Why is corporate culture important?
Sir Win Bischoff, the FRC Chairman, discussed the role of corporate culture in instilling confidence amongst investors and enhancing long-term value. Sacha Sadan, Head of Governance at L&G Investment Management said that businesses that pay attention to culture and strategy outperform the market over the longer-term, so cultivating the right corporate culture is an opportunity for both the Company and its investors.
The Board has a central role to play in this process by defining a Company’s purpose and values and embedding good behaviours. Issues that shape corporate culture include:
- Risks: How the Board tackles its material risks
- Remuneration: Ensuring pay is proportionate and incentivises longer-term thinking
- Succession planning: the importance of continuity as well as new and innovative thinking
- Diversity of perspective and leadership style and the importance of encouraging constructive discussion
However, short-termism and a focus on financial results are still prevalent amongst investors and other stakeholders, so more needs to be done to emphasise the importance of long-term thinking, for example auditors should include cultural issues in their reports.
As part of this debate, the Financial Reporting Council (FRC) has embarked on a market-led project that aims to consult with stakeholders to find ways to help boards take effective action on culture.
More information on the culture project is available on the FRC’s website: https://www.frc.org.uk/Our-Work/Codes-Standards/Corporate-governance/Culture-Project.aspx