Whose culture is it anyway?

Originally an article for Governance Magazine.

Glaziers Hall was packed on 12 November at the ICAEW Audit Quality Forum’s event on corporate culture. With the cryptic title ‘whose culture is it anyway?’ the event attracted many of London’s growing profession of corporate governance specialists as well as auditors. Corporate governance might never have been the same if a meteor had landed on SE1 9DD that evening. Here is a personal account of the evening and a few ideas for how boards can get their culture right.

The purpose of the meeting was to discuss how businesses can establish a culture that supports long-term success. This is an important subject. Problems with culture were found to have been at the heart of the banking crisis and in most corporate scandals from BCCI and Polly Peck in the early 1990s to Enron and WorldCom in the early 2000s. Problems with culture are probably also behind Tesco’s accounting problems and Volkswagen’s emissions scandal.

After opening addresses from Baroness Neville-Rolfe, Parliamentary Under Secretary of State for Business, Innovation and Skills, Sir Win Bischoff, Financial Reporting Council Chairman, and commentator and stand-up comedian Mark Steel the main part of the evening was a discussion involving leading figures from academia, accounting professional practice, institutional investment and the army, a non-executive director and Steel.

Baroness Neville-Rolfe wanted less regulation and was pleased that major changes are not envisaged for the UK Code of Governance. She emphasised the improvements which had been made in boardroom diversity and encouraged more. Sir Win stated that society wants company behaviour to improve, and culture to change. He recognised that addressing cultural issues is not an easy task and that strict adherence to the Code is not necessarily an indication that a company’s culture is completely healthy. He said culture is ‘very high on the FRC’s agenda’.

The FRC recently launched its Culture Project ‘to assess how effective boards are at establishing company culture and practices, and embedding good corporate behaviour, and to consider whether there is a need for promoting best practice’. It is a collaborative project, he said the FRC has received a positive response from many interested individuals and organisations to its invitation to participate. Sir Win said it will deliver practical, market-led observations to help boards and companies establish and embed their desired culture.

Sir Win also emphasised the positive role that external audit can play in culture, ‘auditors need to have assurance and evidence to prove that management operates with integrity and transparency’ and ‘be satisfied that risk management and internal controls operate effectively, protecting the corporate reputation in addition to investors’ interests’. The impact, he said, of a poor culture on risk management and control can now be part of the extended auditor’s report. He noted that audit committees also are giving consideration to cultural issues.

The Discussion

Here are some personal highlights of the discussion. It does not attempt to capture everything that was said. Sacha Sadan, Director of Corporate Governance, at Legal and General Investment Management, said investors can look at culture. He would like auditors to be more involved in metrics of culture. Multiple independent non-executive director Carla Stent was a senior executive at Barclays from 2005 to 2010. She said there was lots of talk there about culture and the majority of staff wanted to do right for their staff but some people at the top were possibly too focussed on return and there may have been a degree of a culture of fear. She said that if you empower staff and create the right values then staff can concentrate on delighting their customers.

Mark Steel agreed that most staff want to do right for customers but this is sometimes in spite of corporate culture rather than because of it. He asked if a board would want a CEO who focussed on making sure staff were happy. Cynics might think not. However Sacha Romanovitch, CEO of Grant Thornton UK LLP, said that businesses that focus on structure and culture will outperform. Former Brigadier Nicki Moffat CBE emphasised culture and leadership are inextricably linked. Leaders need to be able to trust people. In the army this comes from making leadership and empowerment everyone’s business. Moffit also pointed out that if you work in an organisation you have to fit in unless you are in charge. People will fit in until they rise to a position where they can change the culture.

Implying that profit is not all that matters, Professor Verity Brown, Vice-Principal (Enterprise and Engagement) at the University of St Andrews, said that triple bottom line reporting should help companies to get the culture right. Steel, warming to his role of court jester, reflected that while all this makes sense – staff should feel valued and be able to focus on the long term – it goes against the current dominant ideology and political climate. Markets do not support long term thinking.

Sadam suggested that companies would ask different questions if the results of employee surveys were to be made public. Romanovitch noted that Glassdoor.co.uk will tell you what employees think about their employers. Sadam mentioned one company with well known culture problems but he said most investors don’t care; 92% of votes supported the management team. He suggested that investors don’t want to vote against management as they don’t want to lose their mandates. I comment from the audience was that there is a crisis of accountability rather than culture. Romanovitch said there is an alpha style of leadership which can be male or female. The alpha style may not be ideal. She said that internal auditors are now focussing on culture. Some of the comments from the floor expressed doubt about the ability of internal and external auditors to comment culture citing lack of training, a lack of independence and the likelihood that, owing to the need to validate their work, auditors will use a check list to ‘prove’ the intangible.

Assessing culture is not straight forward. Romanovitch said we judge other people by their behaviour and ourselves by our intent. Culture probably comes between the two. Brown highlighted the problem with measurement and assessment – it is said that what is important cannot be measured whereas what is measured does not matter.

In the concluding comments Steel mentioned that things are moving in favour of the public interest. 40 years ago a debate such as this one would have been inconceivable.

Comments

Although everyone was in strong agreement that culture is important it was clear that there is a variety of views about what is important.

Sadam was of the view that there was no need to pay consultants to tell companies what their culture is. This may be true but there surely is a need for boards to raise their game when it comes to living up to what the FRC says they should do. The Code says a key role for the board is ‘establishing the culture, values and ethics of the company. It is important that the board sets the correct ‘tone from the top’. The directors should lead by example and ensure that good standards of behaviour permeate throughout all levels of the organisation. This will help prevent misconduct, unethical practices and support the delivery of long-term success setting the corporate values and standards’.

The discussion shed little light on how this could be done. In this sense although the event may have achieved its stated purpose of discussing how businesses can establish a culture that supports longterm success, it was less useful in telling us how to go about it. Here are a few suggestions for how boards could do so.

Establishing a culture that supports long-term success

Begin by considering what sort of culture the company needs. This is not as simple as saying we want one that is honest, transparent, compliant, empowered, innovative, results focussed, with good teamwork and happy people etc. Nor is it sufficient to require that everyone should obey an ethical code. Boards will want people to be innovative, achievers, honest etc. They will also want to have controls and ensure people are accountable.

In practice it may be found that controls may make it harder for people to innovate, take personal responsibility or exercise common sense. The need for accountability might help qualities such as trust but it could also harm them. Boards must also ensure a suitable balance is struck between the desire for profit and the desire to avoid risk. In competitive sectors success depends on innovation but innovation is not possible without risk. If risk is eliminated it is likely profit will be too. Boards must choose what sort of culture they want. They should understand that it will mean some tradeoffs such as between profit and risk and innovation and control. They should also understand that the culture they want may be different in different parts of the company. You would not necessarily want the same culture in a selling function as you would in the finance function although there will of course be aspects of culture, such as honesty, that you want throughout.

The next step is to find out what sort of culture you have in different parts of the company, identify the differences from what the board thought it wanted then consider what to do about it. There is much more that can be done. Boards might want to assess the company’s ethical health, how well its performance management system works in practice or if conflicting incentives create unintended consequences, find out if there are systemic issues that affect staff complying or not with regulations and procedures, understand and work with the company’s values, consider how well the culture supports or otherwise the business model, and ascertain what risks are posed by the prevailing culture. Boards may also want to know whether decision making is negatively influenced by cognitive biases such as groupthink. Having assessed these matters boards will want improvements made. That will be another challenge.

A future edition of Governance will look in more tail about how this can be done. Anyone wanting more information is welcome to contact the author.


Paul Moxey is an author, trainer and consultant. He is also visiting Professor of Corporate Governance at London South Bank University and co-chairman of the CRSA Forum, a network of practitioners established in 1992 interested in the behavioural and cultural aspects of risk, governance and organisational performance. He has written several papers on governance, risk and culture. He can be contacted for further information about assessing culture and governance and about the CRSA Forum at paul@moxey.co.uk.

www.crsaforum.com

www.moxey.co.uk

Sir Win’s address is available at https://www.frc.org.uk/News-and-Events/FRC-Press/Press/2015/November/Sir-Winfried-Bischoff,- Chairman,-Financial-Reporti.aspx

Information about the FRC’s Culture Project at https://www.frc.org.uk/Our-Work/CodesStandards/Corporate-governance/Culture-Project.aspx

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