“Cultural failures damage reputation and have a substantial impact on shareholders value.” That’s the conclusion of the Financial Reporting Council (FRC), the UK’s corporate governance watchdog, in a report on corporate culture.
The reports seeks to make observations for company boards that are actionable in helping executives and non-executives manage and establish effective corporate cultures.
The report was much anticipated after a string of corporate scandals in the UK and abroad which brought into question cultural standards across a range of sectors and organisations.
The FRC’s paper, Corporate Culture and the Role of Boards, is based on a series of observations from conversations with company chairmen and chief executives as well as a range of stakeholders.
The report makes the point that managing culture is a critical part of risk management. “Intangiable assets such as intellectual property, customer base and brand now account for over 80% of total corporate value, compared to under 20% 40 years ago.”
The report goes on: “This shift magnifies the impact on total value when a reputational crisis occurs.” The FRC makes a series of points.
- The value of culture should be recognised; directors should not wait for a crisis “before they focus on company culture”.
- The chief executive must embody a company’s culture but boards have a responsibility to act when leaders fail to “deliver”.
- Openness and accountability should be demonstrated in the way a company “conducts business and engages with and reports to stakeholders. This involves respecting a wide range of stakeholder interests.”
- Key company functions should be “empowered and resourced” to act on embedding the right values and assess culture effectively. This includes human resources, internal audit, ethics, compliance and risk functions.
- Pay and incentives should “support and encourage” behaviour consistent with company values and purpose. A board has to be able to explain this “alignment” to stakeholders.
- Boards have to pick and use the right indicators for measuring progress against company values and purpose.
- Investors need to ask themselves whether they encourage the right behaviour in companies.
The FRC now expects to receive feedback on the report and intends to update Guidance on Board Effectiveness based upon responses.
