How the new values based UK Corporate Governance Code provides the groundwork for a much-needed transformation of business culture.
Some years ago, when I made my living by investing in some of the world’s most volatile emerging markets, I would have fallen off my chair if anyone had told me that one day I’d be excited by a new corporate governance code. Now I am older, maybe a bit wiser too, and the world has changed. The UK Financial Reporting Council (the FRC - the regulatory body for the auditing and accounting profession) has just issued its new Corporate Governance Code, and it has thrilled me to bits.
The financial crash of 2008 changed the world in many unpredictable ways. In particular it profoundly changed the way people perceive society and its institutions, including the corporate and financial sectors. The belief that we are facing “a crisis of capitalism”, with unacceptable income differentials, predatory business practices, a culture of entitlement among business leaders and a complacent political class, is now commonplace.
Across the whole Western World and from both ends of the political spectrum, people have been demonstrating their dwindling levels of trust at the ballot-box and on the streets. For many, faith in the system has melted away completely. The toxic attitudes and practices which caused such outrage when they were exposed by the 2008 meltdown are perceived to have gone shamefully unpunished and uncorrected, and even got worse. Every fresh corporate scandal such as BHS or Carillion reinforces this cynicism and seems to confirm our worst fears about corporate recklessness and greed.
A healthy society needs the support of a robust economy driven by a thriving business sector. But businesses can’t thrive for long if they lose the trust and confidence of the population at large, including employees, suppliers and customers. In the succinct words of Peter Montagnon in his Institute of Business Ethics submission to the FRC:
“Companies do not exist in isolation. They depend on society for their franchise.”
There has of course been a great deal of good work going on to try to turn the situation around, but most of this has been behind the scenes or carried out inside companies, and so is not evident to the broader public.
Values at the heart of the new Code
That’s why the recent release and implementation of a new UK Corporate Governance Code is so interesting. It takes a dramatically new approach to addressing the business practices that have caused so much damage not only to business itself but to society as a whole.
To their great credit the Financial Reporting Council has thought long and hard, and consulted widely. It has evidently realised that its previous mainly rules-based approach to regulation needed fundamental review, and understood that its existing Code had failed to prevent so much abuse because rules and regulations, while necessary and important, never really determine how organisations act in the real world.
The real driver is always going to be the organisation’s own particular culture; a culture is based on a set of shared values; and those values are what drives the behaviour of the organisation and its members, for good or ill.
The FRC’s new thinking was already clear in its 2016 report Corporate Culture and the Role of Boards, issued after lengthy consultation with the business community and those seeking reform.
The FRC’s Chair, Win Bischoff said then:
“Rules and sanctions clearly have their place, but will not on their own deliver productive behaviours over the long-term. This report looks at the increasing importance which corporate culture plays in delivering long-term business and economic success.”
At the heart of the new Code are 5 guiding principles, set out clearly at the outset:
A. A successful company is led by an effective and entrepreneurial board, whose role is to promote the long-term sustainable success of the company, generating value for shareholders and contributing to wider society.
B. The board should establish the company’s purpose, values and strategy, and satisfy itself that these and its culture are aligned. All directors must act with integrity, lead by example and promote the desired culture.
C. The board should ensure that the necessary resources are in place for the company to meet its objectives and measure performance against them. The board should also establish a framework of prudent and effective controls, which enable risk to be assessed and managed.
D. In order for the company to meet its responsibilities to shareholders and stakeholders, the board should ensure effective engagement with, and encourage participation from, these parties.
E. The board should ensure that workforce policies and practices are consistent with the company’s values and support its long-term sustainable success. The workforce should be able to raise any matters of concern.
What’s not to like? The whole tone of the new Code is that the FRC is not looking for mere box-ticking compliance. Companies are expected to take substantive steps to comply with all these key requirements and provide evidence that they have done so. The company’s board must assess and monitor the company’s culture, and “Where it is not satisfied that policy, practices or behaviour throughout the business are aligned with the company’s purpose, values and strategy, it should seek assurance that management has taken corrective action. The annual report should explain the board’s activities and any action taken.”
Boards and managers won’t be able to make the excuse that proper assessment and monitoring of values compliance isn’t possible. The FRC itself gives excellent practical advice on how to go about implementing a values strategy and assessing its impact in its Corporate Culture and the Role of Boards report. There are plenty of ready-made approaches and resources which can be easily applied – some are mentioned in the report including the well-regarded Barrett Values transformation and assessment tools used at Old Mutual Group, one of the report’s Case Studies.
Sea-change for business
This new Code will set the tone not only for hundreds of leading UK companies listed on the stock-market, but will immediately become best practice for the whole corporate sector. It will precipitate a major sea-change in how businesses are managed from now on. No longer will organisations be able to get away with paying mere lip-service to the values which they lay claim to. Auditors will be obliged to check and report publicly whether our top companies’ policies, practices and behaviours are aligned with their values and, if not, what steps are being taken. Cynical box-ticking exercises will not be sufficient.
I am really surprised how little public attention has been given to this significant development since the new Code came into force towards the end of last year, whether in the general press and media or among specialist writers covering the auditing, accounting and legal sectors. Most of the latter have focused on the new Code’s new approaches towards diversity, workforce engagement, whistleblowing and remuneration, all of which are important and welcome, but have skipped over the new emphasis on culture and values, ignoring the high profile given to them by the FRC and the Code itself.
The auditing profession is currently under quite a cloud for its numerous recent failures to pick up signs of looming financial disaster. Maybe it’s time for them to pay a lot more attention to values.
Part of a broader change in the way we view business
With its new Code the Financial Reporting Council was not only responding to the steady stream of collapses and scandals in the corporate sector, but to broader changes in the way society relates to business. We are now living to an ever-greater extent in what my colleague at the UK Values Alliance, Alan Williams, calls the “Values Economy”.
Consumers no longer buy just goods and services (a bag of coffee, a cup of brewed coffee) , nor even just experiences (a bespoke cup of coffee specially prepared for you consumed in a carefully curated environment), but instead interact with brands whose purpose and values they feel are aligned to their own (ethically-sourced coffee from an organisation which cares about its coffee-growers, its employees and other stakeholders, and its community).
Structural demographic and technological changes in our knowledge-driven Western economies are also pushing employers to work harder at attracting and retaining the brightest and best employees, and these employees too want to be able to work where they feel their own values are reflected in the values of the organisation.
These are powerful long-term forces that are rapidly re-shaping our world, and our business culture will inevitably have to follow. The new UK Corporate Governance Code is a major step forward in making this process less painful for those concerned. Of course, we will never completely get rid of business scandals and disasters, but we may get a corporate sector which we can be proud of, and which will serve us better.
Charles Fowler is Chair of the Human Values Foundation and helps co-ordinate World Values Day. He is a member of the Steering Group of the UK Values Alliance whose purpose is to put values at the heart of society in the UK. Find out more about the benefits of joining the UK Values Alliance here.