Featured in ICSA’s Governance + Compliance Magazine: ‘Why companies should align values and value’

By Anne Kirkeby

A cohesive approach to culture and strategy can build a competitive advantage

For the past 12 years, Black Sun has conducted an annual research project called the ‘Complete 100’, which identifies and analyses corporate reporting trends and best practice in the annual reports of all FTSE 100 companies.

How companies report on corporate culture forms part of this, with the project finding the FTSE 100 are increasingly discussing culture in their annual reports. However, the research also shows they tend to focus on how to create a culture that protects value, rather than one which supports value creation.

With new reporting requirements relating to the proposed revisions to the Guidance on the Strategic Report and UK Corporate Governance Code on the horizon, a change is needed.

Continual consideration

This focus on culture has been high on the corporate agenda for a number of years now, since the FRC kicked off its Culture Coalition project in 2015.

Learning from this project has been implemented into the recently proposed updates to the UK Corporate Governance Code and Guidance on the Strategic Report, with a focus on value creation as well as value protection.

As the FRC’s chairman, Sir Win Bischoff, emphasised in the report ‘Corporate culture and the role of boards’: ‘A healthy culture both protects and generates value. It is therefore important to have a continuous focus on culture, rather than wait for a crisis.’

 

Companies are increasingly being scrutinised by both internal and external stakeholders, who expect them to rise to the challenge through improved procedures, governance and reporting.

Despite this, we continue to see high-profile cases of corporate misconduct, which erode public confidence and create a sense that companies serve the interests of a few.

Recent parliamentary and government inquiries have explored how the UK’s governance regime can be strengthened to restore public trust in business. However, governance reform on its own is not enough to prevent inappropriate behaviour.

A unifying corporate purpose that takes the company’s impact on stakeholders into account and a healthy corporate culture driven from the top are further vital ingredients. Supporting this, clear cultural norms that define the behaviours that are encouraged and discouraged within the organisation are also paramount.

Impact on reporting

The debate around corporate culture has substantially affected reporting, with most companies in the FTSE 100 now reporting on their culture to a greater or lesser extent.

Our ‘Complete 100’ research suggests companies are generally happy to describe their values (66% do so), while 46% make commitments to a desirable corporate culture in their leadership statements.

38% also discuss some of the initiatives they undertake in support of this commitment, 23% include culture or values as part of their employee training programmes and 21%, up from 12%, report that culture or values form part of their staff appraisal process.

Although these numbers are still somewhat low, they have crept up over the past five years as understanding of culture matures and more data is generated as a result of programmes put in place.

Companies are most likely to discuss culture in relation to risk, with 52% doing so. This is symptomatic of the ‘value protection’ approach most companies take to culture – or at least the approach they take to reporting on culture.

The emphasis still tends to be on compliance and ensuring that employees adhere to a set of ethical behaviours. There is much less focus on how corporate culture contributes to value creation.

Context of the code

Corporate culture is difficult to define and harder to manage. Most importantly, cultural change takes time. Maybe that is why our research shows relatively little year-on-year change.

It is clear that by 2019 there will need to be a change in reporting, with companies having to comply with the many new requirements coming out of the proposed revisions to the UK Corporate Governance Code and Guidance on the Strategic Report.

Increased responsibilities and reporting in relation to corporate culture is a key part of this agenda.

Cohesive reporting

When writing narrative on culture it is important to remember that the proposed Guidance on the Strategic Report also addresses culture and what companies should disclose on this topic.

The convergence of the governance and strategic report is something that we have noticed with certain topics, such as having regard for stakeholders. This is emphasised by the FRC, which encourages linkages between the two reports.

The guidance proposes that companies disclose their desired values, behaviours and culture and how their financial and non-financial objectives are drivers of these.

If you are tasked with writing part of the annual report, you may want to consider liaising with the rest of the reporting team to set a strategy for how you cover culture consistently in relevant places throughout the report, in order to emphasise the central nature of culture.

This is an excerpt from the feature that appeared in ICSA’s Governance + Compliance Magazine, April 2018 - Read the full article here