BUSINESS bosses need to pay more attention to instilling the right corporate culture in order to restore confidence in the way businesses are run and ensure long-term sustainable growth, according to the FRC.
The report, released by the reports watchdog, comes after Prime Minister Theresa May called for an overhaul of the governance of boards of directors, including employee representation projects on boards of directors.
Recent governance scandals, including Volkswagen’s emissions rigging, Tesco’s accounting irregularities and Libor investigations, have damaged confidence in the behavior of large companies and directors and underscored the need for more great attention to corporate culture at the board level, the FRC said.
“A healthy corporate culture leads to long-term success by protecting and generating value in the UK economy. It is therefore important to consistently and consistently focus on culture, rather than waiting for a crisis. A strong culture will endure in times of stress and change, ”said Sir Win Bischoff, FRC President.
The report, which brought together the views of more than 250 chairmen and CEOs of the UK’s largest companies, found that excessive board compensation is often cited as a factor in bad behavior and that “l ‘inconsistent alignment’ between compensation and company performance has led to a lack of public trust.
He also found that culture is increasingly important as intangible assets such as intellectual property, customer base and brand now account for over 80% of the company’s value.
“An increasing proportion of the company’s value is now made up of intangible assets that are not capitalized, such as brand, reputation, intellectual property, human capital and culture,” the report says.
The FRC admitted that culture is inherently difficult to measure and that it is difficult to tie it to the executive. However, the researchers present seven key findings associated with defining and measuring good corporate culture.
- Recognize the value of culture: A healthy corporate culture is a valuable asset, a source of competitive advantage and vital for the creation and protection of long-term value. It is up to the board of directors to determine the purpose of the company and to ensure that the values, strategy and business model of the company are aligned with it. Directors don’t have to wait for a crisis to focus on corporate culture.
- Demonstrate leadership: Managers, especially the CEO, must embody the desired culture, anchoring it at all levels and in all aspects of the company. Boards of directors have a responsibility to act where leaders fail to deliver.
- Be open and responsible: Openness and accountability are important at all levels. Good governance means focusing on how it plays out across the company and those who act on its behalf. This needs to be demonstrated in the way the company conducts business, engages and reports to stakeholders. This implies respecting a wide range of stakeholder interests.
- Integrate and integrate: Company values must inform the expected behaviors of all employees and suppliers. Human resources, internal audit, ethics, compliance and risk management functions must be empowered and resourced to embed values and effectively assess culture. Their voice in the boardroom should be strengthened.
- Evaluate, measure and engage: The metrics and metrics used should be aligned with desired outcomes that are important to the business. The board has a responsibility to understand behavior across the company and to consider where it finds a mismatch with values or needs better information. Boards should devote sufficient resources to cultural assessment and reflect on how they report on it.
- Align values and incentives: The performance management and reward system should support and encourage behavior consistent with the purpose, values, strategy and business model of the company. The board is responsible for clearly explaining this alignment to shareholders, employees and other stakeholders.
- Exercise stewardship: Effective stewardship should include a commitment to culture and encourage better accountability. Investors must question the behaviors they encourage in companies and reflect on their own culture.