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Draft v1.0
16.09.2021
This guidance note is for the information of UKGI staff only. It is not to be circulated
outside of UKGI.
Organisational culture as part of effective governance and performance - best practice
guidance for UKGI shareholder teams and NEDs
In representing government’s shareholder interest, UKGI proactively challenges and
supports its portfolio assets’ (its ‘Assets’) effective governance and performance.
Good organisational culture is a key component of effective governance. It supports better
and effective performance’, and decreases risk. Conversely, bad organisational culture, if
not recognised and addressed, can lead to significant reputational damage and other
impacts for an organisation, for example, FIFA? and Carillion’.
This guidance note provides an overview of:
1.
2.
3.
What is an organisation’s culture, including in the context of purpose
What we expect of our Assets in this area
What we expect of our NEDs and shareholder teams in this area, and how they should
promote and challenge in this area
How to assess and measure culture
1 https://www.managers.org.uk/~/media/Files/PDF/Checklists/CHK-232-Understanding-organisational-
culture.pdf
+ a-duty-to-care_2016-evidence-of-the-importance-of-organisational-culture-to-effective-governance-and-
leadership _tcm18-14220.pdf (cipd.co.uk)
? https://www.bbc.co.uk/sport/football/29603170.amp
3 https://www.peoplemanagement.co.uk/news/articles/rotten-corporate-culture-carillion#gref
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Section 1: What is an organisation’s culture in terms of good governance, and how
Directors have a duty to establish the company’s purpose and culture under Principle B in
the Corporate Governance Code, which states, “The board should establish the company's
purpose, values and strategy, and satisfy itself that these and its culture are aligned. All
directors must act with integrity, lead by example and promote the desired culture.”
The Financial Reporting Council (FRC) defines culture as “a combination of the values,
attitudes and behaviours manifested by a company in its operations and relations with its
stakeholders”. Organisational culture can also be defined as the collection of values,
expectations, and practices that guide and inform the actions of a company and their
stakeholders, or more simply “the way we do things around here®”.
The Chartered Management Institute® defines purpose as “an organisation’s meaningful
and enduring reason to exist that aligns with long-term financial performance, provides a
clear context for daily decision making, and unifies and motivates relevant stakeholders.”
Acompany’s purpose, values and culture should be clearly defined and aligned with each
other.
Below are some positive and negative indicators we have observed, drawing on colleagues’
experience, which may be helpful in making an initial assessment of an organisation’s
culture:
A healthy Positive indicators in an Negative indicators in an
culture organisation organisation
requires...
Effective Well-respected CEO / Senior Dominant CEO who doesn't
leadership Management team actively develop
followership
Transparency CEO and/or Senior Leadership Team Command and control
(SLT) who share Management environment where
Information transparently, including information must be prised
areas of concern out
Openness to CEO / SLT actively seek out ideas of CEO / SLT oversensitive,
challenge others and graciously act on feedback _defensive or arrogant
Pragmatic Operating within the hard-red tramlines Tolerance of frequent
control but flexible where necessary with breaches in ethics, code or
others regulation
Established Organisational culture is commonly Poor understanding of
purpose understood, bought into, and culture
frequently discussed
Shared values Pride in and shared understanding of Values not well known in
importance of values organisation and / or lack of
identification with them
Team All employees talk in terms of "we", not Overly competitive working
orientation "I" and "the organisation" separately environment
“ https://www.frc.org.uk/getattachment/3851b9c5-92d3-4695-aeb2-87c9052dc8c1/Corporate-Culture-and-
the-Role-of-Boards-Report-of-Observations.pdf
5 Balogun and Johnson
§ https://www.managers.org.uk/knowledge-and-insights/article/how-to-define-your-business-purpose-2,
Evolution
Continuous
improvement
Diversity of
thought
Inclusivity
Resilience
Fairness
Positive
behaviours
Good
communication
Acceptance that as the organisation
evolves, culture will need to follow suit
Innovation is actively encouraged and
rewarded
Board papers incorporate thinking from
all levels and parts of the organisation
All voices are heard, and alternative
views are considered in decision-
making
Organisation bounces back rapidly
from setbacks and exhibits high
energy
Employees feel treated equitably
Board, CEO and SLT role model
behaviours aligned to values and this
feeds through to the organisation
Open channels of communication up,
down and across the organisation
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Employees commonly harp
back to halcyon days of the
past
Same ideas are recycled on
a regular basis
Similar small group of
people lead all strategic
thinking
Siloed working and low
employee engagement
Short-term focus on getting
the job done and
unwarranted pressure to
meet targets
Issues around remuneration
and opportunity for
progression
Frequent grievances, poor
attendance and high
turnover
Information shared on a
need to know basis
The indicators of good or bad organisational culture continue to evolve and will always be
specific to an organisation and its purpose. However, there are recognised indicators of
issues with culture; the Investment Association_published a culture framework which
provides practical insights and self-assessment processes.
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2. What we expect of our Assets in this area
We expect our Assets to devote significant time and resources on an ongoing basis to
planning, developing and sustaining their organisational culture.
Within the FRC Report on Corporate Culture and the Role of Boards, there are different
responsibilities at board level within an organisation for ensuring good culture.’ Summarised
below are the recommendations:
The Chair should:
v Lead the Board in promoting a culture of openness and debate in line with Principle F
of the Corporate Governance Code, and this should be reviewed in their annual
appraisal.
The Board should:
Observe and assess the company’s culture for alignment with purpose and values.
Engage in ongoing dialogue about organisational culture.
Develop a common and consistent language around culture.
Reassess and evaluate the culture on a regular basis.
Hold the CEO accountable for driving and influencing the culture of an organisation.
(UKGI should be mindful of this in our shareholder roles when appointing,
remunerating and reviewing their performance)
v Periodically review MI on engagement, absenteeism, turnover, exits, whistleblowing,
grievances and poor performance as well as staff survey results.
v Ensure the organisation updates HR procedures and policies including aligning
incentives and rewards with culture, particularly when setting the policy for executive
remuneration (Provision 32 of the Corporate Governance Code).
v Ensure the organisation builds, embeds and monitors a robust and healthy risk culture.
This can be shaped by the hard controls (policies, governance, compliance) and soft
controls (training, communications).
v When cultural issues are found, encourage management to use root cause analysis to
understand what the issue is and take effective action to correct it.
Y Look to identify and share areas of external good practice, to help drive a healthy
culture and reinforce the company values.
~4 444
The Board Committees should support the Board in assessing and improving culture:
vy Remuneration Committees should address the alignment of executive remuneration to
culture to drive behaviours consistent with the company purpose, values and strategy
(Provision 40 of the Corporate Governance Code).
v¥ Risk Committees should be in a position to support boards in evaluating alignment
between incentives, values and behaviours.
Y Audit Committees should be able to seek internal audits to ensure assessment and
monitoring of culture is continually undertaken.
7 Corporate Culture and the Role of Boards (frc.org.uk)
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Below are case studies examining how two organisations decided to drive a change in
culture:
Case study: Post Office Ltd )
Following a long running dispute between Postmasters and the Post Office the business
committed to reset its relationship with Postmasters and its culture.
Improvements were driven by the appointment of a new CEO who made fixing the culture one of
their main objectives.
POL identified the need for a wholesale culture change. As part of this several commitments made
were by POL to Postmasters.
This included initiatives such as:
« Increasing Postmaster remuneration as many felt they had not received fair pay alongside
POL’s profits
e Putting the relationship with Postmasters at the heart of management decisions
e Appointing two Postmasters to the Board so that Postmasters voices are better represented at
the highest levels within POL
« Strengthening the management team including the creation of the role of Postmaster Director
e Improving stakeholder engagement, including meeting monthly with the Minister, establishing
Quarterly Shareholder Meetings, and attending Postmaster curry nights
* Formalising many of these in POL’s Framework Document, as well as updated Articles of
Association
e Using the OHI reporting framework to understand, monitor and improve culture
« Reviewing and upgrading POL’s core processes as they affect Postmasters with the help of
external advisers
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3. What we expect of our NEDs and shareholder teams in this area, and how they
should promote and challenge in this area
Considerations of culture are relevant across the core activities we carry out in our standard
shareholder role, as framed by our Portfolio Operating Principles. Shareholder teams need
to consider the health of their Asset’s culture on a regular basis, as well as at key decision-
making points or reporting events.
The following sets out minimum actions that shareholder teams should undertake in relation
to each of the relevant Portfolio Operating Principles in terms of culture:
Principle A: Establish and maintain appropriate and effective corporate governance
foundations which govern the Department-Asset relationship
« UKGI shareholder teams should seek to ensure that an emphasis on culture and
values is a feature of the Chair's letters that Departments issue annually to Asset
Chairs
Principle B: Promote effective objectives, business planning and performance against
business plan:
e UKGI shareholder teams and NEDs should be able to articulate what the culture,
purpose and the values of an Asset are, and how an Asset'’s culture is embedded in
its strategy and business plan
Principle C: Promote strong corporate capability
« UKGI shareholder teams should understand how well internal risk and whistle
blowing processes and systems are complemented by the right behaviours in order
to be effective — in particular teams should note the related Guidance Notes on Risk
Management and Whistleblowing Policies and Complaints, in terms of how culture is
a central consideration for these aspects of corporate capability
Principle D: Promote effective leadership (high quality boards and senior management)
« UKGI shareholder teams should use board effectiveness reviews to assess whether
an Asset is acting in accordance with the culture and values it articulates. As part of
assessing a board's effectiveness, UKGI should seek to assure itself that the Asset’s
culture is open, transparent and one where “bad news” can be surfaced without
defensiveness, with the Board having the ability to take a detached view of the
culture in the Asset (including how the leadership is living the culture and values)
« UKGI shareholder teams should seek to ensure that performance reviews of Chairs
and CEOs also focus on culture and values.
Principle E: Promote effective relationships between the Department and the Asset
« UKGI shareholder teams should table “culture” as a regular agenda item at quarterly
shareholder meetings and in discussions with the Asset’s CEO and Chair.
« Where UKGI has concerns or misgivings related to culture, this should be a red flag
for both the UKGI NED and shareholder team. Extra vigilance in terms of monitoring
these concerns should be undertaken, including formal escalation to the Asset’s
Chair, and alerting the relevant Permanent Secretary and/or Ministers as appropriate
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More generally NEDs and shareholders teams should consider if there are issues or
misalignment with their Asset’s culture, purpose or values.
A list of questions that shareholder teams and NEDs can use to consider and challenge
culture in their Asset is provided at Annex A.
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4. How to assess and measure culture
There is not a unified set of measures to assess culture. However, there are several
frameworks that can be used to enable comparisons across the organisation and measure
improvements over time®. Please see Annex B for the different frameworks.
Boards should discuss and agree the most suitable metrics and KPIs, to monitor and assess
good culture that fit their organisation depending on the outcomes they are looking to
achieve. We have highlighted in red minimum indicators shareholder teams and NEDs
should expect to see:
e Regular employee engagement surveys, (from pulse, open feedback and focus
group sessions) giving quantitative and qualitative metrics for employee engagement,
motivation, and satisfaction
e Absenteeism data, on how often staff are off sick (including for stress), and whether
there are any underling reasons
e Staff turnover and retention rates within the company
e Employee Assistance Programme participation
¢ Staff training data including data on personal development or skills to enhance
performance and if this is by choice or recommended through managers
« Exit interview information on culture and personal experience from leavers
« Whistleblowing incidents, grievance and ‘speak-up’ data, with numbers and
types of cases
« Poor performance data
e Diversity and Inclusion (D&I) data, in relation to staff composition and recruitment
by organisational area and by different characteristics including gender and ethnicity
e Key Behavioural indicators, which can include monitoring employees’ motivation,
satisfaction, commitment, and loyalty to the organisation, indicating how good or bad
the culture is.
r any queries.
® https://www.cipd.co.uk/knowledge/culture/working-environment/organisation-culture-change-factsheet
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Annex A — Suggested questions teams can use to consider and challenge culture in
their Asset
Key UKGI NED and shareholder questions to ask to ascertain culture wellbeing:
e Does your asset have a clear purpose, values and culture which are aligned?
e Does the Board understand its duties in relation to organisational culture?
« What is the external reputation of your company’s culture?
« Howis your asset encouraging honest feedback about the culture?
e Are there weaknesses in the culture that need improving?
«Is culture considered in remuneration incentive schemes?
« What risks does the current culture create for the organisation?
Is culture on the Board agenda? Is it discussed in enough depth?
Do the Board Committees support the Board on culture?
Could the Board benefit from a specific conduct, ethics or culture Committee?
Is the CEO willing to listen, take criticism and let others make decisions?
Does the Chair set the tone from the top?
When cultural issues are found do management use root cause analysis?
action taken?
« What is the company’s approach to investing in and rewarding its workforce, in
relation to culture?
« Are cultural questions included in employee surveys?
«¢ Does the Internal Audit plan include an assessment of culture?
Do the Board understand the employee perspective on their organisational culture?
e Is organisational culture measured/calibrated in the Board effectiveness review?
« Does the annual report include the Board’s activities in relation to culture and any
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Annex B — Frameworks for measuring culture
e Organisational Health Index (OHI)
designed by McKinsey and Company
provides some insights into what key
indicators can be used in measuring
good culture
« The Denison culture index defines four
traits (see diagram), which can be
measured and an improvement plan
produced
¢ The Organisational Culture
Assessment Instrument is another
common framework that assesses,
culture against 16 measures
© The Organisational Culture Inventory
includes behavioural norms — how
people ‘fit in’ and meet expectations
and the impact on performance
« The Investment Association has also
provided a range of different indicators
on measuring culture.
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Bibliography
For further information please see the list of documents below:
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Title
Author
Link
The Emotional Intelligence
(El) Institute
Peter Salovey and John D Mayer
The Emotional Intelligence Institute - What is emotional intelligence? - 4.
Mayer and Salovey model of emotional intelligence (theeiinstitute.com)
What you need to know
about Emotional Intelligence
Healthline
Emotional Intelligence: What It Is and How to Apply It to Your Life
(healthline.com)
Understanding
Organisational Culture
Chartered Management Institute
(CMI)
https://www.managers.org.uk/~/media/Files/PDF/Checklists/CHK-232-
Understanding-organisational-culture.pdf
A duty to care? Evidence of
the importance of
organisational culture to
effective governance and
leadership
CIPD
a-duty-to-care_2016-evidence-of-the-importance-of-organisational-
culture-to-effective-governance-and-leadership_tcm18-14220.pdf
(cipd.co.uk)
The Board's Role in
Corporate Culture
Diligent Insights
The Board’s Role in Corporate Culture I Diligent Insights
Corporate Culture and the
Role of the Boards
Financial Reporting Council
Corporate Culture and the Role of Boards (frc.org.uk)
Referenced to Balogun and Johnson
Developing organisation
culture: six case studies
CIPD
developing-organisation-culture_2011-six-case-studies_tcm18-10885.pdf
(cipd.co.uk)
Culture, a practical
framework for sustainable
change
The Investment Association —
Latham and Watkins
Cultureframework-thirdedition.pdf (theia.org)
important than ever
Five steps to making culture I P A consulting Five steps to making culture work for the board I PA Consulting
work for the board
How to Define Your Business I CMI https://www.managers.org.uk/knowledge-and-insights/article/how-to-
Purpose define-your-business-purpose-2/
Why Culture is more KPMG https://home.kpmg/be/en/home/insights/2020/1 1/adv-why-culture-is-
more-important-than-ever.html
The inclusion imperative
boards
Deloitte Insights
https://www2.deloitte.com/content/dam/insights/us/articles/4987_the-
inclusion-imperative-for-boards/DI_The-inclusion-imperative-for-
boards.pdf
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https://www2.deloitte.com/uk/en/insights/topics/value-of-diversity-and-
inclusion/redefining-board-responsibilities-to-support-organizational-
inclusion.htmirs.com/gb/platform/
Five ways to enhance board
oversight of culture
Ernst & Young
Five ways to enhance board oversight of culture I EY UK
14 signs of a bad company
culture and how to improve
Builtin - Kate Heinz
https://builtin.com/company-culture/bad-company-culture
Organisational culture and CIPD https://www.cipd.co.uk/knowledge/culture/working-
culture change environment/organisation-culture-change-factsheet
Management information on I Deloitte https://www2.deloitte.com/content/dam/Deloitte/sg/Documents/financial-
culture services/sea-fsi-management-information-on-culture-noexp.pdf
In A Crisis, Organizational Forbes Article In A Crisis, Organizational Culture Matters (forbes.com)
Culture Matters
Lockdown values. Preserving I CMI Article Lockdown values. preserving your organisation's culture through crisis -
your organisation’s culture
through crisis
CMI (managers.org.uk)
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