A recent report by the United Kingdom’s financial regulator said companies have improved compliance with reporting and other requirements, but the regulator’s chairman is urging companies to tackle the less tangible issue of corporate culture.
Sir Winfried Bischoff, chairman of the Financial Reporting Council, wrote an opinion piece in London’s City A.M. last week that raised the question of who is accountable when a company’s culture is found at fault. He acknowledged corporate culture “is not an easy concept.”
“Good corporate governance is an essential part of a healthy corporate culture,” Bischoff wrote. “Strict adherence to the principles and provisions of the (corporate governance) code is not, on its own, necessarily an indication that company culture is completely healthy.”
Bischoff pointed out that last year’s revisions to the U.K. Corporate Governance Code require boards to set “the appropriate tone from the top.” He said the FRC this year will work with various stakeholders to gain “practical insight” into how a company establishes its culture and embeds that culture throughout the enterprise. The governance code recognizes that culture can vary between companies, and incorporates flexibility within the framework which allows companies to use a comply or explain approach, Bischoff wrote. But boards should consider carefully when to take advantage of that flexibility, and provide a clear rationale when doing so.
A company’s risk and risk appetite are closely tied to its culture, Bischoff said, adding that boards should take a close look at their risks, how they affect the company’s long-term viability, and whether performance drivers, rewards, and other policies support the company’s values. Boards need to ask questions and balance innovation with “disproportionate risk-taking,” he said.
“Any governance framework, however, cannot totally eliminate risk and should not seek to do so,” Bischoff said. “The difficult question of what represents an acceptable level of failure will always be with us, but that does not mean that we should be complacent.”
Bischoff said boards should become “a place of constructive challenge,” and be constantly vigilant when it comes to corporate culture.
“The FRC knows that this is not an easy task,” Bischoff wrote. “We are ready to help by continuing to seek new ways to promote and improve governance practice.”
In his introduction to the FRC’s annual corporate governance report, Bischoff said he was pleased with many of the gains made over the past year and an increase in compliance. Specifically he pointed to improvements in the quality of audit committee disclosures, an uptick in companies retendering external audit contracts, and gains in diversity. Bischoff said the U.K. is on track to meet its target of 25 percent of women directors in the FTSE 100 in 2015, and is seeing a rise in the numbers of women executive directors after it stalled around 5 percent to 6 percent for several years.
The report cited the need to improve the executive pipeline in relation to diversity issues, and announced the FRC is launching a project for best practice on high quality succession planning. The report pointed to gains in reporting on diversity as well, with 85 percent of the FTSE 100 now having a clear policy in place, but urged the FTSE 250 to do better than its current level of 56 percent with policies in place.
Full compliance with the governance code rose to 61.2 percent of the FTSE 350, the report said, while more than 93 percent of that group is compliant in all but one or two provisions. More companies also have signed on to the U.K. Stewardship Code, now approaching 300 signatories, although their level of engagement varies. Of particular concern are the quality of explanations and whether statements against the code or conflict of interest disclosures are up to date, the report said.
The FRC said it will take heed of increasing concerns among companies and investors about proxy advisors, especially their “perceived lack of engagement” with companies and what the FRC called a box-ticking approach.