In July 2018, the Financial Reporting Council (FRC) published the 2018 UK Corporate Governance Code. Designed to set higher standards of governance, the new code also aims to promote transparency and integrity and attract investment in the UK. It will apply to premium-listed companies (and those that voluntarily choose to comply) for financial years beginning on or after 1 January 2019.
The 2018 code looks very different from what has gone before. It contains some interesting new elements for boards of directors to consider, including purpose, values and effective stakeholder engagement. Getting this right will require careful consideration and should not be taken lightly.
Boards must think beyond needing to be seen doing the right things. Engagement with all stakeholders must be authentic and consistent, and this relies on a strong company culture. The new code calls for directors to assess and monitor culture and to ensure that policy, practices and behaviours throughout the business are aligned to its purpose, values and strategy.
But how does a board assess and monitor company culture?
Joining the dotsThere is no single indicator or metric that will show what a company’s culture is, and only the most enlightened and open boards will establish this effectively. The skill is reading between the lines of the data, and joining the dots to build and interpret the picture presented. What’s more, this can only be addressed when there are processes in place to seek and capture the data.
The FRC’s new Guidance on board effectiveness includes the following suggested sources of culture insights – the dots that must be joined. Gathering these insights will require an integrated approach across a number of functions within an organisation. This is why the board is well-placed to step back and connect what all this data is telling them about the policies, practices and behaviours throughout the company.
Boards should look at these areas of the business to provide culture insight:
Tracy is a director in Deloitte's UK Centre for Corporate Governance and Board Advisory Practice. She undertakes performance reviews and benchmarking exercises for companies keen to meet current standards for best practice and provides bespoke training for board members new to the UK governance framework or needing a refresher on the requirements. She regularly presents to boards, audit committees and members of the Deloitte Academy on the latest governance and corporate reporting developments.
- Turnover and absenteeism rates
- Training data
- Recruitment, reward and promotion decisions
- Use of non-disclosure agreements
- Whistleblowing, grievance and ‘speak-up’ data
- Employee surveys
- Board interaction with senior management and workforce
- Health and safety data, including near misses
- Promptness of payments to suppliers
- Attitudes to regulators, internal audit and employees
- Exit interviews
An important piece of the puzzle
Culture insights do not come just from employees. The culture of an organisation is also reflected in its touchpoints with all stakeholders. The board must ensure that the feedback and insights it is receiving covers groups such as customers, suppliers and, where appropriate, regulators. How a company is perceived by these key stakeholders is a critical part of this culture puzzle.
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What about hotspots or issues?When assessing and monitoring the culture of a large organisation, it will be necessary to watch out for the existence of individual subcultures or fiefdoms that could undermine, or be inconsistent with, the overall culture. Early identification of potential culture hotspots can prompt a more in-depth assessment before issues arise.
If the full picture suggests that cultural issues exist, then the board must ensure that management takes action to understand why. FRC guidance recommends root cause analysis as an important tool for understanding the underlying causes of a poor culture and taking effective action to correct it.
It’s more than leading by exampleDone well, assessing and monitoring a company’s culture will be a valuable exercise in understanding the mood at all levels of the organisation. All too often we hear about the importance of tone at the top, but for most people the main yardstick for an organisation’s culture will be their direct report. So it is tone at every level – top, middle and bottom – which requires attention.
Boards need to look at the information they are being given about company culture to make sure it is appropriately comprehensive. A misaligned company culture can derail even the most well-constructed strategy – that is why this assessment and monitoring activity is so important. Start joining those dots now.