23 August 2016 by David Styles
In isolation, the principles of the Corporate Governance Code cannot prevent inappropriate behaviour, strategies or decisions
There is much work to do to rebuild trust in business. The media, politicians and commentators frequently draw attention to corporate conduct that falls below the standard expected; and in today’s digital age, instant communication can escalate a problem quickly, causing damage to business reputation and its future.
The Financial Reporting Council strives to promote high quality corporate governance and reporting in the public interest. Trustworthy information helps meet the needs of investors, generates confidence in the stewardship undertaken by company boards and is an important indicator of wider corporate behaviour. High standards of corporate governance and reporting are important for the fair and effective functioning of the capital markets that benefit investors, companies and the wider public interest.
We are custodians of the UK Corporate Governance Code, which has, since 1992, played a strong and positive role in defining and helping companies to set down in practice what good corporate governance means. The Code is not a rulebook and should not be viewed as such. The ‘comply or explain’ approach gives companies flexibility in how they govern themselves. Boards – ably assisted by company secretaries – should give extensive thought to how they apply the principles of the Code and consider carefully when they wish to depart from its provisions, providing a clear explanation for this decision.
The FRC is well aware that, on its own, strict adherence to the Code is not necessarily an indication that company culture is completely healthy. Codes set out principles for best practice that, if followed, make bad behaviour less likely to occur; and public reporting can make it harder to conceal such behaviour. But, in isolation, the Code cannot prevent inappropriate behaviour, strategies or decisions. Only the people, particularly business leaders, can do that.
Our report, Corporate Culture and the Role of Boards, published on 20 July, promotes the importance of a healthy corporate culture in creating sustainable growth and protecting value. This brings together a number of practical, market-led observations designed to help boards and companies establish and embed their desired culture. We had a positive response from many individuals and organisations – including ICSA: The Governance Institute and its members – who contributed to our report.
We observed that it is important for the board to define the purpose of the company and what behaviours it wishes to promote in order to deliver its business strategy. It involves asking questions and making choices that will benefit the company now and in the future. This focus on the longer term was underlined in 2014 when the Code introduced a ‘viability statement’ to strengthen boards’ focus on the longer term and sustainable value creation. This will also provide investors with an improved picture of the state of the business and its prospects.
In the culture report and associated research, the roles of the board, executive management, chief executive, company secretary and middle management are explored. Boards and executives play different roles. The board’s role is to influence, assess and monitor culture and the executive’s role is to drive and embed culture throughout the organisation. The two are most powerful when the purpose and values of the company are linked to its strategy and business model. Many argue that the chief executive is the single person with the most influence on culture. Boards have a responsibility in selecting, performance managing and holding chief executives to account.
In a survey of 34 FTSE company secretaries conducted by Independent Audit Limited for the report, just over half said they feel the board gives enough attention to corporate culture and expected standards of behaviour. Company secretaries were less content with the attention given to culture than the chairmen who were also surveyed for the report.
The company secretary’s role is important and is a position of significant influence when it comes to culture. It is a position of trust, typically considered to be impartial and the ‘senior independent executive’ in the business. The company secretary typically sits on the executive committee, has access to high-level information and is often the person in the boardroom who has been there the longest. Consequently, the company secretary is in a position to influence the board and culture. This can happen in a number of ways:
The company secretary’s influence can depend, to a large extent, on the relationship with the chairman and the NEDs. They are a trusted adviser to the NEDs who will turn to them with the difficult questions they might not be comfortable raising with others.
The company secretary also plays an important and sensitive role within the company, based on a position of trust. They are usually responsible for ensuring business/ethical standards are upheld. They often act as the designated officer for the purposes of whistleblowing procedures and prepare the annual compliance statement and report to the audit committee on these matters.
The company secretary is in a position to play an important role in guiding the board on culture. They also play a direct role within the company, being responsible for a number of the levers that are part of the cultural fabric of the company and have ample opportunity to gather useful insights into what is happening in the business ‘on the ground’. Boards can look to the company secretary to provide them with unique insights into culture and behaviours at all levels of the business; to influence the tone and tenor of culture conversations; to help them ensure behaviour in the boardroom is aligned to values and the desired culture; and that behavioural considerations are factored into decision making.
Company secretaries also have a role in dealing with investors, who should engage with companies to understand their long-term strategy and the role that culture plays in that. This is encouraged by the FRC’s Stewardship Code. The Stewardship Code, launched in 2010, has increased the quality and quantity of engagement between directors and investors. Many investors and companies approach engagement in a spirit of trust, openness and constructiveness which are key elements in any corporate culture.
Adopting an approach which considers all stakeholders is a vital component of corporate success and essential to building trust. A positive culture is one that takes account of all concerns, backed up by incentives, clear communication and training opportunities to promote the delivery of value.
The FRC will explore these and other findings at our annual conference, Culture to Capital: aligning corporate behaviour with long-term performance, on 20 September. When there is a healthy culture, the systems, procedures, and overall functioning and mutual support of an organisation exist in harmony. Boards need to ask the right questions and make the right decisions that will help foster a suitable culture. This will contribute to the overall success of the business and create an environment that investors can depend on and will prosper in the long term.
Companies that establish a culture which minimises poor behaviour, encompasses all levels of the organsiation and is embedded throughout, will deliver benefits to their investors, stakeholders, society and the UK economy.