FRC’s disappointment in early reporting on culture: Boards need to develop a structure for regular and meaningful discussion on culture (Long read: on FRC Annual Review of Corporate Governance Code)

Can you show what it means to belong to your company, and how this guides the Board’s decisions – and everybody’s actions?

The Financial Reporting Council (FRC) has started the year sharing concerns about a disappointing level of reporting on culture. It calls for “Improved governance and reporting required to promote sustainability and trust in business”.

 

“Too many companies substituted what appeared to be a slogan or marketing line for their purpose or restricted it to achieving shareholder returns and profit. This approach is not acceptable for the 2018 Code. Reporting in these ways suggests that many companies have not fully considered purpose and its importance in relation to culture and strategy, not have they sufficiently considered the views of stakeholders in their purpose statements.”

Boards need to develop a structure for regular and meaningful discussion on culture. This is the only way to report usefully on this complex and multi-layered subject.

The FRC requires no slogans or ‘tick box’ glibness, it’s not a single figure from a single source, it doesn’t fit neatly into a spreadsheet: it takes a new approach to pin down culture meaningfully. 

What does it mean to belong to your particular company, and how does this turn into long term sustainable value?

How can you make that easy to pin down?

For this you’ll need a framework. Ours is the Belonging Framework, which we relate to our top five tips on How to Report on Culture, which we’ll come back to later in this article.

What’s it all about?

The FRC Annual Review of UK Corporate Governance Code examined the annual reports of FTSE 100 companies with December 2018 and March 2019 year ends (82 reports in all).

The FRC’s press release1 says:

“Companies need to improve their governance practices and reporting if they are to demonstrate their positive impact on the economy and wider society, according to a new report2 from the Financial Reporting Council (FRC).”

You can download the full report2 here and the 2018 FRC Corporate Governance Code3 here.

What’s the issue?

The FRC’s key concern was compliance with the Code without detail on impact:

“It became apparent that many companies simply concentrated on achieving strict compliance with the Provisions, and this approach gave little insight into governance practices… many annual reports lacked information on the outcomes of governance policies and practices, including any areas for future improvement.”

“Effectively applying the Principles is much more valuable than a ‘tick box’ approach. It requires demonstrating the actions a company has taken and how these link to their strategy and purpose.”

Specifically, on the new requirement to report meaningfully on culture, the FRC finds:

“We are encouraged that company culture is something that many boards are taking seriously.”

But…

“It was disappointing that only a small number of boards disclosed that they already receive reports on culture to aid discussions… Moreover only a few reporting that it had a specific agenda item on the alignment of culture with values and strategy.”

Why does this matter?

It’s all about building trust, and providing stakeholders with rounded information to give confidence in Directors’ long-term stewardship of the company.

What does the FRC want companies to achieve?

“The best reporting described purpose by considering it alongside culture and strategy in a way that demonstrated the company had thought about purpose effectively.”

“We wish to see much greater focus on the activities and outcomes of implementing the Principles of the 2018 Code, particularly on the board’s effectiveness and decision-making, and how this has led to sustainable benefits for shareholders and wider stakeholders.”

Whereas currently, on culture reporting…

“…The lack of this level of discussion [on culture] at board level perhaps links back to some of the poorer articulations on company purpose”

The FRC’s analysis found the following key points:

  • Some good examples of reporting by companies who are increasingly using incentives relating to non-financial matters and are grounded in long-term strategy.
  • Many companies are grappling with defining purpose and what an effective culture means with too many substituting slogans or marketing lines for a clear purpose.
  • There is insufficient consideration of the importance of culture and strategy, or the views of stakeholders. Following the FRC’s 2016 report on culture, companies should be commenting on culture and now explain how they are monitoring and assessing it.
  • Limited reporting on diversity. Those companies that did report well had clear plans to meet targets – beyond just gender – and understood the long-term value of diversity.
  • The use of engagement surveys was portrayed by many as an effective tool to achieve insight on employee engagement and culture. While these can help, they only provide a snapshot of information and should not be used in isolation. 
  • Companies must be able to demonstrate that the engagement methods used are effective in identifying issues that can be elevated to the board and how this affects company decisions.

The report stresses the benefits of sharing negative information transparently. Tantalisingly it refers to “One company…” doing this well – but we will have to read all 82 reports to fine which one!

“One company did report on some of the less positive feedback received as a result of a survey, and went on to explain how the board had dealt with the concerns raised. This approach demonstrates company commitment to its survey and values and that it acts on the views expressed.

Others tended to focus on the positive responses of any survey and failed to demonstrate any consideration of concerns raised.”

The report recommends linking different sources of information together to help companies better understand their culture.

“Very few companies cited more than three metrics used to monitor and assess culture.”

The report finds little evidence to suggest that companies saw a role for internal audit in the assessment and/or monitoring of culture and recommends

“The internal audit function can provide an independent and objective assessment of the company’s operations.”

The FRC’s Chief Executive, Sir Jon Thompson said:

“While there are examples of high‑quality governance reporting from ‘early adopters’, looking ahead we expect to see much greater insight into governance practices and outcomes reporting on a range of key issues from diversity to climate change.

Concentrating on achieving box-ticking compliance, at the expense of effective governance and reporting, is paying lip service to the spirit of the Code and does a disservice to the interests of shareholders and wider stakeholders, including the public.”

Who does this affect?

It’s not just investors and analysts. Employees themselves need to be reassured, as do partners, customers, and the Trustees and individual members of pension funds.

At a broader level, the FRC is concerned for institutional trust, in the wider role of business within a capitalist society, and the force of business to do good – or bad – in the world. The FRC says it has actively led and participated in recent years in the

“…continuing debate about the purpose of capital markets and the role of companies and investors in solving – as opposed to contributing to – economic, environmental, and societal problems.”

The changes to the UK Corporate Governance Code… broaden the scope of governance and stewardship, in particular address how actors in capital markets interact with a wider set of stakeholders to deliver substantial value and benefit the economy, environment and wider society.”

So what should companies do?

In the many themes around culture, this means showing the practical application of values, ethics and safety in everyday work, fairness and opportunity through careful diversity and inclusion.

How to report on culture: Six key points 

We outlined our view on How to report on culture in this piece in October 2018. These six key points are all directly relevant to the concerns raised in the FRC’s report, so repeated here as a quick summary:

  1. Use a mix of qualitative and quantitative evidence from a combination of sources.
    This new requirement is more nuanced than some aspects of the traditional reporting discipline, requiring different parameters and perspectives. You might create an overview of culture from, for example: employee engagement, safety record, gender pay gap, diversity & inclusion and ethics.
    But don’t use any one of these sources alone: a ‘tick-box’ is not enough. Evidence needs assimilation and commentary.

 

  1. Use a mix of facts and narrative to put this evidence into context.
    Show how culture and values connect to purpose and strategy. Show how they are relevant to the performance on the business, good stewardship for future, and what they mean for people’s work. Look forwards in time as well as back.

 

  1. Communicate on culture through different aspects of the report.
    For example: expect both the Chair and CEO to comment meaningfully on culture, make it relevant to strategic priorities, show how culture is considered within remuneration, how culture is considered as part of risk planning.

 

  1. DON’T use glib brand straplines or slogans.
    They have a place in marketing, but in reporting they lack depth or real meaning. This is NOT credible. Indeed, our anti-sloganeering slogan: ‘Brand risks bland’.

 

  1. DO own up to what’s not working well – as well as outlining the action you are taking to remedy.
    This shows scrutiny, transparency and commitment. In fact this (along with identifying emerging risks) may well be the most useful and credible aspect on culture for investors, partners, customers and employees.

 

  1. In order to do all this… For a meaningful Board conversation and reporting on culture, you’ll need a framework. Ours is the Belonging Framework, which we use as a basis for achieving these six top tips. Culture is very wide reaching yet can seem amorphous. You need a way to ‘catch the cloud and pin it down’. Make culture’s comprehensive scale easier to to get hold of, so you can show the impact on people, performance, purpose and prosperity in the widest sense.

It might be that one or two workshops with the Board will help frame your response, or a mid level exploration with our Belonging Litmus Test to give richer narrative, or our deeper examination of evidence around our Belonging Framework for fuller review of the impact of culture on performance.

 

Other sources useful for learning about culture reporting?

Alongside this report from the FRC, it’s worth digging into more detail in the FRC Lab’s report from 2018 ‘Business Model reporting: Risk and viability reporting – where are we now?’ 4

The FRC Lab report found that:

“[Company Purpose] can impact credibility when the purpose stated is difficult to connect with the business model disclosed…

… investors are supportive of purpose statements that communicate what the company does and why it does it.”

It sets out a clear expectation for the coming year:

“We expect companies to have further considered their purpose and values during 2019, which should lead to significant improvements in disclosure in this area when companies next report.”

Also relevant is Grant Thornton’s comprehensive review of FTSE 350 report Nov 20195

This shares the encouraging findings that the FRC reflect in their report:

45% of the FTSE 350 provide good or detailed accounts of their company culture, up from 33% 2018.

More companies are considering how corporate culture contributes to value creation, for example, by promoting co-operative or sharing cultures, and focusing on unwavering customer service.

41% of Chairs now provide clear messages about culture in their primary statements, rising from 35% in 2018.

This compares to the 32% of CEOs (who the FRC should lead culture) who communicate clearly on culture, slightly up from 29% in 2018.

Less encouraging data…

Only 34% of the FTSE 350 show how they assessing and monitoring culture:

Methods for gathering data vary: only 19 companies say they use a dashboard or scorecard of three or more metrics.

Most companies that claim to monitor culture seem to reuse existing indicators, particularly employee surveys. Only three say they use an internal audit to test cultural consistency across the company.

Grant Thornton’s report has this overview of culture reporting:

19% Of companies articulate their values

Only 50% of the FTSE 350 clearly state their purpose beyond generating profit

50% Give good or detailed accounts of company culture, up from 33%

45% Discuss how they measure culture – but seem to use mainly repurposed data

24% Explain how their culture is connected to their strategy

Another good source is EY’s ReportAnnual reporting in 2018/19 – Engaging stakeholders, restoring trust – September 20195 is also useful and includes illustrative examples alongside analysis.

More tips from our Belonging Works article: How to report on culture

How deep do we need to go?

The FRC has been careful not to mandate a single approach, or specify the depth of reporting. In these first years of the new Governance Code, as companies get to grips with culture reporting, it’s likely that there will be a broad variety of content in the type and depth of disclosure.

We suggest three possible levels:
– Level 1: Lighter touch – Culture Overview
– Level 2: Mid- level – ‘Litmus Test’
– Level 3: Deeper Exploration – The Belonging Framework

Level 1: Lighter touch – Culture Overview
This lighter touch approach gives an indication of culture in the organisation.
It is quicker, more simple and more pragmatic than the mid or deeper levels, still providing meaningful content.

Level 2: Mid- level – ‘Litmus Test’
More involvement around the business, and consideration of purpose and values, and aspects of how culture and strategy work together.

Level 3: Deeper Exploration – The full ‘Belonging Framework’©
Our full Culture Assessment, working with our proprietary Belonging Framework.
Much richer and deeper analysis, and greater consideration of the impact of culture on strategy and performance.

And it all starts with a conversation.

We’re happy to chat through how you could improve your company’s reporting on culture.

Contact us at isabel@belongingspace.com

07792 433680

www.belongingspace.com

Read our views at www.belongingworks.com

See a short summary version of top tips from this article at www.belongingworks.com. 

Next phase Belonging Space research: Looking at practical examples

Having begun trawling for specific examples it’s clear this calls for a more thorough examination. We are undertaking a qualitative review to recommend best practice in reporting on culture.

This will culminate in a report and seminar.

Please do drop a line if you would like to join us or receive a copy – or you have a good example for us to include.

Sources:

1    FRC Press release summary – 09 January 2020 Improved governance and reporting required to promote sustainability and trust in business
https://www.frc.org.uk/news/january-2020/improved-governance-and-reporting-required-to-prom

2    FRC Review of UK Corporate Governance Code     https://www.frc.org.uk/getattachment/53799a2d-824e-4e15-9325-33eb6a30f063/Annual-Review-of-the-UK-Corporate-Governance-Code,-Jan-2020_Final.pdf

3    FRC – UK Corporate Governance Code – July 2018 https://www.frc.org.uk/getattachment/88bd8c45-50ea-4841-95b0-d2f4f48069a2/2018-UK-Corporate-Governance-Code-FINAL.pdf

 4    FRC Business Models Lab report 2018
https://www.frc.org.uk/getattachment/43c07348-e175-45c4-a6e0-49f7ecabdf36/Business-Models-Lab-Implementation-Study-2018.pdf

5    Grant Thornton – Corporate Governance Review 2018
https://www.grantthornton.co.uk/insights/corporate-governance-review-2019-the-issue-of-trust/

https://www2.grantthornton.co.uk/rs/445-UIT-144/images/Corporate%20Governance%20Review%202019%20%28LP1%29.pdf

6    EY Report – Annual reporting in 2018/19 – Engaging stakeholders, restoring trust September 2019
https://www.ey.com/en_uk/assurance/annual-reporting-in-2018-19

Download report here
https://assets.ey.com/content/dam/ey-sites/ey-com/en_uk/topics/assurance/ey-annual-reporting-in-2018-19-engaging-stakeholders-restoring-trust.pdf

ENDS