What can business do to rebuild public trust? There may be no silver bullet, but there is no doubt that corporate behaviours need to be closely aligned with long-term value creation for all stakeholders.
With the government and others taking a close interest in issues that portray business as out of touch, firms face a wake-up call to look at their own cultures before winning back broad support from society. Companies must establish a culture that encourages good behaviour, which operates through all levels of the organisation and which becomes embedded in the minds of all staff. This subject will be explored in depth today at the Financial Reporting Council's (FRC) annual conference, where experienced business leaders will explore the relationship between culture, value creation, stakeholders, the economy and society.
This is now a priority for the Prime Minister. Her concerns about executive remuneration and boardroom representation are a response to society’s frustration with poor corporate conduct.
A recent report published by the FRC highlights the importance of corporate culture in creating sustainable value. The challenges of assessing, embedding and monitoring culture may be significant but are vital in promoting desired values and behaviours.
Trustworthy behaviour throughout a company is as important as trustworthy information. It helps investors decide where to allocate their much needed capital and help deliver the jobs, growth and prosperity needed to drive the economy. Treating all stakeholders, including customers, staff and suppliers with respect makes companies more investable. Culture sits at the heart of this cycle.
Since 1992, the UK Corporate Governance Code has played a strong and positive role in defining and helping firms to set down in practice what good corporate governance means. The Code is not a rule book. Its “comply or explain” approach gives companies flexibility in how they govern themselves and relies on shareholders to engage with them and challenge compliance with the Code’s principles. Boards should give extensive thought to how they apply the principles and provide a clear rationale when they wish to depart from them.
Strict adherence to the principles and provisions of the Code is not necessarily an indication that company culture is completely healthy. Codes set out principles for best practice that, if followed, make bad behaviour less likely to occur – and public reporting can make it harder to conceal such behaviour. But, by itself, a code does not prevent inappropriate behaviour, strategies or decisions. Only the people, particularly the leaders, within a business can do that.
The board must define the purposes of the company and what type of behaviours it wishes to promote in order to deliver its strategy. It involves establishing a set of behaviours and expectations to create the desired culture, asking questions and making choices that will benefit the company now and in the future.
This focus on the longer term was underlined in 2014 when the Code introduced a “viability statement” to strengthen boards’ attention to sustainable value creation. This will also provide all shareholders with an improved picture of the state of the business, its prospects and its contribution to the public good.
Investors also have a role to play. They should approach engagement with companies in a spirit of trust, openness and constructiveness. These are key elements in any corporate culture.
When deciding the cultural direction of a company, it is important to consider the views of all stakeholders – not just those of shareholders. Adopting such an approach is a vital component of corporate success and an essential indicator of trust. A positive culture is one that seeks to put the stakeholder first, backed up by incentives, clear communication and training opportunities to promote the delivery of value.
When there is a healthy culture, the systems, procedures, and the overall functioning and mutual support of an organisation exist in harmony.
Boards need to ask the right questions and make the right decisions to help foster a suitable culture that can then be entwined in the business model. This will contribute to the overall success of business and create an environment on which society can depend and our economy can continue to prosper in the long-run.