18 April 2018 by Peter Montagnon
Updates to the UK Corporate Governance Code will spur directors to keep tabs on behaviour
It is now official – or at least almost. The new draft of the UK Corporate Governance Code requires boards to monitor and assess culture and satisfy themselves that behaviour throughout the business is in line with the company’s values.
Understanding and shaping behaviour is a new task for boards. Most people agree that culture is not directly measurable, but now boards must find ways of assessing it and satisfying themselves that people are behaving in the way that is expected of them.
The Institute of Business Ethics (IBE’s) latest Board Briefing – Culture Indicators: understanding corporate behaviour – aims to help with this task.
Starting by looking at the information boards are receiving, it asks what more they need and how they should interpret the data they are sent. Although boards may have skills in traditional areas like finance, much of the material around culture is new.
Directors are not alone in wondering how to evaluate a corporate code of ethical behaviour. They may also be less attuned to the important culture and behavioural signals from some traditional indicators, like the degree to which the company fulfils its commitments on payment terms to suppliers – an important indicator of stress.
A core message is that boards need to look at a reasonably wide range of indicators and be prepared to make connections that add to the overall picture. A company whose employees, customers and suppliers are reasonably happy likely has a positive culture, but boards tend to focus their attention on a limited number of human resource indicators.
For example, survey evidence in the briefing suggests that boards spend little time looking in detail at the supply chain or at customer complaints.
On staffing, they look at survey results but rarely check sites like Glassdoor, which hosts worker reviews, to see what recently-departed employees say about the organisation.
Few are the companies that look at morale in the supply chain – but this can tell you a lot about how a company is perceived by key stakeholders and the build-up of unwanted stress, as some supermarkets have learned to their cost.
All this involves a raft of new work. Rather than adopt a standardised clipboard of indicators, boards may do better to create a ‘culture dashboard’ based on their business’s nature and their main stakeholders’ concerns.
In doing so, it is sensible to include forward-looking indicators that will reveal potential trouble, rather than just highlighting problems that have already arisen.
One such indicator would be incidents that could have caused death or serious injury, even if no-one was hurt in that instance. Another is critical equipment failure, which might not yet have led to an explosion, but probably will if the underlying reasons are not addressed.
Still another is the frequency with which employees have had to be stopped from actions that contravene regulations. But can the board be sure that it is getting reliable information on indicators such as these, or is there a risk that they may be covered up?
Building up this picture requires input from a range of sources: compliance, internal audit and obviously human resources – often the first port of call for examining culture. This variety is a source of strength, enabling connections to be made which would otherwise be hidden.
Where several disparate indicators are flashing amber throughout the business or in a particular part of it, boards know to look further.
Whatever the data, it is important to ask the right questions. If calls to a speak-up or whistleblowing line have dropped off, this could mean that morale has improved, or that people have suddenly become frightened to speak up or that they are no longer sure what number to dial.
Some companies find it useful to have board committees do the detailed work, relying on them to escalate critical issues to the full board.
However the issue is approached, a strong personal commitment by the chair and chief executive is crucial. Boards cannot steer behaviour within their organisations if they do not espouse values that tell employees what to expect and the values will not be credible if the leadership conspicuously ignores them.
Conversely, when companies take the trouble to espouse strong values and embed them properly, they find their franchise is more secure, risk is reduced and an empowered workforce can drive the business forward.