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UK corporate governance requires a cultural revolution

JUSTIN KING says “nothing moves a business in a direction as powerfully as corporate culture”. It is the challenge of directors and management to ensure that it moves it in the right direction.

The comments came as the former boss of Sainsbury’s addressed a group of the UK’s leading chief financial officers at Financial Director’s industry event in central London last week, and neatly highlight how adherence to good company ‘culture’ lies at the heart of good (or bad) corporate governance.

The CFO Agenda ostensibly set out to examine how global risk – political, economic and social – impacts the finance function and company boardrooms. Yet it was the concept of cultural risk that repeatedly cropped up throughout the course of the event.

Corruption at football’s world governing body, endemic phone hacking at News Corporation, flawed accounting practices at Tesco and many of the failings that led inexorably to the onset of the financial crisis can be drawn to a greater of lesser extent from a failure of corporate culture – the shared values, attitudes, standards, and beliefs that characterise members of an organisation and define its nature.

According to King, a “culture of empowerment went through the spine” of Sainsbury’s during his ten years as chief executive. Like King, who joined the retailer in need of a dramatic turnaround, the event’s second keynote speaker also joined an organisation in need of a cultural revolution; the Rugby Football Union.

Stephen Brown, CFO of the RFU, joined the governing body in the midst of a litany of board sackings, resignations, reviews, leaks and public recriminations that raised questions over the body’s culture and, ultimately, how it was governed.

He suggests culture can be turned round very quickly, but deeper questions remain about how corporate culture can be monitored and good culture as it relates to corporate governance, be enforced.

Indeed, there are many who criticise the UK’s current governance framework – the FRC’s Corporate Governance Code – for being too prescriptive, rules-based, and too focused on compliance rather than principles. The ICAEW has previously suggested the debate around corporate governance is “too focused on boards” and “unable to address current concerns about company culture and behaviour”. The institute has proposed that an overarching framework for company behaviour is developed that involves all groups with a stake in companies.

Speaking on a panel about ‘when governance becomes real’, Simon Laffin, chairman of Flybe and the former CFO of Safeway, echoed the idea that rules around governance had become overly prescriptive and suggested that “rules are the antithesis of good performance”.

The ICAEW and others argue that changes in those who play key roles in capital markets are altering the dynamics of the governance of company behaviour, and are potentially leading to the development of an increasingly complex and inconsistent system of codes, rules and regulations. The public has subsequently lost trust in business and believe the system is run by a network of City insiders. One only has to look at the connections that exist between company boards and within the watchdogs tasked to regulate them to see the truth of that belief.

While the public may yearn for a more sustainable form of capitalism, institutional investors remain more interested in the health of a company’s balance sheet than the health of its ethical soul. When asked whether they look at corporate culture when making nvestment decisions, one investor on a panel about what they look for in a CFO suggested culture will always come second to a healthy P&L.

The FRC has already urged greater commitment from investors to its stewardship code, and expressed disappointment that deeper engagement has failed to take place with sufficient quality. Improvements are happening, with greater discussion over how financial reports are structured and written.

Until investors truly champion making long term plays over more than just 18 months, a cultural revolution among UK boards and regulators remains will gain little traction. An investigation into the cultural failings at an individual level among Britain’s banks would be a good place to start.

Richard Crump is deputy editor of Financial Director and attended the CFO Agenda 2015

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