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Corporate culture and the role of boards

09 September 2016 by Conor Ryan

 ‘There needs to be a concerted effort to improve trust in the motivations and integrity of business,’ says Chairman of the UK’s Financial Reporting Council (FRC) Sir Winfried Bischoff in his foreword to the FRC’s report looking at corporate culture and the role of boards. Culture is offered as the antidote to the public distrust of business that has permeated the globe since the financial crisis; and this applies equally to Ireland where businesses and charities have found themselves under the microscope in recent years for failing to live up to public expectations.

The FRC report proclaims that a healthy culture generates value and helps to stop people doing questionable things during times of stress. If culture equates to business success then good governance has a clear role to play here too. Strong governance underpins healthy cultures so it is vital that the board demonstrates good practice in the boardroom and promotes good governance throughout the business.

‘A healthy corporate culture is a valuable asset, a source of competitive advantage and vital to the creation and protection of long-term value.’

Companies do not exist in isolation. They prosper only when they build and maintain enduring relationships with a wide range of stakeholders based on respect, trust and mutual benefit. Given how culture and trust are so heavily interconnected, leaders (the chief executive in particular) have to embody the culture and embed it throughout the business at every level and in all aspects. Where this is not happening, boards must take action as they are ultimately responsible for setting the cultural tone.

Openness and accountability are considered to be key and the values of a company should inform the behaviours which are expected of all employees and suppliers. Similarly, effective stewardship should include engagement about culture and it should be reported on better. The FRC is also encouraging investors to challenge themselves about the behaviours they are encouraging in companies and to reflect on their own culture.

The FRC report recommends that companies do three main things to address culture:

  1. connect purpose and strategy to culture

  2. align values and incentives

  3. assess and measure.

The first of these requires boards to drive correct behaviours by linking the company’s overall purpose to its values. The strategy to achieve this overall purpose should also reflect the company’s values and culture.

The second means that recruitment, performance management and reward need to support and encourage behaviours consistent with a business’ purpose, values, strategy and its business model. Financial and non-financial incentives should be balanced and linked to behavioural objectives. Also, boards need to explain this alignment clearly to shareholders, employees and other stakeholders.

The final recommendation is easier said than done. Measuring culture is notoriously difficult but the FRC is keen that people try. They suggest that human resources, internal audit, ethics, compliance and risk functions should be empowered and resourced to embed values and assess culture effectively. I would venture to suggest that the company secretary already fulfils this role. Certainly as the ‘conscience of the organisation’ company secretaries are already ensuring that business proposals are a cultural fit and that the company is doing the right thing.

Finally, it is worth remembering that acceptable behaviour changes over time so culture has to be adjusted to reflect these evolutions. Even well-chosen values which typically stand the test of time need to be checked for continuing relevance.