpose of the company and establish the culture, values and ethics of the company. The CEO has responsibility to implement these values and ethics, with the report noting that ‘At an operational level the focus will be on obtaining assurance that the company’s operations are aligned with its culture. In this way, boards and executive management can ensure that decisions around value creation and values are fully integrated’.
Interviews and meetings with more than 250 chairmen and CEOs from the UK's largest companies, investors, leading industry experts and other stakeholders contributed to the report’s findings. Chairmen and chief executives ‘agreed overwhelmingly that boards must have a responsibility for culture and must exercise oversight in this area’. Recognising the challenges inherent in boards being confident that the lived values and behaviours align with the desired values and behaviours, the report notes that ‘boards need to start by defining their purpose and values and setting out clearly the desired culture and behaviours, against which they can benchmark actual behaviour throughout the organisation. They then need to develop frameworks and tools to assess behaviours and culture to guide management and board decisions’. And alignment of values and incentives is a key area where the board can align the purpose of the company with the desired values.
The report notes that essential enablers of positive and productive behaviours are trust and openness, as well as accountability. The report includes questions a board can ask, such as: ‘What is the company telling the outside world about what it stands for and how it conducts business? What behaviours are being driven when setting strategy and financial targets? Are we seeing evidence of sub-cultures or pockets of autonomy in the business that could undermine the overall culture?’
The report also covers the responsibility of management at every level for owning and maintaining the culture. It notes that human resources, internal audit, ethics, compliance, and risk functions should be empowered and resourced to embed values and assess culture effectively, and their voice in the boardroom should be strengthened.
Assessing and measuring culture remains a challenge. Quantitative data such as employee turnover can indicate areas of potential concern, and qualitative data from focus groups with employees and other stakeholders can provide a more nuanced cultural assessment and highlight risks. The report also noted that digital developments mean that boards need to ask themselves if they are leveraging technology sufficiently to assess and monitor culture risk.
Partnering with the FRC to produce the report were the Chartered Institute of Management Accountants, the City Values Forum, the Chartered Institute of Personnel and Development, the Institute of Business Ethics and the Chartered Institute of Internal Auditors.