Corporate governance

New FRC Culture Coalition report released

Simon Lowe Simon Lowe

The Financial Reporting Council’s (FRC) report on their enquiry into Culture last week says it’s time for the FTSE to embrace changes, and use their imagination to ensure that corporate culture remains at the forefront of governance

Last week, the Financial Reporting Council (FRC) released their report on the findings of their Culture Coalition – a year-long consultation project into corporate culture and the role of the board in establishing and embedding positive and sustainable corporate culture. Although setting the ‘tone from the top’ is already recognised by the UK Corporate Governance Code (the Code) as integral to good governance – this report expounds on its benefits and offers advice for how boards can entrench culture.

The report, drawing from 250 interviews with chairs, CEOs, industry experts, internal auditors, audit committee chairs, company secretaries, investors and professional organisations, confirms a common view that corporate culture is an important issue. It confirms that a company's culture is highly valued by an organisation’s stakeholders and makes the case that it can – and should –  be the board’s job to address culture.

In a report by Independent Audit launched in conjunction with the FRC's work, they found that more than half (53%) of chairs thought their boards could be doing more to consider their role on culture.

While this is broadly in line with the findings in our 2015 Corporate Governance Review: Trust and Integrity - Loud and Clear? it may understate the work that is still to be done. We identified more than half of the FTSE 350 made only a passing reference to culture in their annual reports, and 26% made no reference at all! 

Early findings from our 2016 review – full research findings will be released in the Autumn –  show only marginal improvements. Similarly, the FRC report gives focus to the CEO as the most significant influencer of company culture and that appointing the CEO is the most important role of the board in driving culture. Again we see mixed responses; less than one third of the companies we have looked at feature CEOs discussing culture in any meaningful way.

The FRC report is in-depth and expansive, as it needs to be; culture is one of those topics that has become so vague that it can be thrown into every conversation about business and governance without any real definition. We see this in annual reporting across the FTSE – companies are talking about culture more than in previous years, but for many it is just a passing reference.

At times there is also a lack of imagination: the FRC report points out that the most commonly used words in FTSE 100 reports around values are ‘integrity’ – featured in 35 of the FTSE 100 companies and ‘respect’ – used by 28. ‘People are our greatest asset; the customer is first and foremost, etcetera. Of course, these are important values, but culture and values have to be about more than stating clichés. Culture cannot always be measured by reporting, but the best reporting builds on and highlights behavioural trends, and shows pride in what the board is doing to embed, assess and manage culture.

We can only hope the commitment shown by the chairs and CEOs interviewed for the FRCs research –  presumably standard bearers committed to the issue – are truly prepared to embrace the change that will be required if the FRC's message is to have lasting effect, initially among the FTSE and then beyond.

For further information on our corporate governance research, visit Governance matters. To learn more about the work we do contact Simon Lowe.