Sir Winfried Bischoff, chairman of the Financial Reporting Council (FRC), advises in his foreword to the Council’s new report on corporate culture that companies should connect purpose and strategy, align values and incentives with and assess and measure culture. “Investors should consider carefully,” he adds “how their behaviour can affect company behaviour and understand how their motivations drive company incentives.”
This new report from the FRC was undertaken to “gain a better understanding of how boards are currently addressing culture, to encourage discussion and debate, and to identify and share good practice to help companies.” In order to prepare it the FRC conducted an extensive literature review, considered submissions from its partners, conducted interviews with FTSE chairmen and CEOs, surveyed of heads of internal audit, chairmen and company secretaries, and conducted “many roundtables and discussions with investors, a range of professionals working in companies, and organisations with expertise and experience in company culture.”
What counts is the actual behaviour of the organisation and its top people. This is far more significant than a hundred statements about a company’s culture or its ethical policy.
David Tyler, Chairman, J Sainsbury
In order to promote corporate culture, the report advises, chairmen and boards should:
Recognise the value of culture
Be open and accountable
Embed and integrate
Align values and incentives
Assess, measure and engage
Four Workstreams of the report
Delivering sustainable success – the role of an effective board.
People issues – delivering alignment between culture, values, human resource practices and performance reward systems.
Stakeholder issues – relationships with shareholders, customers and suppliers, and the impact on the wider community and environment.
Embedding and assurance – measuring and monitoring culture, the role of internal audit, risk management and public reporting of cultural indicators.
Boards were comfortable with their responsibility for setting the values of an organisation, but were much less comfortable about their role or ability to embed these values. In contrasting evidence, however, a survey of chairmen found that 89 per cent felt the role of the chairman “is influential or very influential and 54 per cent viewed the role of NEDs” similarly. The same survey found that the CEO has the most influence and that boards are spending more time “discussing values, behaviours and culture than they were five years ago.”
The role of corporate culture also plays a significant part in due diligence in mergers and acquisitions. Many mergers were not pursued “because of a lack of cultural fit or because they had concerns about the values and behaviours in the other company.” Even many private equity houses said it was common for them to “walk away from a deal because of an overly dominant managing director or chief executive that they did not feel they could work with.”
It’s good for NEDs to go out into the business but they need to do it carefully. Orchestrated royal visits by herds of NEDs are in my view often not very productive, whereas individual NEDs popping in to sniff the breeze works well.
Rupert Soames, Chief Executive, Serco
Chairmen also report that culture impacts the strategy that is chosen, for example:
Which international markets should the company operate in?
Can the desired culture be maintained in particular markets?
How quickly should the company expand?
Will rapid growth affect the culture in a harmful way?
Areas for vigilance
Dominant chief executive
Length of chief executive tenure
Pressure to meet the numbers/ overambitious targets
Lack of access to information
Low levels of engagement between leadership and employees
Lack of openness to challenge
Poor succession planning
Misaligned incentives and flawed executive remuneration practices
Tolerance of minor regulatory or code of ethics/conduct breaches by star employees
Lack of diversity
In order for culture to play its role properly, the report advises the engagement of “middle management, human resources, recruitment induction and training, succession planning, incentives and reward, speaking up (speak up and whistleblower policies), codes of ethics and conduct, risk management and risk culture.” Companies must also build trust with stakeholders – customers, employees, suppliers, regulators and shareholders – and must report on culture. Investors should also be asking: “are the company’s values aligned with its business model, have they turned down business because of poor cultural fit, what actions has it taken to reinforce culture.”
Boards can assess and monitor culture by working with and receiving data from HR, internal audit, risk and compliance functions. But they must also design their own cultural indicators, warns the report and “they must understand the culture and spend time in the business.” The report concludes with eight cases studies on companies such as Marks & Spencer and TalkTalk.