Assessing culture to become a key tenet of UK corporate governance

Following the publication of the new UK Corporate Governance Code last month, corporate culture looks set to become a boardroom issue. While most boards recognise the importance of culture, a survey of FTSE 350 board directors in 2016 found that only 19 per cent felt that the primary accountability for their company’s culture sat with them. The 2018 Code looks set to change that.

Establishing Purpose

Under the section on leadership and company purpose, it states that a board must ‘establish the company’s purpose, values and strategy and satisfy itself that these and its culture are aligned’.

To do this, boards will be required to assess and monitor culture. Where they are not satisfied that the company’s policy, practices and behaviour are aligned with company purpose, values and strategy, the board is now expected to ‘seek assurances that management has taken corrective action’. Any activities and action taken by the board should be explained in the annual report.

These additions follow on from the 2016 report by the Culture Coalition and led by the Financial Reporting Council (FRC), which called on boards to ‘assess how effective they are at establishing company culture and practices and at embedding good corporate behaviour’.

Interests of stakeholders

The new Code also calls on boards to demonstrate how they have considered the interests of stakeholders when performing their duties and in particular, how they have engaged with the workforce.

In our white paper Measuring Ethical Culture, published in June, we argued that while culture may appear intangible and hard to measure, boards need to find a way to do just that. This will involve identifying the right culture indicators that will enable a board to assess whether good corporate behaviour is properly embedded.

This approach is supported in the FRC’s guidance on the new code which urges boards to identify and track core characteristics that are typical features of a positive culture. Establishing a benchmark against which future monitoring can take place is also recommended.

Based on the thousands of interviews we have conducted with employees, customers, suppliers and shareholders as part of our assessment work over the last 18 years, we have identified ten key drivers of good and ethical company culture.

In line with the FRC, we believe that the workforce can provide a vital insight into how good corporate culture is embedded into an organisation.

Culture indicators

We have therefore taken our cultural drivers and developed an Ethical Culture Healthcheck which can be used with the workforce to ‘take the temperature’ of an organisation. The evidence gathered will provide insight into the health of the culture, giving boards the assurances they need where all is well, but also insights into any sub-cultures or anomalies, enabling action to be taken when findings are less positive.

Our Healthcheck will provide both qualitative and quantitative data, which can be used to create a culture dashboard and an overall Net Ethical Culture (NEC) score, all of which can be used in board reporting.

UK Culture benchmark

To establish a benchmark, we have used our culture statements to conduct a nationwide survey of 2,000 UK workers from a range of industries and seniority levels to assess current perceptions of culture in the UK workforce.

The survey found that a quarter of the UK workforce believe their managers would bend the rules to get the job done, with only half feeling able to say that senior managers really believe in doing the right thing at work. Only 60% were proud to tell people who they worked for, with 59% saying they thought their organisation had a strong ethical culture.

Businesses will be able to benchmark themselves against these findings to establish how their organisation performs against the UK average.

Poor corporate culture is a business risk in itself, so the focus on ensuring that a healthy corporate culture is established is a positive step for long-term business sustainability. The Code has been welcomed as a step in the right direction. Businesses that engage with the new requirements will reduce the risk of corporate misconduct while also building better relationships with workers and other stakeholders. A positive move for all concerned.

Contact us to find out more about our Ethical Culture Healthcheck.