This summer, while many of us headed for sunnier climes, the Financial Reporting Council (FRC) was busy putting together a new discussion document that reflects a subtle shift in its focus but serves as a significant call to action for the boards of publicly quoted companies. Addressing how existing governance regimes address the board’s responsibilities to stakeholders and why a focus on corporate culture is increasingly important to delivering sustainable success, “Corporate Culture and the Role of Boards” (FRC, July 2016) may not be one for the beach, but is essential reading for board directors. Three principal themes of the report are explored below.
Connect purpose and strategy to culture
“It is the board’s role to determine the purpose of the company and ensure that the company’s values, strategy and business model are aligned to it ”. The advice is to set a clear tone at the top, be open and transparent and lead by example, and, specifically, not to wait for a crisis before focusing on culture. The troubles at the Olympic Committee of Ireland highlights this point in technicolor, with the OCI Board hastily forming a Crisis Committee to lead their response to the scandal several days after the scandal broke. However, there is a Dutch phrase “Trust arrives on foot and leaves on horseback ”. Reputational failures are costly to fix, absorb huge amounts of the board’s time and can take years to recover from. Time, money and effort are better spent in designing an organisation that supports ethical conduct and ensuring it is governed by leaders who espouse integrity. Companies with strong reputational capital will be more easily forgiven for an isolated blip than one with a litany of sins to its name.
Align values and incentives
“The performance management and reward system should support and encourage behaviours consistent with the company’s purpose, values, strategy and business model ”. When goal-setting and concomitant rewards are ill-conceived and fail to consider how they will drive behaviour, all manner of weird and not so wonderful things can follow. The downfall of the Irish banking sector is a case in point. Loan officers across all major banks were primarily rewarded on the value of loan cheques drawn down, with often scant regard to the borrower’s ability to repay. Traditional lending protocols were gradually less observed, no longer deemed relevant with property inflation and endless credit, while managers with a firmer stand on risk management were replaced or demoted. The rest is a history we will be paying off well into the future. If “what gets measured gets done”, an exclusive focus on financial KPIs must be eschewed in favour of a more balanced suite of metrics linked to the values of the organisation.
Assess and measure
“Boards should devote sufficient resource to evaluating culture and consider how they report on it”. Human resources, internal audit, ethics, compliance and risk functions are all uniquely positioned to serve as antennae for the ethical health of the business. Yet how often are these purveyors of probity wheeled in for their annual half hour presentation to the board and then despatched, box ticked? These functional leaders must be resourced to effectively embed and monitor values and their voice in the boardroom strengthened. As well as empowering valuable internal resources, the board need to assess how management are handling key stakeholder relationships and, again, look beyond traditional assurance models. Site visits are invaluable to this understanding. Likewise, personally interacting with the company as a customer is a simple but often telling experience. Employee engagement surveys, if done well, are also excellent tools for gauging corporate culture. Other information worth reviewing include 360-degree reviews on the executive team, recruitment policies, employee turnover statistics and whistleblowing reports, customer satisfaction results, pending litigation and breach incidents, social media coverage, and so on - all contributing to an overall picture of “ the way things are done around here”.
Thought-provoking and practical, “Corporate Culture and the Role of Boards” is only the start of a concerted effort by the FRC to focus the minds of boards on the need for more trust in the motivations and integrity of business. Further guidance, and monitoring reporting on culture are to follow. So watch this space…
Ros O’Shea is an expert in governance and ethics and lectures on these topics for the Institute of Directors, the Irish Management Institute and Chartered Accountants Ireland. She is a partner in Acorn Governance Solutions and sits on the Boards of the Food Safety Authority of Ireland and the Royal Victoria Eye & Ear Hospital. She is also the author of “Leading With Integrity – A Practical Guide to Business Ethics”, published by Chartered Accountants Ireland.
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