Exploring the relationship between corporate culture and long-term business success in the UK

12 September 2016

The Financial Reporting Council (FRC) has published the results of a study, exploring the relationship between corporate culture and long-term business success in the UK - Corporate Culture and the Role of Boards: Report of Observations (the study).

The study considered broad aspects of company culture: the role of the board in delivering sustainable success; engagement with employees, customers, shareholders and other stakeholders; how to embed the desired culture; and, how to assess culture. Key observations made by the FRC include:

  • Recognise the value of culture: The board’s role includes determining the purpose of the company and ensuring that the company’s values, strategy and business model are aligned to it. Directors should not wait for a crisis before they focus on company culture.
  • Demonstrate leadership: The Company’s leaders, in particular the chief executive, should embody the desired culture and embed it across all levels and aspects of the business. The board has a responsibility to act where leaders do not deliver.
  • Be open and accountable: Good governance is demonstrated in the way the company conducts business and engages with and reports to stakeholders. This takes place throughout the company.
  • Embed and integrate: The company’s values should inform the behaviours which are expected of all employees and suppliers. Human resources, internal audit, ethics, compliance and risk functions should be empowered and resourced to embed values and assess culture effectively. Their voice in the boardroom should be strengthened.
  • Evaluation: The board has a responsibility to understand behaviour throughout the company and to challenge where they find misalignment with values or need better information. Boards should devote sufficient resource to evaluating culture and consider how they report on it. Indicators and measures used should be appropriate, aligned to desired outcomes and material to the business.
  • Align values and incentives: Recruitment, performance management and reward should support and encourage behaviours consistent with the company’s purpose, values, strategy and business model. Financial and non-financial incentives should be appropriately balanced and linked to behavioural objectives. The board is responsible for explaining this alignment clearly to shareholders, employees and other stakeholders.

The FRC intends to reflect on the information gathered, and any feedback to the study, and use it to inform its review of the Guidance on Board Effectiveness, which is expected to be completed in 2017.

For further information on this issue please contact Scott Knight.

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