26 October 2015
Consolidation of regulation is welcome, says Peter Swabey
The issue of corporate culture and the extent to which the board can influence and encourage it throughout an organisation is the topic of a recent event held by ICSA and the Institute of Directors.
At the event, Baroness Neville-Rolfe, Parliamentary Under Secretary of State at BIS, spoke about the Government’s focus on four areas relating to corporate governance: consolidation rather than increasing legislation or regulation; looking at examples of what good boards do; continuing support for gender diversity on boards; and emphasising the positive contribution that business makes.
It is great to hear that the Government is proposing a period of consolidation of existing regulation – and it will be encouraging the FRC and the EU to do the same. It may have more success with one than with the other, but the consolidation is welcome nonetheless. There has been a stream of new legislation and regulation in recent months, much of it knee-jerk and more onerous than we would like. The Minister mentioned the PSC Register, which, although it will bring important transparency to UK business, is a complex and prescriptive piece of legislation.
She also spoke about the new requirement for companies to include details of all their subsidiary companies in their annual report, rather than appending a list to their annual return. This will add more than twenty pages to the annual reports of some companies with complex structures. How this can be seen as cutting clutter when this information is already in the public domain is a mystery known only to BIS. The central point however is that a moratorium on new regulation means that companies have a chance to breathe and look at their internal issues – and for many that will mean culture.
Good boards put in place a model which encourages good business practice and helps to address thorny issues that can be overlooked: handling risk, succession planning and demonstrating ethical behaviours – such as treating the customer fairly. The board also needs to understand its own strengths and weaknesses; independent board evaluation, including that of individual directors, which is then appropriately reported, is critically important.
Boardroom diversity is directly relevant here too. I might prefer to see focus on broader indicators of diversity than simply gender, but that is one metric that some effort has been directed to addressing. Lord Davies will present his final report on 29 October and I expect that it will point to significant progress since 2011 but also to the distance left to go, particularly in the executive pipeline. There is major research to be done on the socio-economic factors which lead to the decision of many women to leave the workplace. The board is not necessarily the ideal venue for social engineering, but companies do play a key societal role and need to be encouraged to do that better. It is encouraging that the FRC is looking at succession planning to see how that process might be improved.
The positive role of business in our community also needs to be emphasised. Simon Osborne said during the panel session that there is a fundamental lack of trust in business, and the role of business in creating employment and creating prosperity needs to be better understood.
All these elements contribute to organisational culture. Philippa Foster Back, Director of the Institute of Business Ethics, defined corporate culture as ‘this is how we do business round here’. I could not sum it up better. An important issue to consider is the ‘say/do gap’ – the difference between what the board says and believes happens and what actually happens in the wider organisation. There is no easy answer to explain how the board identifies and closes this gap, but it is one that ICSA is seeking to explore in new research undertaken in conjunction with the Institute of Business Ethics and Mazars. This will focus on the role of an ethics committee or any other mechanism within an organisation for dealing with this issue. If you receive an email from us in this regard, please do take the time to respond.
This research is one of many being developed by various organisations and overseen by the FRC as part of a wider project. We call this #culturecoalition and you can expect to see more of this over the coming months. If you would like to contribute to our #culturecoalition work, please let me know at firstname.lastname@example.org
Peter Swabey is Policy and Research Director at ICSA