FRC proposes changes to the UK Corporate Governance Code

On Tuesday, the Financial Reporting Council (FRC) released their proposed revisions to the UK Corporate Governance Code. These changes will have a real impact on one of the biggest issues in business today, corporate culture.

At our Belonging Summit, in October, when we asked if culture was at the top of the agenda for our delegate’s leaders, we were met with a resounding “yes…but…”. They weren’t sure they’re equipped to face the challenges. So, whilst boards know this is important, they don’t yet know how to take action.

One recent research piece, by Mazars, highlighted culture as the third priority for organisations, after strategy and financial performance. However, it also states that only 22% of respondents felt their company spent enough time on culture, with 63% saying that culture was not fully embedded in their risk management systems.

Tuesday’s report from the FRC addresses this head on. The FRC has been reviewing the UK’s Corporate Governance Code, put in place in 1992, to ensure that it’s still fit for the world today. They’ve set out sixteen new governance principles, and requested consultation on their proposition. Of the sixteen, eight are directly relevant for the measurement, management, and reporting of culture. In this article we’ve given quick comment and analysis against these eight, providing some insight into best advice and the possible impacts of the proposed changes.

Principle A: A successful company is led by an effective and entrepreneurial board, whose function is to promote the long-term sustainable success of the company, generate value for shareholders and contribute to wider society. The board should establish the company’s purpose, strategy and values, and satisfy itself that these and its culture are aligned.

This is one of our core principles; culture and strategy are mutually supportive. Without joining your culture and strategy, not only do you not see the benefits of each supporting the other, they’ll each become barriers to one another’s success. We frame culture around ethos. Your ethos is what you stand for, what you value, and why. The more clearly you can set out your ethos, the stronger your culture will be.

In any company this will manifest itself in many forms, that’s what makes culture so difficult for boards, it’s a part of everything. That’s why we’ve defined our parameters around ethos. If you ensure that you’re ethos is positively impacting your strategy in each of our parameters then you’ll have a healthy culture, acting as a catalyst for your strategy’s success.

Principle B: The board should ensure that the necessary resources are in place for the company to meet its objectives and measure performance against them. The board should also establish a framework of prudent and effective controls, which enable risk to be assessed and managed.

Boards will need to demonstrate that you’ve got a framework in place for the management of your culture, whilst also showing that you’ve assessed any potential risks which may come as a result of your current or desired culture, or the move between the two. The challenge with a framework for culture is that culture is unique to each organisation. We’ve identified common principles across companies of all shapes and sizes, so our Belonging Framework stretches to fit any organisation.

Principle C: In order for the company to meet its responsibilities to shareholders and stakeholders, the board should ensure effective engagement with, and encourage participation from, these parties.

Culture is a critical part of managing business risk. By involving and engaging your audiences at each of these levels you are furthering their sense of belonging, pulling your people together, and increasing shared accountability for the culture. This open approach, giving everyone associated with the organisation a voice, should also result in a greater level of candour within your business, reducing risks of ethical breakdowns.

Principle D: All directors must act with integrity and lead by example in the best interest of the company. The workforce should be able to raise concerns in relation to management and colleagues where they consider that conduct is not consistent with the company’s values and responsibilities.

The introduction of the term “workforce” rather than employees is to account for new ways of working. Workforce includes those on part time contracts, or sub-contractors who may be legally self-employed. This, again, extends the sense of belonging to your company to even more people than before, driving better engagement and higher productivity. Hear more about new ways of working in our interview with Matthew Taylor, covering The Taylor Review of Modern Working Practices.

Principle E: The chair leads the board and is responsible for its overall effectiveness in directing the company. The chair should demonstrate independent and objective judgement, and promote a culture of openness and debate by facilitating constructive relations between directors; in particular, the chair should ensure the effective contribution of all non-executive directors.

Culture is such an all-encompassing aspect of business that discussions can very easily get dragged down into the specifics and details rather than focusing on the strategic big picture. It may help to have a specialist facilitator host the conversation, ensuring you stay on topic, and everybody has their say.

Principle F: The board should include an appropriate combination of executive and non-executive (and, in particular, independent non-executive) directors, such that no one individual or small group of individuals dominates the board’s decision-making. There should be a clear division of responsibilities between the leadership of the board and the executive leadership of the company’s business.

Conformity, following the crowd rather than thinking individually, was one of the challenges covered at The Belonging Summit. Jorina von Zimmerman, UCL, spoke about how easily we can be swayed by a group, be that in polarising our views or via groupthink, as a result of our intrinsic need to belong. For more from Jorina on conformity, email us for a copy of her academic paper “Belonging and Social Influence”.

Principle J: Appointments to the board should be subject to a formal, rigorous and transparent procedure, and an effective succession plan should be in place for board and senior management. Both appointments and succession plans should be based on merit and objective criteria, and promote diversity of gender, social and ethnic backgrounds, cognitive and personal strengths.

This is an important theme. Diversity is still too often seen as a tick-box political correctness, but theres a hard business benefit for the principle. McKinsey’s 2015 research into the link between performance and diverse companies has shown that with greater diversity comes greater performance. Be it that gender diverse companies are 15% more likely to outperform less diverse competitors, or that ethnically diverse companies are 35% more likely to outperform theirs.

Principle N: The board should satisfy itself that company remuneration and workforce policies and practices promote its long-term success and are aligned with its strategy and values.

Reward and recognition is extremely important when it comes to managing your culture. Culture is not a one-off programme that you do once every five years, it has to be ongoing if you’re to be effective. Building values and supporting behaviours into your systems for reward and recognition, as well as having a transparent process for promotions and development based around them, gives you the best chance to maintain the positive culture you’ve spent the time to curate.

Throughout their proposed changes the important role of Non-Executive Directors (NEDs) is highlighted. They provide an objective and independent view of your culture. In the FRC’s culture report last year, this was highlighted via a story from Justin King’s reign at Sainsbury’s. He stated that “The best non-exec I have ever had was Anna Ford. She spent loads of time in the stores, she went to suppliers, she went to depots… as you would expect of an investigative journalist. She immersed herself in the business and absolutely was part of that sense of belonging.”

These changes still won’t be implemented until 2019 at the earliest, however, it shows there is a promising move for the UK to be a better place to work. It’s great to see boards receiving guidance on the complex and apparently ethereal subject of culture. Culture often doesn’t fit the normal pattern of information that boards assess, or their usual decision making process, it requires reflective thought, empathetic understanding, and cross-relation of impacts from one aspect to another seemingly unrelated area. That’s why you need to have a framework, and specialist support can be invaluable.

The FRC is setting new expectations for boards, calling for them to tackle corporate culture head on. We’re here to make it easier for them to answer the call.

If you’ve had, or are currently experiencing, any of the challenges highlighted by this article, please take the time to get in touch, we’re here to help.