Following Teresa May’s speech, the Financial Reporting Council (FRC) of the UK has responded. It looks like the UK will be getting government driven corporate governance reform – watch this space!

Aligning the interests of business and society – comments from the FRC after Teresa May’s speech to the Conservative party conference:

Commenting after the Prime Minister’s speech, Stephen Haddrill, Chief Executive of the Financial Reporting Council said:

We share the objective of wider stakeholder engagement by companies and are considering how corporate governance principles can best meet the demands of all stakeholders or be amended to do so. We look forward to responding to the Government’s consultation later this year and will propose measures to realign the interests of business and society.

Tackling important issues such as diversity in boardroom representation and executive pay is in the interests of society and business.

In particular we need to look at how Boards set pay, respond to votes at annual general meetings on remuneration and align pay and culture. We should also look wider at other issues including how directors are held to account in relation to their obligations to all stakeholders.

The success of business is essential to our prosperity and wellbeing. The UK is home to many high-performing companies with excellent reputations, products, services and working environments. But there has been a loss of confidence in business – particularly big business.

If we ignore this, damage will be done to our economy and prosperity. There are no simple solutions. We need the right balance of reform of governance requirements and focus on corporate culture to improve the relationship between business, wider stakeholders and society.” Financial Reporting Council

Corporate Governance Drives Culture

Last July the FRC published a document called “CORPORATE CULTURE AND THE ROLE OF BOARDS REPORT OF OBSERVATIONS”. This interesting document also comments that strong governance underpins a healthy culture, and boards should demonstrate good practice in the boardroom and promote good governance throughout the business. The report identifies three important issues:

  • Connect purpose and strategy to culture
  • Align values and incentives
  • Assess and measure.

The report is of the view that the tone from the top determines organisational culture. Boards should assess the culture and determine indicators of organisational culture. The Board is responsible for the culture values and ethical standards in their organisations. This gives the directors the very broad responsibility of not only setting the culture and values, but also of assessing organisational culture.

The report requests investors and other stakeholders to engage constructively to build respect and trust, and work with companies to achieve long-term value. Investors should consider carefully how their behaviour can affect company behaviour and understand how their motivations drive company incentives.

Boardmembers – Leading by Example

As boardmembers this leaves us with a brighter light being shone on our responsibilities while we are also charged with the ongoing quest for effective measures of corporate culture.

In conclusion, these discussions would lead us to question whether we have the measures and the controls to prevent and or identify compliances breaches, bullying, bribery and corruption to name a few, and whether our board represents values of diversity, fairness, ethical standards and reasonable executive pay aligned with values and incentives.

The next article on employee feedback and whistleblowing will attempt to address some of these measures and controls, and will discuss how these protected disclosures can be used to drive cultural change and heightened awareness of an organisation’s ethical standards.

Penelope Kenney

Penelope is a member of CAIM – Chartered Accountants Interim Managers

View and contact Penelope via her CAIM professional profile