A strong corporate culture that is embedded throughout a company and reinforced with strong leadership by the chief executive and chairman can produce long-term value for businesses a study by the Financial Reporting Council has found.

The report, based on a series of interviews with company secretaries, chairmen and chief executives, explores the relationship between corporate culture and long-term business success in the UK. The study is the culmination of the work of the Culture Coalition the FRC formed with 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).

The FRC has concluded that companies should recognise the value of a healthy culture to an organisation and believes that culture can be source of competitive advantage and vital to the creation and protection of long-term value. The leaders of companies, in particular the chief executive, must embody the desired culture, embedding this at all levels and in every aspect of the business, the report states while boards have a responsibility to act where leaders do not deliver.

Aligning values and incentives are important the report suggests. The authors notes that 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,” the report states.

The performance management and reward system should support and encourage behaviours consistent with the company’s purpose, values, strategy and business model, the FRC concludes, while the board is responsible for explaining this alignment clearly to shareholders, employees and other stakeholders.

The report suggests that management at every level must assume responsibility for owning and maintaining the culture. Middle managers should, according to the report, be able to observe the culture in a business and should be involved in communicating change and developing ideas to ensure success.

The other areas that the report believes will encourage a good corporate culture is ensuring openness and accountability at every level and with all stakeholders in a business; embedding and integrating the values throughout the company by ensuring that employees and suppliers know what is expected of them and that human resources, internal audit, ethics, compliance, and risk functions are empowered and resourced to carry out this work and there should be assessment, measurement and engagement with the board having a responsibility to understand behaviour throughout the company and to challenge where they find misalignment with values or need better information.

Peter Cheese, CIPD Chief Executive, said: “As recent corporate scandals have shown, when cultures turn toxic trust breaks down and performance, wellbeing and reputation suffer. This is why boards have a fundamental role in understanding the cultures of their organisation and how culture is changing or evolving, as well as leading from the top in the behaviours and values they demonstrate. They must also hold management to account to ensure that culture, values and behaviours align, and the decisions the organisation makes enables it perform financially, ethically and sustainably.”

Sir Winfried Bischoff, Chairman of the FRC, said: “The extremely positive response from many individuals and organisations, demonstrates how important the subject is. I would like to thank all those who joined the debate to foster sustainable growth and long-term business success in the UK.”

There is a role for investors in encouraging a good corporate culture, according to the FRC. “They should ensure that their stewardship activities 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.”

Going forward the FRC has signalled that, in addition to continuing work with coalition partners to encourage further debate, the report and its feedback will inform its next review of guidance on board effectiveness. Over the next year the FRC said it would also be monitoring reporting on culture by companies and investors. Any feedback on the report can be sent to: culturecoalition@frc.org.uk

Last Updated: 24 July 2016