Company boards must focus more on corporate culture, FRC finds

COMPANY boards must pay more attention to instilling the right corporate culture in order to restore trust in business and deliver long-term sustainable growth, according to the profession’s watchdog.

The report, published by the FRC, comes after the prime minister, Theresa May, called for an overhaul of boardroom governance, including plans to put employee representatives on company boards.

Recent governance scandals including Volkswagen’s emissions rigging, Tesco’s accounting irregularities, and the Libor investigations damaged trust in big business and director behaviour and highlighted the need for greater attention to company culture at board level, the FRC said.

“A healthy corporate culture leads to long-term success by both protecting and generating value in the UK economy. It is therefore important to have a consistent and constant focus on culture, rather than wait for a crisis. A strong culture will endure in times of stress and change,” said Sir Win Bischoff, chairman of the FRC.

The report, which collated the views of more than 250 chairmen and CEOs of the UK’s largest companies, found that excessive boardroom pay is often cited as a driver of bad behaviour and that the “inconsistent alignment” between pay and company performance has led to a lack of public trust.

It also found that the culture is increasingly important because intangible assets such as intellectual property, customer base and brand now account for over 80% of corporate value.

“An increasing proportion of enterprise value is now made up of intangibles that are not capitalised such as brand, reputation, intellectual property, human capital and culture,” the report said.

The FRC admitted that culture is inherently difficult to measure and is hard to link to executive. However, the researchers outline seven key findings associated with setting and measuring the right company culture.

• 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.