CORPORATE
CULTURE AND
THE ROLE OF
BOARDS
REPORT OF OBSERVATIONS
#culturecoalition
Coalition partners
Chartered Institute of
Internal Auditors
Research partner
Lg
INDEPENDENT AUDIT &
The FRC is responsible for promoting high quality corporate governance
and reporting to foster investment. We set the UK Corporate Governance
and Stewardship Codes as well as UK standards for accounting, auditing
and actuarial work. We represent UK interests in international standard-setting
We also monitor and take action to promote the quality of corporate reporting
and auditing. We operate independent disciplinary arrangements for accountants
and actuaries, and oversee the regulatory activities of the accountanoy and
actuarial professional bodies.
The FRC does not accept any liability to any party for any loss, damage or costs
howsoever arising, whether direotly or indirectly, whether in contract, tort or
‘otherwise from any action or decision taken (or not taken) as a result of any person
relying on or otherwise using this document or arising from any omission from it.
© The Financial Reporting Council Limited 2016
The Financial Reporting Council Limited is a company limited by guarantee,
Registered in England number 2486368.
Registered Office: 8th Floor, 125 London Wall, London EC2Y 5AS.
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CONTENTS
Foreword 02
Introduction 04
Executive summary 06
How can the board influence and shape culture? 12
Bringing the values to life 20
Building trust with stakeholders 28
How can boards assess, measure
and monitor culture? 35
Conclusions and next steps 46
Appendix 1 - Case studies 47
Appendix 2 - Methodology 56
Appendix 3 - Acknowledgements 59
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The way companies create and sustain
value is directly linked to the debate about
the role of business in society.
Aheatthy culture both protects and 66
generates value. It is therefore important to
have a continuous focus on culture, rather Ahealthy culture both
than wait for a crisis. Poor behaviour can _I Protects and generates
be exacerbated when companies come value. It is therefore
under pressure. A strong culture will endure I important to have
in times of stress and mitigate the impact. acontinuous focus
This is essential in dealing effectively with on culture, rather than
risk and maintaining resilient performance. ¢
wait for a crisis.
Strong governance underpins a healthy
culture, and boards should demonstrate
good practice in the boardroom and
Sir Winfried Bischoff promote good governance throughout the
Chairman business. The company as a whole must
Financial Reporting Council demonstrate openness and accountabllity,
and should engage constructively with
shareholders and wider stakeholders
There needs to be a concerted effort about culture.
to improve trust in the motivations and
integrity of business. Rules and sanctions _In taking action on culture, I should like
clearly have their place, but will not on their all those involved to consider three
own deliver productive behaviours over important issues:
the long-term. This report looks at the
increasing importance which corporate Connect purpose and strategy to culture.
culture plays in delivering long-term Establishing a company’s overall purpose
business and economic success. is crucial in supporting the values and
driving the correct behaviours. The strategy
to achieve a company’s purpose should
reflect the values and culture of the
company and should not be developed
in isolation. Boards should oversee both.
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The strategy to achieve a company’s purpose
should reflect the values and culture of the
company and should not be developed in
isolation. Boards should oversee both.
99
Align values and incentives. Recruitment,
performance management and reward
should support and encourage behaviours
consistent with the company's purpose,
values, strategy and business model.
Financial and non-financial incentives
should be appropriately balanced and
linked to behavioural objectives.
Assess and measure. Boards should give
careful thought to how culture is assessed
and reported on. A wide range of potential
indicators are available. Companies
can choose and monitor those that are
appropriate to the business and the
outcomes they seek. Objectively assessing
Culture involves interpreting information
sensitively to gain practical insight.
lalso ask 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.
In its research for this project the FRC has.
seen abundant evidence that companies
and boards are taking action to shape their
culture in order to encourage investment.
This will drive efficient capital allocation,
improve productivity and deliver sustainable
value. We commend these companies and
encourage them to maintain this focus. We
encourage those companies yet to take
action, to consider the benefits of
addressing this important issue.
Chairman
July 2016
6
Investors should
consider carefully
how their behaviour
can affect company
behaviour and
understand how their
motivations drive
company incentives.
99
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INTRODUCTION
The FRC’s mission is to promote high quality
corporate governance and reporting to foster
investment. The UK has a good reputation in this
field which has underpinned a substantial amount
of business success, but it is by no means perfect.
There are valid questions about how
effectively existing corporate governance
arrangements address the board’s
responsibilities to stakeholders other
than shareholders, as envisaged in the
Companies Act 2006. The framework
of corporate governance in the UK is based
on a shareholder primacy and value model
of equity capitalism. There is a continuing
debate about what this means. One view
is that it necessarily involves a short-term
focus since shareholders are most
interested in the certainty of more
immediate financial returns. This inevitably
has consequences in terms of the
decisions and actions which companies
and investors take. Short-termism can drive
poor business behaviours and conduct,
for example: inappropriate incentives,
market-rigging, poor customer service,
low levels of investment and opaque
financial structures and arrangements.
The view of the FRC is that the UK
governance model remains an efficient
and effective means of meeting the
Objectives of, and arbitrating between,
‘the many stakeholders in the market.
The combination of legislation, regulation
and codes provides a flexible framework
for companies and their stakeholders
to pursue their objectives and achieve
long-term success. Success depends,
however, on the spirit with which
companies and investors apply the
principles and use the flexibility they have.
The FRC embarked on this project to gain
a better understanding of how boards are
currently addressing culture, to encourage
discussion and debate, and to identify and
share good practice to help companies.
This report seeks to address how boards
and executive management can steer
corporate behaviour to create a culture that
will deliver sustainable good performance.
This report looks at the increasing
importance which corporate culture plays
in delivering long-term business and
economic success — an issue very much to
the fore this year. In doing so it focuses on
the role of the board in shaping, monitoring
and overseeing culture.
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The view of the FRC is that the UK governance
model remains an efficient and effective means of
meeting the objectives of, and arbitrating between,
the many stakeholders in the market.
99
With the help of our partners in the project, I The FRC is very grateful to all those who re
the Chartered Institute of Management responded to our invitation to participate, Meetings
Accountants (CIMA), the City Values. and would particularly like to thank our
Forum, the Chartered Institute of Personnel I partners for their contribution and guidance
and Development (CIPD), the Institute of throughout the project. We would also like
Business Ethics (\BE) and the Chartered to thank Independent Audit Limited for
Institute of Internal Auditors (IIA), we their invaluable work in surveying and
focused on broad aspects of company interviewing chairmen, chief executives a
culture — the role of the board in delivering and company secretaries. Interviews
sustainable success, engagement with
employees, customers, shareholders and The report is designed to stimulate thinking
other stakeholders, how to embed the around the role of boards in relation to 23
desired culture, and how to assess culture, Culture, and encourage boards to reflect
Our partners have published separate on what they are currently doing. Over the
reports on each of these aspects, listed next year we will be monitoring reporting FTSE chief executives
in Appendix 2. on culture by companies and investors.
We welcome feedback on this report,
This report was informed by an extensive which will inform our review of the 58
literature review, the submissions from our Guidance on Board Effectiveness in 2017.
partners in the coalition, interviews with Please email: culturecoalition@t. FTSE chairmen
FTSE chairmen and chief executives, get in touch.
surveys of heads of interna! audit, chairmen
and company secretaries, and many a
roundtables and discussions with investors, Surveys
arange of professionals working in
companies, and organisations with expertise
and experience in company culture. 44
FTSE chairmen
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EXECUTIVE
SUMMARY
Culture in a corporate context can be
defined as a combination of the values,
attitudes and behaviours manifested by
a company in its operations and relations
with its stakeholders. These stakeholders
include shareholders, employees,
customers, suppliers and the wider
community and environment which are
affected by a company’s conduct.
Key observations
From our discussions with chairmen, chief executives,
investors and a broad range of stakeholders and
professional organisations we make the following
observations about corporate culture:
RECOGNISE THE VALUE
OF CULTURE
A healthy corporate culture is a valuable
asset, a source of competitive advantage
and vital to the creation and protection of
long-term value. It is the board's role to
determine the purpose of the company and
ensure that the company's values, strategy
and business model are aligned to it.
Directors should not wait for a crisis before
they focus on company culture.
LN
DEMONSTRATE
LEADERSHIP
Leaders, in particular the chief executive,
must embody the desired culture, embedding
this at all levels and in every aspect of the
business. Boards have a responsibility to
act where leaders do not deliver.
a
BE OPEN AND
ACCOUNTABLE
Openness and accountability matter at every
level. Good governance means a focus on
how this takes place throughout the company
and those who act on its behalf. It should
be demonstrated in the way the company
conducts business and engages with and
reports to stakeholders. This involves respecting
a wide range of stakeholder interests.
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EMBED AND INTEGRATE
The values of the company need to inform
the behaviours which are expected of all
employees and suppliers. Human resources,
internal audit, ethics, compliance, and risk
functions should be empowered and
resourced to embed values and assess
Culture effectively. Their voice in the
boardroom should be strengthened.
ALIGN VALUES
AND INCENTIVES
The performance management
and reward system should support
and encourage behaviours consistent
with the company’s purpose, values,
strategy and business model. The board
is responsible for explaining this alignment
clearly to shareholders, employees and
other stakeholders.
We
ASSESS, MEASURE
AND ENGAGE
Indicators and measures used should be
aligned to desired outcomes and material to
the business. The board has a responsibility
to understand behaviour throughout the
company and to challenge where they find
misalignment with values or need better
information. Boards should devote sufficient
resource to evaluating culture and consider
how they report on it. '
*°
EXERCISE STEWARDSHIP
Effective stewardship should include
engagement about culture and encourage
better reporting. Investors should challenge
themselves about the behaviours they are
encouraging in companies and to reflect
on their own culture.
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Executive summary
Business, society and the
corporate governance
framework
Companies do not exist in isolation.
They need to build and maintain successful
relationships with a wide range of
stakeholders in order to prosper. These
relationships will be successful and
enduring if they are based on respect,
trust and mutual benefit.
Business’ reputation is still recovering
from the impact of the global financial
crisis and continuing examples of poor
corporate behaviour. As we have seen,
Cultural failures damage reputation and
have a substantial impact on shareholder
value. Intangible assets such as intellectual
property, customer base and brand now
account for over 80 per cent of total
corporate value, compared to under
20 per cent 40 years ago.' This shift
magnifies the impact on total value when
a reputational crisis occurs. This is a
challenge for boards, which must find ways
to understand and influence the factors
which affect culture and behaviours.
The debate about the role of business in
society is directly linked to the way in which
companies create and sustain long-term
value for the benefit of a wide range of
stakeholders. From the outset of our work
the FRC has been clear that we wish to
offer constructive observations which
have practical application. We are not
suggesting changes to the current flexible
framework of corporate governance. While
legislation, regulation and codes influence
individual and corporate behaviour, they
do not ultimately contro! it.
The Companies Act 2006 makes it clear
that in pursuit of the overarching duty to
promote the success of the company for
the benefit of the members as a whole,
directors should take account of a range
of stakeholders in making decisions.
Inevitable conflicts will arise between the
interests of different sets of stakeholders
but where there is a broad alignment
between their objectives, a focus on
how business is conducted and how
stakeholders are treated will create
opportunities for value creation that
have mutually reinforcing benefits for all.
UK Companies Act 2006,
Section 172.
(1) A director of a company must act in
the way he considers, in good faith,
would be most likely to promote the
success of the company for the
benefit of its members as a whole,
and in doing so have regard
(amongst other matters) to -
(a) the likely consequences of any
decision in the long-term,
(b)the interests of the company’s
employees,
(c) the need to foster the company's
business relationships with suppliers,
customers and others,
(d)the impact of the company's
operations on the community and
the environment,
(e) the desirability of the company
maintaining a reputation for high
standards of business conduct, and
(f) the need to act fairly as between
members of the company.
1 Ocean Tomo LLC, 2015. Intangible
asset market value study.
‘S&P500 http:/www.oceantomo.
com/2018/03/04/2015- intangible-
assel-market-value-study/
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The UK Corporate Governance Code
(the Code) ascribes to boards a
responsibility for setting the company’s
values and standards (supporting principle
A.1), while the preface to the Code states:
‘One of the key roles for the board
includes establishing the culture,
values and ethics of the company. It is
important that the board sets the correct
“tone from the top”. The directors should
lead by example and ensure that good
standards of behaviour permeate
throughout all levels of the organisation.
This will help prevent misconduct,
unethical practices and support the
delivery of long-term success.’?
Culture is closely linked to risk and risk
appetite and the Code asks boards to
look at the risks which might affect the
company and its long-term viability.
Chairmen and chief executives recognise
the relevance of major shifts in the broader
environment in which business operates.
Acceptable behaviour evolves over time
SO Culture has to be adjusted for the
context and the times in which the
company is operating. For example,
consumers are far more concerned with
the environmental impact of companies
and of their own behaviour than they were
30 years ago. Well-chosen values typically
stand the test of time, but need to be
tested for continuing relevance as society
changes and business adapts.
Purpose, strategy and
the business model
Several chairmen told us that a clear
purpose — why the company exists and
what it is there to do — is the starting point
for a successful company and closely tied
to culture. In an increasingly complex
business environment, boards and
executive teams need to have a good
understanding of the company and how
it makes money - its business model - in
order to have a clear line of sight between
the decisions they take and how these
impact on the company's culture and
deliver its purpose.
Companies are recognising the value in
defining and communicating a broader
purpose beyond profit which generates
wealth and delivers benefits to society as
a whole. This can help create shared goals,
motivate employees and build trust with
customers. As organisations become less
hierarchical, and flexible working more
prevalent, many companies are finding that
common purpose is helping to bind
organisations together.
Chairmen felt strongly that there is
no ‘one-size-fits-all’ when it comes to.
culture. What matters is that the culture
is appropriate for the context in which
the company is operating and that there
is internal alignment between company
purpose, values, strategy and business
model(s). Aligning business decisions with
purpose and values and focusing on how
financial targets will be achieved, will over
the long-term lead to more sustainable
value creation. One example of a
framework that can help boards to achieve
alignment has been developed by the City
Values Forum.
FTSE chairmen and chief executives
interviewed strongly agreed that culture is
integral to everything they do and features
implicitly or explicitly in discussions about
strategy, and in particular how to achieve
that strategy.
66
The focus on long-term
performance is critical
and reduces the risks of
short-term, inappropriate
behaviour. Poor
short-term behaviour
and performance gets
found out in the
longer-term.
Sir Martin Sorrell,
Chief Executive
WPP
66
We need to make sure
that we are clear-sighted
enough about our culture,
and that it is sufficiently
adaptive to a changing
world and changing
interpretations.
Sarah Bates
Chairman
St James's Place
6
Culture is most definitely
factored into discussions
on the strategy.
Derek Mapp
Chairman
Informa
2 FRC, 2016, UK Corporate
Governance Code https:/www.
fre.0rg.uk/Our-Work/Publications/
Corporate-Govemance/UK-
Corporate-Govemance-Code-
April 2016 pdf
3. City Values Forum and Tomorrow's
Company, 2016. Governing culture:
risk and opportunity — a guide to
board leadership in purpose values
and culture
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Executive summary
Chairmen also report that culture impacts
the strategy that is chosen, for example:
— Which international markets should
the company operate in?
— Can the desired culture be maintained
in particular markets?
— How quickly should the company
expand?
— Will rapid growth affect the culture
in a harmful way?
For most chairmen, culture is the enabler,
the differentiator and a source of competitive
advantage. The importance of culture to the
successful operation of the firm is amplified
still further when the capital of the firm is
vested primarily in the quality of its people.
Chief executives we interviewed told us
that culture is an intrinsic part of how
the business is managed and an output
of how the business is run. Key enablers
for achieving strategic targets include the
business models), employee behaviour,
processes and management. Many chief
executives agreed that, in normal
circumstances, what works best for many
companies is making sure behavioural
considerations are a prominent, consistent
part of everything they do.
Investors echoed much of this sentiment,
pointing out that they gain a good deal
of insight into the culture of a company
through its articulation of its business
model and the attitude to employees.
For most large organisations, the business
model comprises a complex and
connected series of relationships, activities,
processes and stakeholders, drawing on
a range of inputs and resources to achieve
the stated purpose. For boards to have the
capability to assess whether its culture is
aligned with its purpose, a business model
framework can be used to support board
discussion and to assist in understanding
this complexity. One example of such a
framework has been developed by the
Chartered Institute of Management
Accountants (CIMA).*
Ata strategic level, the board's focus will be
‘on setting and monitoring the company's
culture, in terms of the values and
behaviours which best deliver value creation
over the short, medium and long-terms
and the incentives which support this.
At an operational level the focus will be on
obtaining assurance that the company’s
operations are aligned with its culture. In this
way, boards and executive management
can ensure that decisions around value
creation and values are fully integrated.
t4
Our culture is at the heart of the company
and is recognised as our differentiator.
It is our most cherished asset and one on
which the board is heavily focussed to ensure
it does not change as the business grows
and becomes more complex.
Alastair Lyons, Chairman, Admiral
6
Culture is a crucial issue
which is inseparable and
inextricable from strategy.
It is critical to execution of
strategy — and is all about
how we are going to go
about this.
Anténio Horta-Osdrio
Chief Executive
Lloyds Banking Group
CIMA, 2016. Financial Management
— Rethinking the business model
http://www-cimaglobal.com/
‘Thought-leadership/Research-
topics/Budgeting-and-planning/
Rethinking-the-business-model/
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View from the boardroom
Chairmen and chief executives agreed
overwhelmingly that boards must have a
responsibility for culture and must exercise
oversight in this area. The board can
influence culture in many ways. The board
is responsible for appointing and removing
the chief executive. Cultural change may
take a long time to bed in; and boards can
provide continuity. Boards also find it easier
to be objective since they are not immersed
in the day to day running of the business.
Strong governance is essential for a healthy
culture. As well as the processes and
practices in the boardroom, governance
needs to focus on the substance of
what boards do, who they engage with,
what information they are given and what
questions they ask. Boards should see that
good governance runs through all areas
of the business, including the executive
committee and the layers of middle
management. This will deliver improved
decision-making and better outcomes.
Shareholders rely on the board to oversee
a healthy culture that is compatible with
the business model, steers the executive
and delivers the strategy. Boards must
be actively engaged in the business of
shaping, overseeing and monitoring culture
and holding the executive to account where
they find misalignment with company
purpose and values.
It can be difficult for non-executive directors
(NEDs) to obtain sufficient knowledge
of business operations to challenge
management effectively. It is important
for the chairman to set the tone in the
boardroom so that NEDs are empowered
to raise concerns where they have doubts.
The key challenge for boards is to
understand what in practice drives the
behaviour of employees and management
and to shape and influence those drivers
in a way that will foster greater sustainability
and improved performance over time.
The inherent difficulty in understanding and
measuring intangibles such as behaviour
and culture, means that boards need to
start by defining their purpose and values
and setting out clearly the desired culture
and behaviours, against which they can
benchmark actual behaviour throughout
the organisation. They then need to
develop frameworks and tools to assess
behaviours and culture to guide
management and board decisions.
e6
People on the board must
never accept something
that they don’t understand.
This applies to established
members as much as new
members. If something is
not clear, the board must
ask the question even if it
seems a stupid one. They
must have the confidence
to admit that they don’t
understand.
Anthony Habgood
Chairman
RELX Group
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HOW CAN THE BOARD
INFLUENCE AND
SHAPE CULTURE?
A recurring theme in our discussions was the
importance of trust and openness as enablers of
positive and productive behaviours.
Culture is much more about people than Throughout our engagement, NEDs were 66
it is about rules. Codes of conduct are comfortable with the board's responsibility
a baseline; a culture is created by what you __ for setting the values of an organisation.
do rather than what you say. The alignment I However many were much less comfortable
and consistency of behaviours of leaders, about their role or ability to embed the
It’s a challenge to influence
the culture — it takes a lot
of time and effort to
and how they communicate through words __ values in the organisation, and some felt this Ghange:tt
and actions is the essential starting point.’ _ is not the role of the non-executives. John Allan
Large organisations, particularly those with coe
global reach, will have sub-cultures which
can reflect different geographies, business
units and remits. Nevertheless it is realistic
to aspire to a common set of expected (14
behaviours based on company purpose The Board sets the
and values. values and culture (how
people treat each other,
how they operate within the
supply chain and how they
work with employees) and
66 management is then
It is vital to have a genuinely independent pe lel
implementing this.
chairman who can bring unique perspectives Thintstoon
and expertise to their leadership of the board. Chairman
They should be properly remunerated for Bellwey
this role under governance rules.
Richard Solomons, Chief Executive, IHG . pro eender a iioneaid of
organisational culture to effective
governance and leadership
https:/;www.cipd.co.uk/
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What counts is the actual behaviour of
the organisation and its top people. This is
far more significant than a hundred statements
about a company’s culture or its ethical policy.
David Tyler, Chairman, J Sainsbury
Yet, when we surveyed chairmen on how
influential different individuals were on
company culture in practice, 89 per cent
felt the role of the chairman is influential
or very influential and 54 per cent viewed
the role of NEDs as influential or very
influential.° The views of company
secretaries were in line with this.”
Even though not directly responsible for
embedding culture, boards nevertheless
play an important role in influencing
Culture and in supporting the efforts of
the executive to embed the values and
reinforce desired behaviours and culture.
Two of the most important ways in
which boards can influence culture are
in leading by example — displaying and
communicating the values when in the
business — and the selection and
management of the chief executive.
Role modelling and behaviour
of the board
For boards, culture starts with their
behaviour in the boardroom.® Employees
need to see that the leadership is held
to account and to the same standards as
the rest of the organisation. ‘Leading by
example’ was one of the themes most often
emphasised by chairmen when speaking
about the board's influence on culture.
For example showing respect to senior
managers who present to the board.?
Several chairmen spoke of managers
evaluating the board’s behaviour and many
emphasised behaviour as important. When
chairmen were asked how much attention
they give to setting the tone through leading
by example, 58 per cent said ‘we do
enough for now’ and 36 per cent answered
‘some — but we could do more’.
6
Leading by example is
about ensuring boardroom
behaviour is exemplary
and in line with the values,
ethics and integrity.
Roberto Quarta
Chairman
Smith & Nephew
and WPP
6 Independent Audit Limited, 2016.
Survey of 44 chairmen of FTSE 100
and 250 for FRC
7 Independent Audit Limited, 2016.
Survey of 33 company secretaries
‘of FTSE 100 and 250 for FRC
8 Independent Audit Limited, 2016.
Cultivating Culture: What boards
can and can't do about behaviour
http://independentaudit. com/
publications/cultivating-culture-
boards-can-cant-behaviour/
Independent Audit Limited, 2016.
Interviews with 58 chairmen of
FTSE 100 and 250 for FRC
Independent Audit Limited, 2016.
Survey of 44 chairmen of FTSE 100
‘and 250 for FRC
©
fy
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How can the board influence and shape culture?
Chief executives
Aview that came through consistently
in our engagement was that the chief
executive has the most influence over the
culture of the business. This is even more
marked in smaller companies.’
If accountability for owning, assessing
and overseeing culture lies with the board,
then accountability for driving culture lies.
primarily with the executive management
team, starting with the chief executive. It is
the chief executive that sets expectations
and drives behaviour and change
throughout the organisation.
“The tone has to come from the CEO
— he is responsible for the delivery
globally of a culture that values high
standards of conduct. It’s about personal
leadership and being very visible. There
is no substitute for speaking to people
face-to-face. Good stories, employee
experiences are also important.”
Stuart Gulliver, Chief Executive, HSBC
“There is board culture and organisational
culture. The two are linked but it is the
CEO who most influences organisational
culture. The key is to balance the focus.
of the board so as to encourage the
right behaviours across the organisation
without trying to do the job of the CEO.”
lan Durant, Chairman, Greggs
Chairmen, chief executives and company
secretaries all told us that the most
powerful way in which the board
influences culture, other than through
its own behaviour, is through its selection
and management of the chief executive.
The nominations committee should
support the board by building culture
in to recruitment considerations.
In A duty to care?, CIPD supports this view:
“...for many boards the single greatest
influence they have on the culture of the
organisation is the appointment,
remuneration and firing of the CEO —
if they get the decision wrong there may
be severe repercussions felt across the
culture of the business.”
Several chairmen expressed the view that
appointing the chief executive is one of the
most important tasks of the board, while
removing a chief executive who does not fit
is one of the most difficult, particularly if
current company performance is good."*
Company secretaries surveyed reported
‘that 73 per cent of boards consider the
cultural and behavioural fit of an individual
during recruitment.
Chief executives we interviewed agreed
unanimously that driving culture was a
key part of their role and the board should
hold them to account for doing that.
They believe that NEDs have an important
role in helping executives anticipate
unintended consequences, including
behavioural ones, of management proposals.
+4
Driving culture is a key part of my job.
‘Driving’ is the right word, the world is changing
too fast just to speak about maintaining. I expect
the board to hold my feet to the fire over it.
Rob Noel, Chief Executive, Land Securities
6
It is very difficult for the
board to drive culture down
the organisation. However,
they can influence senior
management.
Philip Aiken
Chairman
AVEVA
11. Roundtable with executives and
non-executive members of the
‘Quoted Companies Alliance -
April 2016
12 CIPD, 2016. A duty fo care?
Evidence of the importance of
organisational culture fo effective
governance and leadership
13 Independent Audit Limited, 2016.
Survey of 44 chairmen of FTSE 100
and 250 for FRC
14 Financial Reporting Council
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Chief executives need to be visible and
communicate constantly with the:
organisation through meetings, events,
messages, webcasts and video. Several
chief executives emphasised the.
importance of being approachable and
accessible to customers and employees.
Making it easy to communicate directly
also provides good insight.
Communications from the chief executive
can have a significant effect on behaviour.
Consistent, regular and open
communication of simple messages are
key to building trust and encouraging the
desired behaviours. A number of chief
executives found sharing stories of good
and bad culture (from the business) was.
effective in demonstrating expected
behaviour.
If the board is seeking a change in culture,
it must clearly understand and articulate
the values and behaviours it wishes to
promote in order to guide its choice of
chief executive. Several chairmen stressed
the importance of including values and
expected behaviour in a new chief
executive's job profile, alongside skills,
experience and track-record.
Planning the succession of the chief
executive well in advance, and having
an open discussion about the values and
attitudes required in a new chief executive
is important. Most chairmen stated that
cultural fit was a major factor in senior
executive selection. Internal promotion is
perceived as considerably less risky, given
the individual is much better known, and
will have demonstrated adherence to the
company's values.
“If the culture is working and the
company is a financial success, there is
much less risk in selecting an internal
candidate. If something is wrong and
you want to make big changes, it is
better to get an external candidate who
will bring in new values as CEO.”
Gareth Davis, Chairman, Wolseley
The board has a role in assessing the
performance of executives. The chairman/
chief executive relationship is seen as vital
by both chairmen and chief executives —
it should be collaborative, constructive
and open. Basing this relationship on trust
rather than competition allows the chairman
to act as their sounding-board.*
6
The board can do nothing without the CEO who
has to lead. The board has to influence through
him which is why CEO selection is the most
important thing a board has to do.
lan Durant, Chairman, Greggs
66
As CEO, everything you say
is amplified manifold and
‘the ‘say/do’ ratio is what
really matters.
Javed Ahmed
Chief Executive
Tate & Lyle
66
It is essential to avoid
dilution of the message, to
maintain simplicity and use
simple language.
Antdnio Horta-Osdrio
Chief Executive
Lloyds Banking Group
6
War stories are a useful way
to get the culture solidified.
Jeremy Darroch
Chief Executive
Sky
14 Independent Audit Limited, 2016,
Survey of 33 company secretaries
of FTSE 100 and 250 for FRC
Culture report: Corporate Culture and the Role of Boards
<=> *®
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How can the board influence and shape culture?
“The relationship between the chairman
and CEO is important in defining cultural
behaviour and policies across the
business. The more closely they work
together, the more likely it is that a
strong ethical culture will evolve across
the business.”
Alan Thomson, Chairman, Bodycote
One of the most important tasks for boards
is to hold the chief executive and senior
executives to account. Where boards
become aware that the chief executive
(or another member of the executive
committee) is not demonstrating the
desired behaviours, they should take action.
If the individual is not receptive to the
board's efforts, it may mean the board must
exercise its power to dismiss them. While
this can be unsettling for investors and
employees, several chairmen spoke of
having to change the chief executive to gain
control of the culture and the positive impact
bringing in a new chief executive can have.
“Dominant personalities can be disruptive
in all sorts of ways especially culture.
Choosing the correct balance of people
is key to culture.”
John Watson, Chairman, Bellway
Culture on the agenda
Boards, on the whole, are spending more
time discussing values, behaviours and
culture than they were five years ago.’”®
Some boards are addressing the topic as
a standalone agenda item, while others
report actively discussing and addressing
values, behaviour and culture in a more
integrated way, for example as part of
discussions on customer and employee
feedback, remuneration and reward
policies or health and safety incident
reports. Most boards agreed that they
could be seeking more assurance on
culture. There was also considerable.
agreement that audit, nominations,
remuneration and risk committees could
do more to support the board in
addressing culture.
“The chairman’s responsibility for culture
has moved to the top of my agenda as
a result of my responsibilities under the
Senior Managers’ Regime. Now I receive
a lot of information on culture, a year
ago none.”
Mark Nicholls, Chairman,
Rathbone Brothers
6
The chairman is a very
important ambassadorial
figure. He travels and
represents. There needs
to be a close chairman/
CEO relationship.
George Weston
Chief Executive
Associated British Foods
6
The Board needs to show
it has zero risk appetite for
poor ethical behaviour.
This sends a clear signal.
Turning a blind eye to
dubious behaviour is
very dangerous.
Sir Peter Gershon
Chairman
National Grid
15 Financial Times & Institute of
Chartered Secretaries and
Administrators, 2016. Boardroom
Bellwether Insights into what
boards are thinking from the
survey of FTSE 350 company
secretaries https:/www.iesa.org
uk/knowledge/researchft-iosa-
boardroom-bellwether-survey-
summer-2016
16 Financial Reporting Council
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e6
Culture is not a separate item but
there are elements of it in all other discussions,
decisions and actions — customer service,
measuring and managing people,
how we are dealing with suppliers and
agents — and they all come together.
Philip Rogerson, Chairman, Bunzl
The figure below illustrates how often some
FTSE companies discuss culture as a full
board agenda item:
How frequently is ethics and
culture a full board agenda item?
(Number/percentage of respondents)'*
6%
17%
28%
Wl Once a quarter
ll Every six months
Once a year
i Less than once a year
WH Never
Wi Other
Base: Of the 24 survey participants,
18 responded to this question
The challenge for boards is how to
coordinate across the organisation and
build a holistic approach to addressing
culture. One large UK bank has recently
tasked a number of its business divisions
to work together to provide a single report
of cultural indicators to the board. The
individual functions each track many
different data points in relation to behaviour
and culture across the bank. Discussion
at the board is focussed on a small number
of the most meaningful measures that
provide crucial insight and can be tracked
over time. The chairman is confident this
is a significant step in helping the board
perform its role in seeking assurance
on culture.
Those boards reporting that values,
behaviours and culture were rarely
discussed, explained that company culture
is intrinsic and expected behaviours are
understood by all and do not need to
be articulated. This may be a result of
a long established culture, a sense of
complacency or a reluctance to address
the subject because it is perceived as
difficult to pin down.
66
Our business mode!
requires us to focus on the
needs of customers and
employees. The board
conversation is not framed
or informed by an
aggregated set of cultural or
values-based indicators and
there are few formal reports,
but the board spends
a great deal of time looking
at culture and values, driven
by specific issues or by
regular feedback, surveys
and information from
the frontline.
Patrick Lewis
Group Finance Director
John Lewis”
16 Institute of Business Ethics, 2016,
Culture by committee - the pros
and cons
17 Roundtable with heads of internal
audit, human resources, finance,
and risk and compliance —
January 2016
Culture report: Corporate Culture and the Role of Boards
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How can the board influence and shape culture?
6
Like risk, culture doesn’t benefit from being
given its own separate status and processes.
It is part of doing good business and needs
to be intrinsic in everything.
Sir Peter Gershon, Chairman, National Grid
Cultural due diligence in
mergers and acquisitions
Participants highlighted how important it
is to consider cultural fit and alignment
of values during a prospective merger
or acquisition. Many chairmen and chief
executives said they had not pursued a
merger because of a lack of cultural fit or
because they had concerns about the
values and behaviours in the other
company. Private equity houses also said
it was common for them to walk away from
a deal because of an overly dominant
managing director or chief executive that
they did not feel they could work with.?
In contrast, our survey of company
secretaries revealed that while 40 per cent
felt the board had sufficiently discussed
Cultural due diligence ahead of a merger or
joint venture, almost 30 per cent disagreed.
The head of investor relations of a private
equity firm who had experienced a merger
with a European business reflected on
his experience.
“Both companies were in the same
business and had a similar history.
On paper they were the perfect match
for each other but no one asked about
cultural fit and in the end it did not work.
We were still talking about ‘us and them’
two years later, we haven’t had the
results we expected when the two
businesses came together and now
we're looking at a reverse takeover.”
Chief executives we interviewed reported
it was important to address culture in a
merger or acquisition proactively without
seeking to impose it. Consistent and
clear messages on values and behaviours.
can help generate understanding and
commitment to the culture of the
acquiring company.
18 Roundtable discussion with
members of the British Venture
Capital Association - May 2016
18 Financial Reporting Council
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eo
Questions for boards
Values and behaviours Has the company made a public
commitment to the values?
How are we demonstrating the board's
behaviour reflects the behaviour we: What behaviours are being driven when
expect throughout the company? setting strategy and financial targets?
Are we leading by example?
What percentage of board time is spent
Are we clear about the values and on financial performance management
behaviours we expect when recruiting against targets? And on behavioural
new executives? performance management? Is the
balance right?
Do we hold the chief executive to
account where we see misalignment? Is company tax policy consistent with
stated values?
Are we discussing culture in sufficient
depth at board meetings? How are we challenging ‘group think’
and testing key decisions for
How are we taking account of culture cultural alignment?
in our board effectiveness reviews?
Are we seeing evidence of sub-cultures
How can we ensure we consider the or pockets of autonomy in the business
impact on culture in all the decisions that could undermine the overall culture?
we take?
Mergers and acquisitions
Do the committees support the board
‘on culture? How confident are we that we can
achieve a cultural fit within a reasonable
Is there a need for a specific conduct, timeframe and what could be the cost to
ethics or culture committee? the business of a cultural misalignment?
What is the company telling the outside I What is our strategy for addressing
world about what it stands for and how it I Culture if we proceed?
conducts business?
When doing M&A, there are two major concerns:
financial control and culture. On the culture side,
it is either rushed through too quickly or the target
never culturally integrates. It is important to take
time to understand how to embed and cross-
fertilise culture — not super-impose it.
Jeremy Darroch, Chief Executive, Sky
Culture report: Corporate Culture and the Role of Boards < — > 19
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BRINGING THE
VALUES TO LIFE
If values are to be more than just words on a poster
they need to be translated into a set of expected
behaviours that are meaningful to the company and
those who work there.
Built to Last - successful habits of visionary I Blueprint for Better Business encourages 66
companies highlighted that strategies companies to first establish their purpose. Most companies find it
and practices change, but values do not." I Companies including Unilever, Old Mutual iMiault to detine culture
While a few of the companies we spoke and Vodafone actively support this. ;
with had recently updated their values, approach to ‘uniting corporate purpose ee Beda eet
most have had the same set of values and personal values to serve society’ i oe shel ea
for many decades. Integrity, respect and which starts with having a purpose
innovation are the three most commonly which delivers long-term value.”' Of ihe beleidias thats
expected and then consider
how every element of the
organisation sends.
messages about what the
behaviour norms should be.
expressed values of the FTSE 100.
The values most valued by FTSE 100 companies”
Integrity Lord Blackwell
Chairman
Respect Lloyds Banking Group
Innovation es a
Safety
Q
[
2 Transparency
$
8 Excellence
Tear wok
19 Collins, J. and Porras, J.J. 2011,
it a a Built to Last - successful habits
Responsibility I of visionary companies. London:
Trust Random House Business
20 Maitland, 2015. The values most
Honesty poser se rei ran
oneaty maitland.co.uk/news/business/the-
0 5 ly 0 15 20 25 30 35 values-most-valued-by-uk-pic
21 Blueprint for Better Business http://
Number of times value expressed by FTSE 100 www.blueprintforbusiness.org/
20 Financial Reporting Council < —I >
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The G30 report on banking conduct and
culture said that focusing on values and
conduct are the building blocks of culture
and the ‘what to aspire to’ is largely in place
in banks, through the bold statements
that they have made about their intended
future behaviour. The report pointed out,
however, that failing in implementation and
embedding these values remains a serious
issue for the banks.”*
Simply adopting formal values statements.
is not enough. In order to have an impact
‘on behavioural outcomes and influence the
way business is done, values need to be
embedded in the company and:
— the purpose, strategy and business
model of the company;
- translated into expected behaviours;
— widely and consistently communicated,
including through codes of ethics/
conduct;
— reinforced through recruitment,
performance management and reward
processes; and
— integrated within the different functions,
processes and operations in the
business.
See Appendix 1
Case study: Old Mutual Group
values and culture underpinning
strategy
Engaging middle management
Management at every level must assume
responsibility for owning and maintaining
the culture. Middle managers may be best
able to observe the culture in a business
and should be involved in communicating
change and developing ideas to ensure
success. Middle managers are often cited
as not being receptive to change, yet this
may be because they are not effectively
engaged at an early stage. Investing in
training on the values and expected
behaviours and in people management will
help managers to develop and to embrace
their role in embedding the desired culture.
See Appendix 1
Case study: Lear Corporation
leadership development and
cultural change
66
I do not believe you can
just command and control
anymore. Business now
is just not like that —
especially with so many
outposts and the ‘instancy’
in this internet age. You
have to work by having and
sharing very deep-seated
beliefs across the
organisation. It is about
beliefs, not just rulebooks.
Javed Ahmed
Chief Executive
Tate & Lyle
22 The Group of Thirty, 2015. Banking
conduct and culture: a call for
sustained and comprehensive
reform, http://group30.org/
publications/detail/166
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Bringing the values to life
The first line of supervision, i.e. those 66
employees responsible for managing Human resources Agood culture
teams on the shop floor, have a good lens 9 ratyated
into the true culture of the organisation. Human resources (HR) has an important helps when hiring.
role to play in embedding the values in
These individuals know whether the culture the pusinass, Where alc is a separate Jeremy Darroch
is open, lines of accountability are clear and . i "
ethics and/or compliance function the Chief Executive
the workforce is motivated. As immediate Sky
effectiveness is enhanced through close
line managers, they also have a significant
impact themselves on culture and
sub-cultures.
“The layer below middle management
is key. By looking closely at that you
can really tell whether values and
culture have trickled down. That is
where you see culture played out.”
FTSE 100 Company secretary
One chief executive we interviewed
reported that reducing the number of
layers of management and the number
of direct reports has had a positive
effect on culture. It has increased
accountability and ownership and
improved communication throughout
the organisation.
collaboration with HR. Aligning HR policies
and processes with the values is a critical
step in driving culture.?* CIPD's report,
A duty to care recommends:
‘Invest in building HR and people
management strategy and capability
which focuses on leadership and
management culture, and embedding
cultural values across all levels of the
organisation. The board must work
closely with the HR function to create
the appropriate organisational culture
through aligned strategic human
resources management practices,
from recruitment, induction, training
initiatives, leadership development,
performance management resourcing
and succession.’
6
It isn’t about slogans and
soundbites. It pervades
throughout the organisation.
David Bellamy
Chief Executive
St. James's Place
28 CIPD, 2016. A duty to care?
Evidence of the importance of
organisational culture to effective
governance and leadership
22 Financial Reporting Council
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Recruitment, induction and training
Communicating the values and expected
behaviours starts early with the person
specification for prospective employees.
Where and how you advertise and recruit
is in itself a reflection of the values of the
company and may influence the type of
candidates you attract.
Communication of the company values.
continues throughout the recruitment
process, for example in the way the
company interacts with candidates and the
areas of focus and questioning at interview.
Once appointed, the messages can be
reinforced through induction, ongoing
training and performance management,
ensuring individuals understand the
company’s values, and how they are
translated into expected behaviours.
Developing leadership capability
and succession planning
Building leadership capability is a central
concern for boards and chief executives
and there is an opportunity for more
effective collaboration between the board
and executive. Several chief executives we
interviewed said that internal talent is their
preferred method of developing leadership
capability; the chances of a successful
appointment are greater because you
know the candidate well and they already
understand the company and its culture.
Research shows that leadership capability
is also important to effective cultural
change.” As part of its ongoing role in
overseeing and monitoring culture, the
board must ensure that senior leaders
of the organisation have the desire and
capability to align their leadership with the
values and to hold to account those who
are not willing to conform, however strong
their performance against financial targets.
Incentives, remuneration and reward
Pay is a sensitive issue in the UK and
affects the standing of business in society.
Unfortunately the continuing inconsistent
alignment between executive remuneration
and company performance and between
the remuneration of senior executives
and employees has led to a lack of public
confidence. This has taken place despite
increasing regulation to improve
transparency and accountability.
Remuneration practices are often cited
as a driver of poor behaviour. The
incentives created by performance related
pay, and the corresponding impact on
employee behaviours, is something that
should be of utmost concern to boards
and remuneration committees, which could
do more to apply a cultural and values lens
to the design of remuneration policies and
individual remuneration decisions.
6
People and succession come up too rarely at
boards. There should be more focus on the top
100, developing the mix and spending time with
the leadership group. It’s about having a pipeline
of talent. You have to be clear about succession
and have a strategy.
Adam Crozier, Chief Executive, ITV
66
You need a strong learning
and development team to
keep the culture alive
because it’s vital to give
people the professional
skills and the management
tools to be able to do their
jobs in the right way.
Dorothy Thompson
Chief Executive
Drax
66
Most companies measure
individual performance
against objectives. In future
more companies will
measure individual
behaviour against
a standard.
John Stewart
Chairman
Legal & General
(until 01.06.16)
24 CIPD, 2016. A duty to care?
Evidence of the importance of
organisational culture to effective
governance and leadership
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Bringing the values to life
Adherence to values and expected
behaviours should be an important part
of how all leaders and employees are
assessed and rewarded. This may be
difficult because it requires greater
discretion in remuneration committees
to reward or penalise behaviour, which is.
more difficult to measure precisely than
profits. Investors do not generally favour
discretion and subjective measures; but
they do not like the consequences of bad
culture either.
Salary and bonus are not the only levers for
driving the right behaviours in employees.
Powerful non-financial incentives can
be created, especially via promotion,
termination policies and decisions.
Speaking up
Recent research shows that cultivating
speak up and whistleblowing policies can
lead to an increased level of trust within
organisations.”° Trust is key in influencing
‘the culture of a business. One way to
increase trust is through the continuous
development of visible policies to encourage
transparency around possible bad practice.
This means developing collaborative
policies that allow people to speak up, a
well-organised set of procedures and an
effective system of response to concerns
that arise.
Also critical to success is the
independence of channels through which
whistleblowing information flows. Issues
that can affect this include anonymity, the
seriousness with which management treat
those who speak up and legal issues.
When communication channels are
developed effectively, evidence shows that
speaking up becomes more engrained in
the organisational culture.
Measuring the effectiveness of a
whistleblowing policy can also be useful
to boards in assessing how effectively a
culture is embedded. A healthy ‘speak up’
culture breaks down the barriers than can
often exist between the workforce and the
board. External publication of the data can
also give investors confidence that a
genuine culture of openness exists and
where it does not that the board knows
about it. Demonstrating how the policy is
working can also inspire employees to
speak up in other ways and the culture
becomes self-reinforcing.
6
It is easier to see signs of
departure from the desired
culture (e.g. instances of
bullying) than positive
evidence of its existence.
So whistleblowing is very
important. We find it
valuable — it isn’t dominated
by day-to-day complaints.
People know that they will
be protected, but they also
know that it comes to the
board so they don't use
it lightly.
Sir Roger Carr
Chairman
BAE Systems
25 ACCA (the Association of
Chartered Certified Accountants),
2016. Effective speak-up
arrangements for whistleblowers
http://www.accaglobal. com/uk/
en/technical-activities/technical-
resources-search/2016/may/
effective-speak-up-arrangements-
for-whistle-blowers1.html
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Chief executives who pride themselves
on having a healthy culture told us that an
open culture which supports employees
when they speak up acts as an early
warning system and alerts management if
behaviour starts to slide. It is important to
treat the whistleblower fairly and with
respect and to look into any concerns that
are raised. It is also vital that there is a
feedback mechanism to close the loop.
Codes of ethics and conduct
A tool many organisations use to help
embed a desired culture is their code of
ethics or conduct. A code can translate
generic values into more specific policies
and guidance, which in turn can influence
behaviour. Repeated behaviour over time
creates a corporate culture. Codes also
signal to those in and outside the
organisation that the company sees the
value in acting with integrity.
There are different ways companies can
structure their code of ethics/conduct.”®
All focus on how to handle ethical
challenges when making decisions.
An issue-based approach gives guidance
on topics relevant to the company.
See Appendix 1
Case study: L’Oreal
Employee engagement with ethics
A stakeholder-based approach considers
how a company’s stakeholders may
perceive certain actions and some more
recently developed codes are values-
based, such as the Bank of Englana’s
Code.” Many companies such as Vodafone
illustrate what they expect from employees,
with common ethical dilemmas. This
approach is particularly helpful in large,
international businesses where there may
be significant cultural and geographical
differences.”
Regardless of the specific model it is
clear that the existence of a code and the
process of developing a code help to foster
a positive culture. Its development helps
to engender a sense of trust amongst
employees and stakeholders, and
communication and promotion by the
ethics and compliance function and senior
management can help inform critical
business decisions. Initiatives to embed
codes are often accompanied by
encouraging employees to speak up where
they see the code not being followed.
The existence of a code may also allow
disciplinary procedures to be fairer and
reduce the risk of wrongdoing in the
business. Investors may use the presence,
communication and frequency of review of
a code of ethics/conduct as a risk indicator
of the culture of a company.
The monitoring of code breaches, and
particularly the reasons for those breaches
and where in the business they occur, can
help measure the pervasiveness of the
culture that the leadership wish to embed
and show whether the desired culture is
truly embedded.
26 Institute of Business Ethics,
2006. Making business ethios
work: The foundations of effective
embedding, http://www.ibe.org,
uk/userassets/pubsummaries/
embedding%20_summary.pdf
27 The Bank of England, 2015. Our
Code, Our commitment to how we
work http:/www.bankofengland,
co.uk/about/Documents/
humanresources/ourcode. pdf
28 The Vodafone Code of Conduct:
Doing what's right (2016) http://
www/vodafone.com/content/index/
about/conduct.htm!
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Bringing the values to life
Risk management and
risk culture
The Institute of Risk Management defines
risk Culture as the ‘values, beliefs,
knowledge and understanding about risk,
shared by a group of people with a
common intended purpose, in particular
the leadership and employees of an
organisation.’
Globalisation, the rate of technological and
environmental change, and regulatory
requirements present increasing complexity
and challenge for businesses. Risk taking
is a fundamental part of growing a
successful business and companies should
not seek to eliminate risk. They should be
ensuring that their approach to risk taking
— their risk appetite — is aligned to their
values and an intrinsic part of their culture.
Companies may also want to consider if
the culture they have presents any risks
to the business.
The FRC's Guidance on risk management,
internal control and related financial and
business reporting states that the board's.
responsibility for the organisation's culture
is essential to the way in which risk
is considered and addressed within
the organisation and with external
stakeholders.°°
One risk professional told us that risk
culture is not given enough prominence
because it is not properly understood.
Others suggested that organisations do
not engage because they are reluctant
to appoint risk managers who ask
difficult questions, and want access
to sensitive information.
The Association for Insurers and Risk
Managers (Airmic) advises that risk culture
should be thought of as a way of framing
risk and culture in the organisation's overall
culture and management system — acting
as a bridge between risk, reward and risk
appetite. This sentiment was echoed by
some of those we interviewed.
Roads to resilience looked at the way
leading organisations were building their
ability to withstand both expected and
unexpected risks.*' Researchers found
‘that key to achieving resilience is to focus
on behaviour and culture and achieving
resilience should be at the heart of
strategy and the business model of every
organisation. In order to achieve resilience
companies should establish a culture
based on trust and respect that also avoids
risk blindness. The result is ano blame
culture which ensures all in the company
are committed to a common purpose
and values.
6
The values are an important
part of the board's
discussion of the risk
appetite — the values are an
integral part of this - and in
turn risk appetite is part of
the culture.
Anténio Horta-Os6rio
Chief Executive
Lloyds Banking Group
29 Institute of Risk Management
(RM), 2012, Risk culture: under the
microscope Guidance for Boards
80 FRC, 2014. Guidance on risk
management, internal control and
related financial and business
reporting, Section 1.6
Ey
Cranfield School of Management
and Airmic, 2014, Roads to
resilience - building dynamic
approaches to risk to achieve future
success https:/www.airmic.com/
technicallibrary/roads-resilience-
building-dynamic-approaches-risk-
achieve-future-success
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Questions for the board to ask
Aligning HR processes and reward
Risk?
How well are our values and expected
behaviours embedded in all our HR
processes from recruitment to exit
interviews?
How is corporate reputational risk
considered in the setting of incentives?
Does the balance between financial and
non-financial incentives support the
desired culture?
Are behavioural objectives included in
leadership and employee goals and are
behaviours formally assessed as part of
performance review activity?
Have we considered whether top tier
executive pay awards and those of other
employees could undermine culture?
Are we clear about the company’s
risk appetite and is it communicated
effectively?
What risks does our current corporate
culture create for the organisation?
How do we acknowledge and live.
our stated corporate values when
addressing and resolving risk dilemmas?
How do we actively seek out information
on risk events and near misses — both
ours and those of others — and ensure
key lessons are learnt?
How do we reward and encourage
appropriate risk taking behaviours and
challenge unbalanced risk behaviours
(either overly risk averse or risk seeking)?
Ethics and compliance
ls our code of ethics/conduct
up to date and clearly communicated
to all employees?
How do we measure that the code
of ethics/conduct is adequately
communicated and understood
by all employees?
Is our ethics training programme
up to date and have all employees.
completed it?
‘82 Institute of Risk Management, 2012.
Risk culture: under the microscope
guidance for boards (Adapted)
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BUILDING TRUST WITH
STAKEHOLDERS
A 2018 global survey of executives by McKinsey
& Company showed that a majority believed that
issues relating to external affairs would affect their
company’s income.°?
Those that reported a more capable
external relations team were more likely
to take regular action and were in turn
more likely to see successful results.
‘The results and our experience suggest
that not engaging isn’t an option; neither
is neglecting the organisational capacities
and resources that support meaningful
action’ the report said.
McKinsey suggested that there are three
elements to a successful approach to
external stakeholders. First, the company
must have a clear purpose built around a
set of values that will inform the message.
Second, the approach needs to be strategic,
and based on a clear understanding of
which relationships with which groups
matter and why. Third, companies need
to decide on the nature of the approach
— will it be open and proactive or defensive.
Customers
Delivery of value to the customer is vital
for corporate success and an essential
indicator of trust. Senior leaders need
to be familiar with customers and their
expectations and make customer service
a priority for their workforce. Culture that
puts the customer first, with appropriate
training and incentives that underpins this,
communicates this clearly to staff. In the
course of our research, we spoke with
many companies that have a renewed
focus on the customer.
Higher levels of customer satisfaction
translate into increased sales.“
Communicating with frontline employees
and ensuring good morale is therefore a
key part of the requirement to look after
customers. Strategic commitment to
customer service and the development of
long-term relations with business partners
sharing the same values and ethos are
important ingredients of successful
customer focus.°°
See Appendix 1
Case study: Talk Talk
Customer communication in a crisis
66
The board has a duty of
care to those who depend
on it (staff, suppliers,
customers etc.) and it has
to demonstrate that it fulfils
that duty.
Peter Johnson
Chairman
Electrocomponents
83 McKinsey & Company, 2013.
External affairs at a crossroads
http://www.mekinsey.com/
business-functions/strategy-and-
corporate-finance/our-insights/
externalaffairs-at-a-orossroads
34 Institute of Customer Service
Customer Satisfaction Index 2014
35 The Institute of Customer Service,
2015. Leading by example: How
values-based leaders will shape the
future of customer service
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The purpose of a company can’t be to maximise
shareholder value. That’s a derivative of the
purpose not the purpose itself. The purpose has
to be about serving customers.
Anthony Habgood, Chairman, RELX Group
It is important that the company allows its
customers ready access when they have a
problem that needs resolving. Companies
also need to be careful in the way they
handle confidential personal data, as
unauthorised release can severely damage
customer confidence. Boards need to
monitor customer service indicators
regularly and consider the implications for
reputation, risk management and long-term
business performance.
Employees
A key ingredient of a healthy culture
is a willingness on the part of senior
management to listen to their employees.
and recognise that their commitment is.
often long-term. Employees usually want
their organisation to succeed, and have
good ideas about how to make this
happen. It makes sense to empower them.°°
See Appendix 1
Case study: BAE Systems
Building trust with organised labour.
Employee voice
Employee voice is the two-way
communication between employees and
the organisation.*” Engagement activities
help employees to share ideas and
concems with senior teams to steer
decisions regarding the business. A culture
of engagement and ‘permission’ is required
for employees to feel able to voice their
ideas and concerns. Measuring the extent
to which employee voice processes are
enabled and used is a useful measure
of culture on which boards can draw.
Mechanisms and channels for employee:
voice range from leaders and managers
who listen to and actively encourage
employees to speak up, to formal and
informal internal channels of communication
— such as: ‘town hall’ or networking
meetings and use of social media;
engagement of employees at all levels in
projects and change initiatives - and formal
structures, such as unions and employee:
councils, and external channels, such as
whistleblowing or external social media.”
66
Our entire customer-centric
strategy is driven by the
need to embed cultural
issues around service
and integrity.
Sir Richard Lapthorne
Chairman
Cable & Wireless
Communications
66
It's about doing things
our way — strong beliefs
and values need to be built
into the way we manage the
business. Those beliefs need
to drive business decision-
making and that means
driving customer excellence.
Vittorio Colao
Chief Executive
Vodafone
36 IBE, 2016. Stakeholder
engagement - values, business
culture and society. interview
with Frances O'Grady ~ Secretary
General, the Trade Unions
Congress http:/www.ibe.org.uk/
87 CIPD, 2016. A duty to care?
Evidence of the importance of
organisational culture to effective
governance and leadership.
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Changing workforce = 66
Suppliers
The modern workplace differs markedly Most people define
from those of previous generations.
Business relies increasingly on trust and
on influence as well as on production and
control. This inevitably has an impact on
the workforce and on the culture of an
organisation. What has emerged is a more
open workforce which delivers discrete
projects with flexibility and mobility. This
reduces costs and enhances reach.
The number of people who are not full-time
permanent employees, but are flexible
workers and contractors, continues to
grow. In these circumstances, maintaining
acertain culture can be harder. The flexible
workforce has greater empowerment but
also greater scope for deviation from
core values. The detachment of some.
employees and contractors can impede the
creation of a sound culture as they may not
have bought into the values of the company
and have less to lose when things go
wrong. Clearly, while difficult to address,
these risks need to be managed.
New ways of working — managing the
open workforce suggests that successful
companies should seek to monitor and
manage their talent through understanding
the risks and developing new tools to
enhance performance and decision
making.® The research argues that having
a Strategy in place to recognise these
challenges can significantly improve the
impact and create a culture beyond
traditional organisational boundaries. It is
clear that the change in ways of working
should not present a barrier for focusing
on cultural change.
Many companies today have extensive
supply chains. A challenge for companies.
is how to ensure that supplier culture and
behaviour meet the standards that apply
within their own group. This can be difficult
because suppliers may have their own set
of values and working methods and they
may be supplying a number of different
companies, each with its own set of
requirements. In other cases people
themselves by their job so
there has to be a match
between how they see
themselves and how the
organisation sees itself. They
must have the same values
in order to be comfortable,
engaged and for them to get
something from their work.
representing the company in customer eer Cooper
facing roles may be employed by a sub- é ey
contractor where the customer would ard Factory
assume they are a direct employee of the
company and expect no difference.
Astarting point for engagement with
suppliers is to treat them with respect and
to recognise the mutual benefit of the
relationship. For example, paying suppliers.
promptly is fair and builds trust and goodwill.
See Appendix 1
Case study: Marks and Spencer
supply chain standards
In extreme cases, supplier companies that
are not clear about what is expected of
‘them or the law, may cause more serious
compliance issues for companies. There
is also a reputational risk from not selecting
companies that understand the client
company’s values and represent them.
Procurement policy therefore has to be
consistent with company values.
Companies need to be clear that
preference will be given to suppliers that
meet the expected standards. In some
cases this may involve helping suppliers
to develop and train their own workforce
in the expected standards of behaviour.
98 CIMA, Chartered Global
Management Accountant, 2014.
New ways of working — managing
the open workforce http://www.
‘cgma.org/resources/reports/
pages/new-ways-of-working.aspx
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Regulators
Relations between a company and its
regulators are not always easy given that
their interests are not fully aligned. A
company's attitude to regulators can often
be a useful indicator of culture; is the
relationship driven by narrow self-interest
and a desire to disclose as little as possible
or does it approach the relationship in a
constructive and open manner and regard
it as a source of support and mutual
benefit. A focus on how the executive
engages with the regulator is one way
in which boards can understand the
prevailing culture and seek to influence it.
Regulators too need to be aware that the
requirements they make of companies may
have unintended behavioural
consequences.
Shareholders
Shareholders have a unique relationship
with companies, as providers of capital and
because of their ownership rights.
Shareholders elect the board and directors
are formally accountable to them. Boards,
particularly chairs and board committee
chairs, are therefore often directly involved
in relations with shareholders, while
engagement with other stakeholders is
undertaken by management.
The composition of organisational value
has changed rapidly over the last 40 years.
In 1975, 83 per cent of the market value of
companies in the S&P 500 was accounted
for on their balance sheets. In 2015 that
figure stood at just 16 per cent.*® CIMA's
Global Intangible Finance Tracker 2015
put the UK's intangible asset value at
64 per cent of total enterprise value.*°
“Culture often provides the most
important insight into the intrinsic value
of a company, but can be difficult to
evaluate from company reporting alone.
Therefore shareholder engagement
should play a critical role.”
Andy Griffiths, Executive Director,
Investor Forum
As these figures demonstrate, an increasing
proportion of enterprise value is now made
up of intangibles that are not capitalised
such as brand, reputation, intellectual
property, human capital and culture. These
factors are inherently difficult to measure in
the traditional sense. However, they are
closely associated with risk and opportunity
and are of significant interest to shareholders
who need to be able to hold boards to
account for assessing and monitoring these
intangible assets.
Shareholders have an important role to play
in engaging with companies on culture.“'
While they cannot directly intervene, they
can help to bring about change through
high quality dialogue. They can also
support companies that want to innovate
and change culture, for example through
changes to methods of incentivisation.
Shareholders, chairs and chief executives
all report a degree of frustration in
establishing a dialogue about culture.
Some companies believe that most
shareholders are primarily interested in the
short term outlook and unwilling to spend
time discussing how embedding a strong
culture contributes to long-term success.
Excessive focus by shareholders on
short-term performance — or the perception
that this is the case — can be a driver of
poor behaviour.
The key issue for shareholders is how culture
impacts and underpins performance.
Companies with a ‘poor’ culture may
perform well in the short term but this is
unlikely to be sustainable over the longer
term. Investors report that the answers to
simple questions can reveal much about
culture, for example the extent to which
senior managers care about their employees.
The way answers are given can also reveal
attitudes to their wider stakeholders.
66
The right corporate culture
is critically important for the
delivery of sustainable,
long-term performance, and
hence sustainable pensions
for our members.
Chris Hitchen
Chief Executive
Railpen Investments
39 Ocean Tomo LLC, 2015. Intangible
Asset Market Value Study. S&P
500 http:/www.oceantomo.
com/2015/08/04/2015-intangible-
asset-market-value-study/
40 Brand Finance and CIMA, 2015,
Global Intangible Financial Tracker
— An annual review of the world's
intangible value http:/\www.
cimaglobal.com/Documents/
Thought_leadership_docs/
reporting/Brand-Finance-GIFT-
Report-2015.pdf
IBE, 2016. Stakeholder
engagement - values, business
culture and society
http/Avwwibe.org.uk/
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Building trust with stakeholders
Some shareholders are not convinced that
they have the power or the ability to change
culture. Where they perceive a weak culture
they are more aware of the risks to value
and may be more likely to sell their shares.
A number of passive fund managers
believe that engaging on culture is an
important way of preserving value on behalf
of clients. However, most asset managers.
reported to us that their clients rarely put
them under pressure to put resources into
engaging on corporate culture. It may,
therefore, be helpful for asset owners to
encourage their fund managers to raise the
subject of culture with the companies they
invest in on their behalf.
Nevertheless, discussions with shareholders
identified a growing appetite for an improved
dialogue with companies on culture. This
trend is likely to continue. It has implications
for boards and for corporate reporting, and
regulators will need to monitor this. There is
also a recognition by investors that collective
action could deliver a consistent message
to companies and build trust. The Investor
Forum presents an opportunity for greater
collaboration.
Shareholders need to guard against
concluding too much from a single set of
indicators which may give some signals on
risk but give little insight into the long-term
sustainability of the business. Cultural
indicators can act as a starting point for
discussions with directors, but context is
important and the quality of dialogue is
key for assessing culture. Shareholders
report that they seek reliable data and
consistency which allows comparison with
previous years and with other companies
in the sector.
It is clear that shareholders need to talk
to a wide range of people involved in a
company in order to build an accurate
picture of its culture. This includes
executives as well as NEDs and so it is
important that investment houses ensure
that they are avoiding a siloed approach
to dialogue. Companies often feel that
corporate governance specialists and fund
managers operate in isolation from one
another. Adopting a joint approach to
engagement could help deliver a more
holistic view and improved ability on the
part of investors to understand culture.
Investment houses should also pay
attention to their own cultures, encourage
challenge and practice what they expect
of investee companies.
An increasing number of shareholders
believe that corporate culture should be
an important part of shareholder dialogue
with NEDs. Ultimately shareholders rely
on NEDs and should pay close attention
to the way they are discharging their
responsibilities, including around culture,
when exercising their right to elect them.
6
Companies need to come
up with their own metrics
on culture and report on
those, on a year on year
basis, so that investors can
understand what boards
are focusing on and how
well they are achieving
their objectives.
Helena Morrissey
Chief Executive
Newton Investment
Management
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Questions for investors
Questions for boards
Do the board and senior management
seem to have a clear idea of the
company’s purpose?
Do the company’s values seem to be
aligned to its business model or
models?
What first-hand experience do NEDs.
have of conditions in the operating
parts of the business?
How is the board assessing culture
and how does it hold the executive
to account?
How does the board take account of
culture when structuring remuneration?
How does the board ensure incentives
do not encourage undesirable
behaviour?
How does the company deal with
employees who are in breach of
company rules or codes of conduct?
What actions has the company taken
in the last year to reinforce culture?
Are there examples of where the
company has turned down business
or not pursued a relationship with a
potential business partner because
of a lack of cultural fit?
What steps has the company taken to
ensure that suppliers meet expected
standards of behaviour?
How do we include culture questions
in employee surveys?
Is there a forum for employees to
share ideas and concerns?
How do we demonstrate we listen
to the ideas and concerns from
employees?
How comfortable do employees report
they are with challenging and reporting
bad behaviour and is there any
evidence that they are doing this?
Do employees report that leaders and
senior managers live the values?
Is the chief executive willing to listen,
take criticism and let others make
decisions?
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Building trust with stakeholders
Reporting on culture
There was strong consensus among
investors that there is a need for
companies to improve reporting on culture
and communicate openly about the impact
of culture on the business. In the annual
reports of FTSE 100 companies while
48 per cent define the values of the
company, and 35 per cent the purpose,
only 14 per cent discuss their corporate
culture.’ At an investor event at EY,
81 per cent of investors said that
companies are not currently providing
in their public reports, the information
investors need to assess culture.’*
A good explanation of the business model
and key risks can also convey meaningful
insights into the culture. A commitment
to report is a good discipline and can
translate into a commitment to take real
action on culture — what gets reported
tends to get done. By focussing on what
action companies have taken investors can
get a sense of whether they mean what
they say. Companies could also disclose
non-financial metrics and practical
illustrations of how it expects business to
be conducted and provide more context
around data that they make public.
Companies and investors agree that
auniform set of cultural measures or
indicators applied across all companies and
sectors may not be fit for purpose. Instead,
indicators need to be relevant for investors
and meaningful in the context of the specific
operating environment of the company
concerned. Shareholders report that they
seek reliable and consistent data, which
allows comparison with previous years
and with others in a sector. Boards should
consider carefully what information is
most useful.
Efforts to encourage more consistent ways
of reporting in some areas are taking place.
The Valuing your Talent initiative proposes
measures and frameworks to report on
human capital including employee
engagement, total workforce and
investment in training and development.
These may be useful indicators of culture to
investors and other stakeholders and allow
comparisons to be made across company,
sector and from year to year.“*
6
The annual report shows
how our distinctive culture
links to the business model
and strategy. It includes
customers, colleagues,
corporate partners and the
shareholders. It fits with the
company’s customer-
centric brand but is wider.
It's unique to the company
and is our path to
commercial success.
Glen Moreno
Chairman
Virgin Money
42 Black Sun, 2016. Corporate
Culture: a thought piece on
reporting http:/bestpractice.
blacksunple.com/files/2016/
culture_report_v5.pdf
43 EY Investor Dialogue event
November 2015 - audience poll
of 21 institutional investors http://
wwwey.com/UK/en/Services/
‘Assurance/EY-assurance-services-
cultural-assessments
44 Valuing your talent is an initiative
between UK Commission for
Employment and Skills (UKCES),
CIPD, CIMA, the Chartered
Management Institute and
Investors in People — http:
www.valuingyourtalent.com/
for-external-stakeholders/
external-perspectives/towards-
standardised-measures
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HOW CAN BOARDS
ASSESS, MEASURE
AND MONITOR CULTURE?
Views are divided about the extent to which
culture can be measured. The majority of the
chairmen we interviewed feel that measuring
Culture is difficult and understanding it
means drawing on information from a range
of sources. A minority are more confident
about the ability to measure culture.
Chairmen recognise that there are
limitations on the board's ability to know
what is going on in the business. This can
constrain the board's ability to challenge
the executive.
Management information to the board
is inevitably summarised and can be
presented to conceal the existence of real
issues. Nevertheless, boards can do more.
by requesting access to relevant information;
being smarter in their interrogation of that
information; asking pertinent questions;
probing and challenging where appropriate;
and making sure action is taken when it is
not satisfied that senior management is
embedding the desired culture effectively.
As well as requesting access to a range of
information sources, chairmen agreed that
spending time in the business was critical
for getting a true sense of the prevailing
culture in different parts of the business.
6
The most important thing in
monitoring culture is to have
effective ‘antennae’. Culture
is, by definition, intangible
so you really need to listen
to the organisation and hear
the nuances. There are also
leading indicators like
retention rates, staff surveys
- and you can monitor
externally using Glass Door,
for instance. You bolt
them all together to form
a picture.
Coram Williams
Chief Finance Officer
Pearson
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How can boards assess, measure and monitor culture?
Understanding culture
There is strong agreement among
stakeholders that a determined effort is
required to build a picture from various
indirect indicators and proxies of the true
Culture at different levels in the organisation.
Companies report that they struggle fully
to understand the complex chain of
interactions that drive individual behaviour.
Traditionally, management has focussed on
the mechanisms, policies and processes
that make up the operational framework
of the company and which establish
boundaries, norms and minimum
standards of behaviour.
The realisation that management and
boards need to understand and address
less tangible drivers of behaviour, such as.
closely held values and attitudes or social
and power-driven pressures, that can lead
people to make poor choices is changing
the conversation in the boardroom. To do
this justice boards need to shift focus and
seek new ways of understanding what is
really going on in their organisations.
This suggests that the role of the NED is
changing, with inevitable implications for
the skillset, diversity and experience that
NEDs will add to the board in the future.
Certainly NEDs will need to become more
culturally aware, more tuned in and more
knowledgeable about human behaviours.
and relationships.
NEDs will also need to be more proactive
in their engagement with employees and
other aspects of the business and in their
modelling of company values. This will have
implications for which aspects of their role
NEDs prioritise and how they allocate their
time. There will also be a corresponding
effect on the policies, practices and
processes around the recruitment,
induction and training of NEDs.
When assessing culture, boards need to
be aware of a number of contextual factors
that can influence culture, such as history
of the firm, impact of macroeconomic
conditions, political and regulatory climate,
market sector, degree of competition, local
business environment and cultural norms.
Beyond these broader issues, they need to
assess information from a wide variety of
company specific sources to gain a broad
range of insights into the overall culture and
individual sub-cultures.
Spending time in the business
Chairmen and chief executives agree
‘that there is no substitute for ‘walking the
shopfloor’ to ensure the board has a live
understanding of the culture at different
levels of the business and is able to
intervene before cultural problems take hold.
Site visits were cited as giving a good
sense of what is going on, provided they
were not run as ‘state visits’, although they
are not always practical in organisations
with multiple global locations and
operations and such visits have their
limitations. Chairmen and chief executives
emphasised that site visits are not only an
opportunity to find out what is going on
but also demonstrate the importance and
presence of the board. It is the degree of
engagement and preparation of NEDs that
makes the biggest difference; NEDs need
to be focussed and ready to ask the right
questions. An open discussion with the
chief executives to prepare the ground
can guide NEDs to engage in a way that
reinforces the values and culture and
supports management's message and
reinforce culture. Debriefs with the chief
executives on their return are also
important and can provide useful insights
for management.
6
There are a number of
different ways of measuring
it— but experiencing it is
the most valuable and
insightful.
Derek Mapp
Chairman
Informa
6
Receiving reports and
information is all very well,
but there is no substitute for
going out into the business
and experiencing the
culture for yourself. By
and large, NEDs don’t do
enough of this and boards
should be more rigorous
in insisting they do.
Adam Crozier
Chief Executive
ITV
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Stakeholders agreed that informal time
with executives and employees was
valuable in talking through things that
seemed to be out of alignment with
company values and the desired culture.
NEDs need to be aware that power
differentials make it hard for a member
of staff to challenge a senior executive.
Chairmen interviewed provided many
practical examples of how they
improve their understanding of how
the business operates.
An important role for boards and audit
committees is to spot misalignment
between behaviour, purpose and values.
Where they spot gaps or misalignment,
they should be challenging robustly and
taking action to investigate further and
where necessary to redirect management.
Boards need to challenge themselves and
build a cultural lens into their discussions
and decision-making, for example by
asking questions with a culture focus.
Co) Chairmen’s top tips
Listen to the internal grapevine
and pick up quiet messages
Host town halls — operations/frontline
staff usually welcome the opportunity
to engage
Become a customer/mystery shopper
Talk to frontline staff and the first
line of supervision
Talk to external stakeholders
Ask the simple questions -
generally employees know if there
is something wrong
Increase visibility, for example,
expose new people to the board
Meet with future leaders without
their bosses
Focus on culture during
induction meetings
Assess the talent pool coming up.
through the organisation
Conduct deep dives into business units
and engage with local management
Engage with a wide range of executive
directors from different business
functions, who can cascade the
message back into their business units
Encourage NEDs to mentor
middle managers
Listen for anecdotes and personal
observations
Review customer complaints
and follow up.
66
It's good for NEDs to go
out into the business but
‘they need to do it carefully.
Orchestrated royal visits
by herds of NEDs are in
my view often not very
productive, whereas
individual NEDs popping
in to sniff the breeze
works well.
Rupert Soames
Chief Executive
Serco
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How can boards assess, measure and monitor culture?
Cultural indicators
Chairmen, investors and chief executives
were clear that a common set of cultural
measures or indicators for all companies
would not be fit for purpose. What is.
important is that the indicators used are
meaningful for the context and environment
in which the company operates and
relevant for the outcomes the company
wants to achieve.
Boards need to ask themselves what is
most relevant for their company and seek
appropriate information accordingly.
Companies report using a range of
information sources and tools to gain
insights into culture and behaviours and
make the intangible tangible. Traditional
types of data and numerical indicators
such as employee turnover can give a
sense of scale and, as trends develop,
a Clear indication of the direction of travel
and areas of potential concern.
Other sources offer qualitative evidence
that when analysed and interpreted with
sensitivity can give boards a more nuanced
understanding of the prevailing culture and
behaviours and offer a means of identifying
Cultural misalignment and the root causes
of problems. Targeted efforts to gather
qualitative information from employees and
other stakeholder groups, for example via
focus groups or interviews, can inform a
more comprehensive cultural assessment
and highlight cultural risks which merit
Closer inspection.
Digital developments have led to a vast
increase in the volume of data and
information that is available. Access to data
and information creates new opportunities
to better spot misalignment and respond
to culture risk. The tools for analysing and
mining those information sources and
extracting the hidden messages have
become more sophisticated.
The growing ability to leverage technology
to assess and monitor culture risk means
that boards are in a stronger position to
understand how culture and behaviours
impact performance.*® Objective, evidence-
based tools are already available which
are capable of layering and presenting
information from a range of sources and
across different sites to give a clear picture.
Boards need to understand and utilise
technology to assess and monitor the
existing culture and foster the desired
culture. Boards should therefore be asking
themselves whether they are using
technology to its fullest and whether they
have the right skills and knowledge on the
board to do this.
Culture indicators presented to senior
management and the board should
include analysis of what the indicators
mean, and draw insights from them into
what they tell the company about its
culture, what the areas of concern are
and what recommended actions should
be considered. This should capture
information about sub-cultures and identify
outliers. Leading indicators are particularly
important, as they can help boards to
spot misalignment before a serious
problem arises.
6
While the board cannot
directly drive change, it can
monitor and understand
how individuals at various
levels behave.
Philip Aiken
Chairman
AVEVA
6
We carry out positive
Climate index surveys every
month which provokes.
conversation. Scores are
recorded and questions
asked as to why particular
sites are lower scored.
Sooner or later it affects
the financial results.
Nigel Stein
Chief Executive
GKN
45 Institute of Chartered Secretaries
and Administrators, International
Corporate Governance Network
and IBE, 2016. Report of a senior
practitioners’ workshop on
identifying indicators of corporate
culture
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When assessing culture, it is important to
first establish localised cultural norms.
against which scores can be benchmarked.
This is necessary in order to get a sense
for whether an individual score is cause for
concern. For example, a higher incidence
of whistleblowing in the USA than in Japan
may be more a reflection of cultural norms
than an indication that there is an issue.
A report by the Institute of Chartered
Secretaries and Administrators, the
International Corporate Governance
Network and IBE published in February
2016 identified three main drivers of bad
behaviour: corporate stress, which led
people to take short cuts; excessive focus
on short-term financial targets; and a
tolerance of small breaches of the rules
or a tendency to push at the limits of what
was permitted by the rules or regulations,
which allowed misdemeanour to grow
incrementally. It identified the following
symptoms of a flawed culture: flawed
executive remuneration practices, complex
legal structures, a tendency for takeovers
to proliferate and lax financial discipline
and excess leverage.
Our engagement identified a number of
areas for particular vigilance. Where boards
spot any of these things, a closer look will
usually be warranted. These red flags
may well be suggestive of a wider issue
with culture.
(a) Areas for vigilance
Silo thinking
Dominant chief executive
Length of chief executive tenure
Leadership arrogance
Pressure to meet the numbers/
overambitious targets
Lack of access to information
Low levels of engagement between
leadership and employees
Lack of openness to challenge
Poor succession planning
Misaligned incentives and flawed
executive remuneration practices.
Tolerance of minor regulatory or code
of ethics/conduct breaches by star
employees
Lack of diversity
Hierarchical attitudes
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How can boards assess, measure and monitor culture?
Providing assurance
around culture
Boards can turn to HR, internal audit (IA),
risk and compliance and other business
functions such as finance to provide much
of this data. A trusted and independent
company secretary can be another
important source of information and conduit
for those wishing to raise concerns.
Asmaill but significant number of chief
executives singled out the finance function
as key to unearthing any behavioural lapses.
in the company.
SS
Human resources
HR has expertise and access to many
information sources which can provide a
useful lens on culture and give an indication
of whether behaviour is at the limit of,
or is broadly in line with values and
expected behaviours. This in turn sheds
light on the sort of culture individuals may
be encouraging or tolerating. In many
organisations HR is best placed to lead
cultural assessment, engagement and
change, however some stakeholders felt
that HR needs to further develop its skills
and approach to contribute effectively to
the assessment of culture.
By far the most commonly used tool
for gauging culture is the employee
engagement survey. More than 80 per cent
of companies report conducting such a
survey to capture employee sentiment. The
results of these surveys are frequently
shown to the board. While they are a useful
source, employee engagement surveys are
not, on their own, a reliable indicator of
Culture, and can produce misleading
results depending on how the questions.
are posed, and whether employees feel
they can answer honestly. However, when
used in conjunction with other employee
voice mechanisms, engagement surveys
can be a powerful way to engage the
workforce, and gain insight on
cultural issues.
Many companies are therefore
supplementing the results of the
engagement survey with other sources
of information, and attempting to overlay
information and data points from those
sources to build a picture of the interaction
between values, behaviours and
decision-making. For example, integrating
HR measures of engagement with
business performance measures such
as sales and revenue to understand
whether engaged employees are driving
business results.
A board focus on what action is taken
with the results of the employee
engagement survey to identify root causes
can give an indication of how committed
senior management is to promoting the
desired culture.
Companies that have tried in-depth surveys
with a sample of employees involving
interviews with staff at different levels,
particularly operations/frontline staff, find
them helpful and illuminating and over time
‘they provide useful trend data.
Another development is the use of short,
sharp employee pulse surveys at regular
intervals to gain insight into discrete issues;
regular and ongoing engagement with
employees is a trend and ultimately may
replace the annual survey.
A particular risk area for companies exists
around the way people are incentivised.
Boards should ensure they are paying
significant attention to the nature and
structure of incentives and the behaviour
they drive. Remuneration and risk
committees are in a position to support
boards in evaluating alignment between
incentives, values and behaviours. HR
is well placed to lead discussions on
structuring incentives and work with the
board to develop these in line with
cultural values.
6
We look closely at staff
turnover and customer
complaints.
lan Durant
Chairman
Greggs
6
Culture goes wrong when
people are more interested
in what they would like the
truth to be, rather than in
what it is. They say a fish
rots from the head but in
my experience corporate
rot often starts in the
finance department if they
forget that their principal
role is to ensure that
management and owners
understand the truth.
Rupert Soames
Chief Executive
Serco
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HR sources of insights
into culture
Responses to employee surveys,
especially those shedding light on
middle and senior management
attitudes
Succession plans
Staff turnover and absenteeism rates
Workforce diversity
Staff training data
Recruitment policies and practices
Promotion decisions
Exit interviews
Remuneration policies and practices,
particularly the structure of financial
and non-financial incentives
Grievance data
Internal audit
Obtaining a realistic view of the culture
at the coalface is a common problem for
boards across all sectors.
lA has the potential to be an important
provider of assurance to the board
alongside functions such as HR,
and risk and compliance. For companies.
with an IA function, its positioning and
reach are important factors. IA needs to
demonstrate independence and
accountability and to have effective
mechanisms for communicating its
concems about culture to board members.
This can begin with a clear mandate from
the audit committee. In financial services
firms the head of internal audit is required
to report to the audit committee and this is
becoming best practice for other sectors.
Results can be reported informally or
formally within internal audit reports and
areas of potential weakness identified can
be investigated. Audit committee members
and senior executives, however, must be
open to the idea that the sort of hard
evidence to underpin conclusions found
in more traditional areas of audit will not
always be available. Most heads of IA
told us that assigning experienced senior
auditors who understand the organisation
and have sound working relationships in
place with managers is key to success.
66
The intensity of incentive
schemes says something
about the company.
The focus boards put
‘on measures other than
financial is important.
Nigel Stein
Chief Executive
GKN
6
The head of internal audit
is a good source of
intelligence and insights.
He has his ear close to
the ground.
Mike Evans
Chairman
Hargreaves Lansdown
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How can boards assess, measure and monitor culture?
Internal auditors will need to develop
a broader set of skills than has been
traditional, and place more emphasis
on asking questions about why certain
behaviours occur and understanding the
pressures that are driving the behaviours.
However, IA can suffer from a perception
it is a backwater and is not always valued
as highly by management.
The credibility of IA is fundamental and it
needs to be appropriately resourced. Some
companies are taking steps to strengthen
its role and reputation, for example by
requiring business units to be always audit
ready and given no more than a month’s
notice before an audit. A stint in internal
audit as part of the graduate training
programme can give participants a better
grasp of the business and a keener
appreciation of the value IA can add, which
makes it more likely they will use it effectively.
6
Compliance and control
indicators of culture
Health and safety record, including provide advice
near-miss reporting
Whistleblowing/speak up incidents
Internal audit functions are
valuable and are able to
on where we
are missing a trick. One way
to gain value from internal
audit is by having them
work on projects and not
Promptness of payments to suppliers just doing stan
Control failures and instances of poor
Andrew Page
compliance
Chairman
Northgate
Fines/regulatory breaches
Expense claims
Breaches of the code of ethics/conduct
External sources of insights
into culture
Customer complaints
Customer satisfaction data
Supplier feedback
Social media, for example, Glassdoor
a
Behavioural indicators
of culture
Attitudes to regulators
Senior management attitudes to
employees
How management responds to
1A recommendations
Action taken to deal with poor
behaviour/instances of non-adherence:
to values
dard visits.
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SS
Snapshots of existing
IA practice
A survey of heads of IA conducted by
the Chartered Institute of Internal Auditors
(IIA) in early 2016 as part of the FRC’s
project, found that IA works most closely
with HR and risk management functions
when it comes to assessing culture.“®
However, group discussions and one on
one interviews conducted by IIA between
November 2015 and March 2016 found
little evidence of this, suggesting that,
while it may be recognised as a good idea,
in practice it is not happening on a
significant scale.
IA‘s role in auditing culture is to provide
independent advice and assurance to the
board that the culture and values it has set
are appropriate given the organisational risk
context, and being lived throughout the
organisation. 60 per cent of the IA heads
who responded to the IIA’s survey reported
that their boards have established and
articulated the culture they want. Where
organisations have values statements, the
challenge is how to gather evidence and
demonstrate that the values are being lived
at every level of the organisation. This is by
no means straightforward. According to the
IIA’s survey, only a minority (20 per cent
across non-financial services organisations,
42 per cent in financial services) of IA heads
have been asked to assess the extent to
which the company's values are evident in
the behaviour of employees. To close this
gap audit committee chairs could ensure
that values assessment is incorporated into
the audit plan.
GSK (GlaxoSmithKline) carries out a
values assurance programme across all
operations internationally. A multidisciplinary
team spends four to five weeks on site,
interviewing employees at different levels
in the organisation, which enables
the company to see where leaders.
communicate the values and how people
are demonstrating them in the way
‘they work.
See Appendix 1
Case study: GSK
providing assurance
on company values
The IIA’s survey revealed that staff surveys,
whistleblowing activity and governance
structures are the most common proxies IA
uses to audit culture. Other proxies include
HR grievance data and exit interviews;
management of customer complaints;
values statements and their incorporation
into recruitment and performance
management; and pay, reward and
incentive structures. Supplier feedback
can also be a useful gauge of culture
as highlighted by the Groceries Code
Adjudicator’s investigation into Tesco.*”
The most popular methods used to audit
culture by far were interviews and
observation — nearly nine in 10 internal
auditors use each of these methods.
Other methods include: focus groups;
reputational analysis; and capturing reviews
and lessons from near misses. Surveys.
and interviews can provide indirect insights
and indicators of behaviour but the results
may be skewed if employees do not feel
able to speak openly and honestly.
66
Intemal audit is now
beginning to bring up
different issues compared
to the past. There's now
more focus on root causes.
Anténio Horta-Osdrio
Chief Executive
Lloyds Banking Group
46 The Institute of Internal Auditors,
2016. Organisational Culture:
Evolving approaches to embedding
and assurance, https://www.iia.org
uk/media/1591840/FINAL-0885-
Culture-report-17-5-16-v4 pdf
Groceries Code Adjudicator,
2016. Investigation into Tesco
plc. London: Groceries Code
Adjudicator https://www.gov.uk/
government/uploads/systen/
uploads/attachment_data/
file/494840/GCA_Tesco_plo_final
report_26012016_-_version_for_
download. pdt
4
=
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How can boards assess, measure and monitor culture?
Root cause analysis, cited by 39 per cent
of respondents, is an important way to get
underneath the skin of the behavioural/
Cultural issues. It is about looking not just
at what has happened but also at why
things happened. Root cause analysis can
uncover organisational and process factors
that may have been contributory factors,
for example, how targets and incentives
are set and communicated, and how
appraisals are conducted.
Leeds Building Society recently conducted
a standalone audit of culture using a
mixture of the methods outlined above.
See Appendix 1
Leeds Building Society
internal culture audit
Boards can reflect on whether they are
maximising the opportunity to utilise IA by
asking some pertinent questions, such as:
SS
Questions for boards
Is IA sufficiently highly valued within.
the organisation?
Does IA have the degree of
independence needed or do we need
to change the reporting lines for IA?
Does IA have a clear mandate to
incorporate cultural issues into its
audits and is this mandate written into
the audit charter?
What steps do we need to take to
invest in IA and develop the skills base
and capabilities?
Could we do more to ensure IA,
HR, compliance and risk, work
collaboratively and report jointly
to help us draw insights into culture?
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External audit
Culture is an important consideration for
external audit, in particular its work around
the control environment and in identifying
specific risk issues.
External auditors are not embedded in
the organisation to the extent of IA so the
opportunity to observe and assess culture
might be more limited. In addition, the
external auditors’ focus will be on the
behaviours which impact integrity of
the financial statements and hence some
aspects will fall outside the scope of a
typical external audit. This makes it difficult
for external auditors to give a formal view
on culture as part of their audit opinion.
External assurance and observations are
valuable nonetheless; it is independent
and credible as it is not steeped in the
organisation’s culture. This can support
boards and audit committees’ assessment
and monitoring of culture and an informal
conversation with the chair, chief executive
or audit committee can be a valuable
source of insight.
Participants at a roundtable for FTSE 100
audit committee chairs hosted by KPMG
agreed that external auditors are a useful
source of insight into culture, but observed
they can be reluctant to share views that
are not backed up by hard evidence.
Many external auditors say they already
give informal feedback on culture to audit
committees, pointing out that a few
leading indicators can stimulate a
conversation. Some firms are making
significant investments to develop their
capabilities and services to measure and
assess culture.
Participants at a roundtable of the:
top nine external audit firms hosted by
The Institute of Chartered Accountants in
England and Wales felt strongly that boards
need to support progress in measuring
culture by articulating more clearly the
culture they want, translating that into
behaviours and establishing benchmarks
against which culture can be measured.
In the future, there is the potential for
internal audit and external audit to
collaborate in this area as they do in
relation to assurance around financial and
non-financial controls, but the IIA’s survey
shows that only six per cent collaborate
on culture at present.
66
!am happy for internal and
external auditors and staff
to raise issues based on a
‘gut feeling’. This is all part
of the jigsaw puzzle.
Nick Land
Non-Executive Director
and Chair, Codes and
Standards Committee
FRC and
Audit Committee Chair
Vodafone
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CONCLUSION AND
NEXT STEPS
This report aims to stimulate thinking around the role
of boards in relation to culture, and encourage boards
to reflect on what they are currently doing.
It sets out the key elements which boards
should be considering in relation to The FRC’s next steps will be to:
corporate culture. This is a wide field
of commercial and academic study. — reflect on feedback to this report;
The reports of our coalition partners
(Appendix 2) and other research referred
to in the footnotes of this report provide
more detailed information.
— update our 2011 ‘Guidance on
Board Effectiveness’, taking into
account the feedback we receive;
= continue to work with our partners
to encourage debate on culture and
to identify and share good practice.
Please email:
culturecoalition@
to get in touch.
46 Financial Reporting Council
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APPENDIX 1:
CASE STUDIES
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Appendix 1: case studies
OLD MUTUAL GROUP
VALUES AND CULTURE UNDERPINNING STRATEGY @ ovomutua
Old Mutual Group is an international investment, savings, insurance
and banking group made up of four financial services businesses
— Old Mutual Emerging Markets, predominantly in South Africa and
Africa, Nedbank in South Africa, Old Mutual Wealth in the UK and
Old Mutual Asset Management in the US.
© Background
Following the financial crisis in 2007/2008,
Old Mutual decided to put the customer
back at the heart of the business, and knew
that values and culture would be crucial to
this. How the business set out its vision and
Strategy is made up of a customer promise
— four values and six behaviours.
Co) Action
Sponsored by the board, the group's HR.
function led a review of the values (integrity,
respect, accountability, and pushing beyond
boundaries) to see if they were aligned to the
new customer-centric vision. Employees
felt the values were still relevant, but they
were generic and help was needed to
understand what they meant in practice.
Through interviews with the top 100 leaders,
a survey of employees at all levels of the
group and workshops with the executive
committee, Old Mutual identified six guiding
behaviours that described the values in
practice in the context of the new customer-
centric vision and strategy:
— Aim high and take your team with you
- Customer first - they’re the reason
we're here
— Treat the business like it’s our own.
— Need to listen carefully and talk honestly
— Own our decisions, decide and deliver
— Win together and help others succeed
Employees were regularly assessed
against these behaviours. Performance
management included compulsory 360
degree feedback for all leaders solely
around the behaviours, and this feedback
influenced individual performance scores
which were linked to rewards.
Once the new behaviours had been
introduced, Old Mutual looked to how it
was going to measure progress with the
required overall shift in culture and chose
to use the Barrett Values survey across
the group. Barrett differs from employee
engagement surveys, as it starts with an
individual's personal values, the values they
perceive exist in the current organisation
and the values they believe are needed to
take the business forward. By identifying
misalignment, the data is used to generate.
conversations and then actions.
@ Impact
The first survey in 2011 identified a number
of areas of dysfunction and only two matches
(of ten possible) between existing and desired
culture as described by the company’s
leadership group. Actions to address these
areas included work to focus on the customer,
changing the operating model to reduce
bureaucracy, changing its product offering
and future scenario planning to reduce
short-term focus. The result was that by 2015
‘the leadership group reported there were
seven matches between existing and desired
Culture and a ‘healthy’ culture score. How
culture is measured is now central to how Old
Mutual assesses and manages cultural risk.
In March 2016, Old Mutual announced its
plans to separate the group into four
stand-alone businesses. Consequently,
‘the group culture and behaviours will
change again to reflect the individual
businesses and the new role for the pic.
This is an historical case study reflecting
the position up until the change in strategy.
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LEAR CORPORATION
LEADERSHIP DEVELOPMENT AND CULTURAL CHANGE
LEA
CORPORATION
Lear Corporation is a Fortune 200 automotive supplier.
© Background
Recovering from a period of bankruptcy,
the Lear Corporation was forced by the
financial crisis to seek efficiency savings
and radically alter its business model.
CS) Action
These changes necessitated an
assessment of culture. Working from
an individual and organisational values
perspective, HR focused on embedding
Cultural change through four enabling
phases of culture change.
The first stage of the change, labelled
awareness, involved communicating the
culture change initiative through internal
publicity, such as posters. Leaders
were integral in communicating the
change programme through clear
and coherent messaging.
Lear also focused on training and
development for middle managers.
about new business behaviours and
Cultural assessment techniques in team
environments. This included a number
of away days exploring new behaviours,
led by senior executives.
The final stage involved an assessment
after six months’ participation in the
training for managers. This included
sharing across management to ensure
development conversations included
values-based assessment and that
leaders in the programme owned changes
that enabled the new culture to develop.
(9) Impact
The programme changed the business
and Lear believe that this demonstrates
the importance of structured leadership
development and engagement
programmes. The full effectiveness of
the cultural change programme will not
be understood until after the first tranche
of activity; however, initial signs of improved
business performance are encouraging,
and show that the initiative is having the
right impact on the competitiveness of
the business (Gill and DiDonato 2015).
Lear updated performance management
programmes to embed and assess values-
based behaviours, and restructured or
made redundant roles which did not fit the
new cultural model. They also addressed
bad-behaving high-performers.
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Appendix 1: case studies
LOREAL
EMPLOYEE ENGAGEMENT WITH ETHICS
Headquartered in Paris, LOréal is the world’s largest cosmetics
and beauty products company, with 80,000 employees worldwide
and sales of €25.3bn in 2015.
© Background
LOréal’s approach to ethics is about having
a large international staff adhere to a
common set of ethical values, engaging
them, and helping them to make good
decisions. This goes beyond compliance
with rules and, to emphasise this, its ethics
and compliance departments are separate,
with the chief ethics officer reporting
directly to the chief executive.
The company has four ethical principles:
integrity, which enjoins people not to lie or
cheat; respect, which reminds them to treat
others as they would wish to be treated;
courage, which encourages them to speak
up if they have concerns, recognising that
for many people this is very difficult; and
transparency, which promotes an open
environment in which there is less need
for formal procedures and controls.
Co) Action
Since 2009, the chief executive has made
himself available one day every year to
answer questions on any ethical matter of
concern from staff worldwide through a
live web chat. This is followed by a similar
session conducted by each of the country
managers.
Last year more than 4,100 questions were
submitted, of which 1,300 were directed
specifically to the chief executive. The
company estimates that the web chat was
followed by around 56 per cent of its staff.
L’Oréal has a network of 67 ethics
correspondents. Their job is to bring
ethical leadership to all parts of the
business, including providing advice
to employees about how to handle
concerns and explaining how the
group ethics approach can be adapted
to local customs. They also ensure that
the company's code of ethics is properly
communicated, and that the relevant
training is in place and they are empowered
to ensure that the programme is delivered.
Each ethics correspondent serves a
‘term of three years. The country manager
submits at least two names to the chief
ethics officer who interviews the candidates
and has the last say on selection. UOréal
estimates that the role takes up around
10 to 15 per cent of their time. About
20 per cent come from each of the HR or
finance functions and the remainder from
other disciplines.
(9) Impact
LOréal believes the ethics correspondents
are a good way of spreading understanding
of ethics throughout the organisation. They
provide leadership at a local level and help
Staff feel able to speak up.
LOREAL:
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bey melrre TalkTalk
CUSTOMER COMMUNICATION IN A CRISIS
TalkTalk is a TV, broadband, mobile and phone provider. Based
in London, it has a focus on innovation and value for money.
© Background @ Impact
In October 2015, TalkTalk suffered a The crisis exposed a need for cultural
cyber-attack accompanied by a ransom change and TalkTalk will focus on team
demand. The perpetrators stole data that spirit and reducing silos in future.
could have compromised the security of
the customers. The board has become much more aware
of risk and is now asking questions in a
different way to ensure that it understands
(5) Action the nature of the company’s risks and how
well they are mitigated.
The first decision the company took
was to admit what had happened. There
was no legal requirement to make a public
statement, but the deciding factor was the
desire to warn customers of the heightened
risk. Beside emphasising how seriously the
company was taking the situation and the
efforts it was making to repair the damage,
there was a strong focus on customer
safety, including arrangements for them
to arrange free credit reference monitoring.
Internal communications and staff morale
were also important and at the height
of the crisis the chief executive was
communicating with staff twice a day.
Less than a week after the attack, the
company was able to confirm that the
stolen data was insufficient on its own
for the perpetrators to take money from
customers’ bank accounts and the police
had arrested a suspect in connection with
the case.
Even though their trust had been shaken,
the majority of customers, when polled,
thought the company had done a good
job in keeping customers informed.
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Appendix 1: case studies
BAE SYSTEMS
BUILDING TRUST WITH ORGANISED LABOUR
BAE Systems is a leading international defence, security and
aerospace company headquartered in London with operations
in the US, Australia and Saudi Arabia.
© Background @ Impact
The company recognises a number of The company’s approach is to be as open
trade unions and has high levels of union as possible with its union interlocutors and
membership. The unions have full time this is valued by employees. The regular
conveners (trade union officials paid for by involvement of BAE Systems’ senior
BAE Systems) in each business and site. leadership has fostered a high level of
Separately the company has a bargaining personal trust. Confidentiality is essential,
and consultation framework at group level. and so far the record has been good, as
both sides recognise the mutual advantage
The current relationship has evolved of the arrangements.
over many years and is, at least in part,
aresponse to BAE Systems’ acquisition
of defence and shipbuilding businesses
where there was a tradition of poor and
often confrontational industrial relations.
CS) Action
BAE Systems and the unions describe
their relationship as one of trust. This is
based on a culture of openness, a structure
which allows potentially serious issues to
be escalated and addressed before they
become critical, and a recognition that,
in many areas of public policy, the unions
and management have common interests.
The central element is the Corporate
Consultative Committee that allows BAE
Systems to engage with its own union
officials at convener level. This has about
30 members and meets quarterly. It
discusses issues of mutual interest to
the unions and the group. This allows the
company to engage with unions at every
level throughout the group, while giving
individual sites and businesses the freedom
to conduct their own bargaining on wages
and other specific local issues.
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MARKS AND SPENCER
SUPPLY CHAIN STANDARDS
Head-quartered in London, Marks and
retailer of clothing, home products and
© Background
Marks and Spencer's business model
aims to create long-term value through
the effective use of its resources and
relationships. It manages these in line
with its core values of inspiration,
innovation, integrity and in touch.
@ Action
Marks and Spencer launched Plan A in
January 2007 setting out 100 commitments
to achieve in five years covering responsible
sourcing, reducing waste and helping
communities. It has since introduced
Plan A 2020 which consists of 100 new,
revised and existing commitments.
Plan A on supply chain standards means
working with industrial bodies, opinion
formers and suppliers to deliver innovation
and working practices that will reduce
hazardous waste discharges from clothing
manufacture to zero by 2020.
In food production, this means an incentive
for suppliers through a gold, silver and
bronze benchmarking standard for human.
resources, environmental and resource
efficiency management. Orders flow to
suppliers that meet the highest standards.
The company bought 32 per cent of its
product from suppliers meeting at least the
silver standard in 2015, up from 19 per cent
the previous year. It is now looking to buy
100 per cent of products from factories that
have met at least the silver level by 2020.
Spencer is a leading
food.
Deforestation is an example of an issue
where it works with other global retailers
and food producers to promote sustainably
produced palm oil, low carbon refrigeration
and eliminate food waste. This is helping
the company to meet its target of zero
deforestation from the use of palm oil, soy,
cattle and paper materials in the company's
products by 2020.
Accritical part of the process is audit and
assurance where it must both satisfy itself
that the required standards are being met
and avoid alienating its suppliers. The
company has opted for defining a period
in which an audit will take place.
@ Impact
Plan A delivered measurable savings of
£160m in 2014/15 and a total of £625m
since 2007. The figure relates to savings
generated through reduction of waste and
environmental efficiency. Some of these
savings accrue to the supply chain where,
for example, it has required its top clothing
suppliers to install energy efficient lighting,
and improved insulation and temperature
controls.
However, the company does not seek to
measure the financial impact of Plan A in
terms of margin, corporate earnings and
brand value. The trust Plan A generates
with customers, as well as the impact on
the morale of its workforce and that of its
suppliers, will make the company more
resilient and adaptable.
sMES
Culture report: Corporate Culture and the Role of Boards
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Appendix 1: case studies
GSK (GLAXOSMITHKLINE)
PROVIDING ASSURANCE ON COMPANY VALUES
os
GSK is a science-led global healthcare company that researches
and develops a broad range of products.
© Background
GSK's Values Assurance programme is
designed to evaluate how well GSK’s four
values are embedded in the culture of the
company, and to support the business to
further embed the values.
Co) Action
The methodology is similar to a 360 degree
feedback process; it includes a leadership
self-assessment supplemented by an
independent evaluation. The process
captures both quantitative and qualitative
data to form a holistic view of the values
maturity, behaviours and culture.
A number of actions were taken to address
the areas of opportunity identified in the
Values Assurance process. They include:
creating values-based case studies for
training; integrating values into recruitment
and selection processes; implementing
recognition programmes to reinforce
values-based behaviour; storytelling to
role model the values; and conducting
resiliency programmes to sustain energy
and good health during change. At an
organisational level, the insights gleaned
from the programme are being used to
drive culture change across emerging
markets. Priorities include promoting
speak up behaviour worldwide.
The nature of the Values Assurance reviews,
requires a multidisciplinary team including
auditors, psychologists, operational staff
and those with lean six sigma experience.
Values Assurance addresses a critical gap
in traditional audit programmes, providing
an independent perspective on leadership,
attitudes and behaviours that underlie the
internal control framework.
(9) Impact
The programme is not only an important
component of GSK's internal assurance
plan, but delivers fresh insights that are
making a difference to risk management,
strategy, and GSK's reputation.
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LEEDS BUILDING SOCIETY I a> I
INTERNAL CULTURE AUDIT Leeds
Building
Leeds Building Society was established in 1875 to help people save Society
money and to buy their own home and this is still its core purpose.
© Background
As a result of the Financial Conduct
Authority's Risk Outlook 2014, which
identified culture as a key issue for
the sector, Leeds Building Society
undertook a culture audit.
CS) Action
The audit was based on six themes in
a Culture Cluster, setting the scope and
approach for each theme was conducted
as an audit in its own right while leveraging
other audit plan deliverables wherever
possible. The themes were: tone at the top,
risk culture, governance, member value,
aspirational values, and colleague
advocacy.
Expected and actual controls for each
theme were categorised into three types:
enablers — the processes and frameworks
in place to support the desired culture;
drivers — the incentives to encourage the
right behaviours, such as recruiting the
right people, reward and performance
management; and belief — focussed on
what colleagues actually felt and believed
in. Experienced senior auditors were.
trained to ensure consistency and get
to the core of colleagues’ beliefs. The
responses were scored by colleagues
ona scale of 1-6.
I In order to benchmark the results of the
audit and describe the existing culture,
the internal audit team developed a Culture
Maturity Path. Colleagues were requested
to score their assessment of culture and
board members were asked for their views
for comparison.
@ Impact
The results from the review were assessed
to identify key themes for improvement.
Internal audit reported these results to the
board in 2015 and the chief executive has
initiated a programme to implement
changes. The results and planned actions
were shared via the Society's intranet.
To continue their review of culture the audit
team are developing cultural indicators to
consider as part of audits in 2016 and to be
reported to the audit committee and board.
Culture report: Corporate Culture and the Role of Boards
APPENDIX 2:
METHODOLOGY
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The FRC held a roundtable with FTSE 100 chairmen
and initial discussions with some of our stakeholders
in early 2015 to identity the important themes on the
subject of company culture.
We formed a Steering Group which
included our partners, the Chartered
Institute of Management Accountants
(CIMA), the City Values Forum, the
Chartered Institute of Personnel and
Development (CIPD), the Institute of
Business Ethics (IBE) and the
Chartered Institute of Internal Auditors
(IIA) to help us pursue the themes in
four workstreams.
1. Delivering sustainable success
- the role of an effective board.
i)
People issues - delivering alignment
between culture, values, human
resource practices and performance
reward systems.
°
Stakeholder issues — relationships
with shareholders, customers and
suppliers, and the impact on the
wider community and environment.
4. Embedding and assurance —
measuring and monitoring culture,
the role of internal audit, risk
management and public reporting
of cultural indicators.
Together, with our partners, we held
hundreds of meetings and discussions
with individuals working in, directing, and
advising companies, as well as academics,
professional bodies and not for profit
organisations with expertise and
experience in company culture, to gather
evidence and inform our report. We also
undertook an extensive literature review.
We would like to thank Independent
Audit Limited for their work to survey
44 FTSE chairmen and 33 FTSE company
secretaries, and to interview 22 FTSE
chief executives and 58 FTSE chairmen.
This work provided rich insight into the views,
and practices of companies and made
an invaluable contribution to the project.
We would particularly like to thank our
partners for their contribution and guidance
throughout the project.
Culture report: Corporate Culture and the Role of Boards
Appendix 2: methodology
Steering Group members
Peter Cheese, Chief Executive, CIPD
Philippa Foster Back, Director, IBE
Deborah Gilshan, Head of Sustainable
Ownership, Railpen
Nick Land, Non-Executive Director
and Chair of the Codes and Standards
Committee, FRC and Non-Executive
Director, Vodafone
Tony Manwaring, Executive Director,
External Affairs, CIMA
Alisdair Mcintosh, Director of Policy, IIA
Richard Sermon, Chairman, the City
Values Forum
Charles Tilley, Chief Executive, CIMA
[nnn EERE
The reports of our
project partners produced
as part of this project or
referred to in this report
Chartered Institute of Personnel and
Development, 2016. A duty to care?
Evidence of the importance of
organisational culture to effective
governance and leadership
https://www.cipd.co.uk/hr-resources/
research/duty-care-evidence-
organisational-culture.aspx
The Institute of Internal Auditors, 2016.
Organisational culture: Evolving approaches
to embedding and assurance
https://www.iia.org.uk/policy/
publications/culture-evolving-
approaches-to-embedding-and-
assurance-board-briefing/
The Institute of Business Ethics, 2016.
Stakeholder engagement - values,
business culture and society
http://www.ibe.org.uk/list-of-
publications/67/47
City Values Forum with Tomorrow's,
Company, 2016. Governing Values:
risk and opportunity — a guide to board
leadership in purpose values and culture
http://www.cityvaluesforum.org.uk/
leading_with_integrity_publications.html
Chartered Institute of Management
Accountants, 2016. Financial Management
— Rethinking the business model
http://www.cimaglobal.com/Thought-
leadership/Research-topics/Budgeting-
and-planning/Rethinking-the-business-
model/
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APPENDIX 3:
ACKNOWLEDGEMENTS
Appendix 3: acknowledgements
The FRC is very grateful to all those who responded
to our invitation to participate, and contributed.
A
c
Aberdeen Asset Management
ACCA (Association of Certified
Chartered Accountants)
Admiral
Anderson Risk
Anglo American
Antofagasta
aSource Global
Associated British Foods
Association for Insurers
and Risk Managers (Airmic)
Cable & Wireless Communications
CAH
Card Factory
Cardiff Business School
CBI
Centrica
Chartered Accountants Ireland
Chartered Bankers Institute
Chartered Management Institute
Chiron Risk
Close Brothers
Association of Financial Mutuals CLS Holdings
Aster Group Cobham
AVEVA CORE
Aviva CRSA Forum
AXA UK Cutting through the Grey
B D
Babcock International DAC Beachcroft
BAE Systems DCC
Balfour Beatty Deloitte
Bank of England Department for Business,
Banking Standards Board Innovation and Skills
Barclays Diageo
BBA Aviation Diploma
BDO DMGT
Beever Struthers Domino's Pizza Group
Bellway Drax
Berkeley Research Group DuplexR
Black Sun
Blackrock E
Blueprint for Better Business. EasyJet
BNY Mellon Y
: EDF Energy
Board Insight Electr nerit
Board Intelligence EMIS ceeelitediales
Bodycote .
BP Emperor Design
BP and E Global aha caine
British American Tobacco
i Esure Group
British Private Equity rj
Ethics in Business
and Venture Capital Association E
on 7 xperian
British Standards Institute
Expo Link
BT Group EY
Building Societies Association
Bunz!
BUPA
Bwin Party Marketing (UK)
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F
J
F&C Commercial Property Trust
Financial Conduct Authority
FirstGroup
Foreign & Colonial Investments
Freshfields
Future Value
G
GC100
GCP Infrastructure Investments
GKN
Glencore Xstrata
GO Investment Partners
Grant Thornton
Greggs
GSK (GlaxoSmithKline)
H
Hansteen
Hargreaves Lansdown
Hasley Keetch
Hedley May
Heidrick & Struggles
Henley Business School
Herbert Smith
Hermes
HomeServe pic
Howden Joinery
HSBC
ICAP
IG Group
Imperial Brands
Informa
Institute of Chartered Accountants
in England and Wales
Institute of Chartered Accountants
of Scotland
Institute of Chartered Secretaries
and Administrators
Institute of Directors
Institute of Risk Management
IHG
Intermediate Capital
Intertek Group
Intu Properties
Investor Forum
ITV
J Sainsbury
Jardine Lloyd Thompson Group
John Lewis Partnership
Johnson Matthey
JP Morgan
Jupiter Asset Management
K
KBM Strategy
KPMG
L
Land Securities
Leading in Risk
Leeds Building Society
Legal & General Investment Management
Lloyds Banking Group
London School of Economics
London South Bank University
Londonmetric Property
LOréal
Man Group
Manifest
Marks & Spencer
Marston's
Mazars
McKinsey & Co
Merlin Entertainments
Morrisons
N
National Grid
Navex Global
Newton Investment Management
Next Generation NED Network
NMC Health
Northgate
Nostrum Oil and Gas
°
Old Mutual Group
Organisation for Economic Co-operation
and Development
Culture report: Corporate Culture and the Role of Boards
Appendix 3: acknowledgements
P T
Pearson TalkTalk
Pentland Tate & Lyle
Persimmon Tesco
Petrofac The Institute of Consumer Service
Pensions and Lifetime Savings Association
Polymetal International
Poundland
PricewaterhouseCoopers
Prudential
Prudential Regulation Authority
Public Concern at Work
PZ Cussons
Q
Quoted Companies Alliance
R
Railpen
Rathbone Brothers
RELX Group
Rentokil Initial
Reed Elsevier
Rio Tinto
Risk Oversight Solutions
Royal Bank of Scotland
Royal Dutch Shell
Royal London Asset Management
Royal Mail
RPC Group
s
Santander
Schillings International
Schroders
Serco
Severn Trent Water
Shire
Simmons & Simmons
Sky
Slaughter and May
Smith & Nephew
Spencer Stuart
Sports Direct
St. James's Place
St. Modwen Properties
Stagecoach Group
Standard Chartered
Standard Life
Standard Life Investments
Thomson Reuters
Tomorrow's Company
TR Property Investment Trust
Trades Union Congress
Travis Perkins
TSB Banking Group
Tullow Oil
U
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UBM
UBS Asset Management
UK Financial Investment
UK Shareholders Association
Unilever
Unipart
USS
Vv
Value Alpha
Vectura Group
Vesuvius
Virgin Money
Vodafone
w
Wolseley
Woodford Funds
Workspace Group
WPP
Y
Yorkshire Building Society Group
62 Financial Reporting Council
© The Financial Reporting Council Limited 2016
Design: Red Stone
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