IN his recent article entitled “UK corporate governance requires a cultural revolution” Richard Crump rightly raises the challenge of culture as being fundamental to effective governance. But like the vultures in The Jungle Book looking down on Mowgli being chased by Shere Khan, asking “what are we going to do about it?” the answer that comes back from most corporates is “I dunno. What are we going to do about it?”
Here we get to the nub of the problem. Culture has for too long been seen as a soft, nice to have, nebulous idea. Conceptually it is easy to articulate but when asked to truly define and measure culture, it slips into the ‘too difficult’ box or morphs into values which, far from being differentiating factors for the business, turn into a mushy coalescence of familiar adjectives which could be applied to many businesses: integrity, honesty, respect, collaboration, fairness for all and so on. In the face of this, that initial commitment to “do something” dissolves away to be addressed another day.
We would all recognise the words attributed to influential management concultant Peter Drucker who observed that culture eats strategy for breakfast. So why is it that we continually fail to address this challenge when instinctively we recognise that culture has to be the foundation stone for effective governance? And what can we do about it? With trust in business at an all-time low, and the impact this has on business’ ability to innovate and grow sustainably, boards need to raise the issue of culture higher up their priorities list – the soft stuff is really the hard stuff.
As recently as our 2013 FTSE 350 Corporate Governance Review only 5% of chairman were giving culture the attention and emphasis that it requires. However, responses to our current global governance survey conducted across nine key countries, show only 19% of respondents feel that insufficient time is given to culture! But all may not be as it seems as, being of a sceptical nature and based on our experiences here in the UK, I interpret this as, realisation has yet to dawn rather than, all is well in the world.
RBS, Serco, Co-op, Barclays, Tesco, FIFA, Mid Staffs are all examples of where instinctively we would agree that something was wrong with their culture. And while their boards might argue that their interests and those of the ‘investors’ were aligned, subsequent events have proved that the singular pursuit of short term gain invariably is not sustainable and particularly not when the environment gets tough and circumstances change. Sir David Walker identified this weakness in his 2009 review of the banks and went on to make culture change one of his “three C” priorities when he took over as chairman at Barclays.
But changing practice takes time to embed itself in the permafrost layer of any business and I for one don’t believe business will achieve this lasting change unless leaders and regulators prioritise and communicate the message relentlessly.
At a recent roundtable where I spoke on this subject, there was strong recognition of its importance, but scepticism as to boards’ and particularly the chairman’s commitment to turn it from the soft to the hard by way of measurement. One or two were developing dashboards to capture a number of factors, including: customer complaints numbers, whistleblower statistics, health & safety failings, customer satisfaction results, employee surveys, diversity statistics, community engagement, attitudes to risk, environmental impact, training take up and performance review completions. This was all very encouraging, but if you are going to measure something you first need to know what you are measuring it against; and here it was, like groundhog day, as when asked to articulate what their company culture was, back again we came to values.
Far from being too prescriptive the FRC has rightly held to a principles based approach by increasing the focus on culture and so putting the emphasis on the boards to take up the challenge.
A word search of the 2014 UK Corporate Governance Code finds culture only appearing twice. Fast forward to January 2015 and in the FRC’s annual report there are 18 references to culture (the 2013 review had none), which I think is clear evidence of a sea change in their focus. This is to be welcomed.
It’s down to the boards of companies to turn the nebulous into hard fact. They might start by first addressing the challenge of articulating what their particular culture isn’t and then determining what factors might contribute to its measurement. The fewer the indications of what it isn’t that occur, the closer you will be to where you want to be! And finally, it’s not an exact science – of course companies won’t get it right at the first attempt, but a journey has to start somewhere. In the financial services sector, the PRA is starting to ask companies to articulate what their culture is and to demonstrate how, like with all their other assets, they are managing it to ensure long term success of the business.
Like it or not it, measurement of culture is turning from soft to hard. Now would be a good time to do something about it.
Simon Lowe is large corporate partner and chairman of the Governance Institute at Grant Thornton UK