Culture, boards and the company secretary
August 24, 2016
By Joan Medland
Corporate culture is a hot topic with the regulator of late – it is even making headlines with Theresa May promising in one of her first policy releases as Prime Minister to tackle 'irresponsible behaviour in big business.' But why does corporate culture matter so much?
Reviews carried out in the UK post the 2008 financial crises found the crash was a result of bad culture, specifically a lack of personal responsibility along with excessive risk taking, according to the Kay Review. Other scandals attributed to corporate culture include the more recent financial reporting blunders; excessive executive pay; hyper tax management; mismanaged pension contributions; emissions cheating; payment protection insurance; interest rates swaps; Libor manipulation; and FX rigging, among others.
In some cases, heads have rolled, in others, not really. The Prudential Regulation Authority (PRA) has implemented the "Strengthening Accountability in Banking Regime" to provide a legal basis to punish infractions where none existed before — we are yet to see if these measures have bite. There is an argument to be made, however, that the point of, or after, an infraction is far too late to take action.
Complicating matters, many corporate scandals of late are in actuality operating within legal frameworks, and perhaps lend themselves more easily to a question of morality — and so the focus of commentators, stakeholders and regulators has aligned to the over-arching umbrella of 'corporate culture'. That focus has unearthed a fairly unanimous view that corporate culture is a problem in the UK. A recent poll of business leaders done by the Chartered Institute of Personnel Development (CIPD) elaborates the problem well: it found that 30 percent of business leaders would continue rewarding high-performing individuals regardless of the values they demonstrate (if you don't see an issue in this, think PPI...).
Furthermore, the research showed that only one in four business leaders and HR practitioners said they are always prepared to make short-term sacrifices for the long-term interests of people, organisations and society. Businesses must start to incorporate the wider picture in order to build the public's trust. The ultimate responsibility for making this change lies with the board. The PRA supervisory statement SS5/16 sets out that it is the board's responsibility to "articulate and maintain a culture of risk awareness and ethical behaviour for the entire organisation to follow in pursuit of its business goal".
The PRA requests culture to be embedded using incentives, such as remuneration, to encourage (or even require) the behaviours the board expects to see, and for this to be actively overseen by the board. An effective governance framework relies on the support of the company secretariat for the co-ordination and implementation of the culture framework, and the non-executive for holding the executive to account in their implementation of culture.
To help business leaders get a handle on these requirements, the FRC, CIMA, CIPD, IBE and IIA have joined forces as the 'Culture Coalition' and issued practical guidance for business on what action should be taken within their own organisations, providing constructive examples for improvement in common areas of weakness and questions for boards to ask in order to determine whether they are accurately addressing cultural issues.
The report emphasises the need for boards to lead by example, and for the desired culture to be aligned with employee and director training and development as well as HR policies (including whistle-blowing and speak up policies). The company's desired culture should be articulated by behavioural constructs which are measurable, and backed up by assurance functions.
Company secretaries can play a key role in ensuring these suggestions are implemented, not only in facilitating a coordinated approach from the assurance functions but also in assessing and measuring the articulated behavioural constructs chosen by the business. Today's company secretary stands in an enviable position as the interface between the board, shareholders and the business units; they are both a conduit and an enabler.
By attending board meetings they have a deep understanding of the culture the board wants to achieve and, with their daily interaction with the business and shareholders, will see and hear first-hand the culture on the ground as well as external perceptions. This puts company secretaries in a perfect position to identify and escalate information and practical insights, enable the cultural framework agenda and orchestrate teams on behalf of the board.
Perhaps even more importantly, given the emphasis on top-down culture, is the company secretary's ability to influence culture at board level — implementing tools like board training and development and board effectiveness reviews. As a governance expert, the company secretary will be the key adviser to effect change on any new corporate governance measures (such as widening the pool of non-executive directors) expected to be published by the new Prime Minister.
The Culture Coalition's release gives much-needed guidance for the moral business leader and is a good step in the right direction for building the public's trust in business. However, there is still much work to be done and its success very much lies in the way governance and culture are embedded, lived and breathed within organisations.
Originally published by ThomsonReuters © ThomsonReuters.