Investors should no longer accept excuses by companies that they are unable to monitor and change culture

In the Financial Reporting Council’s latest revisions to the UK Corporate Governance Code, it is made clear that UK primary listed companies must explain how they monitor and manage their culture. They must also take into account a wider set of stakeholders in their board decision-making process.

For some organisations, this is going to create quite a challenge. Many directors and non-executive directors still hold the belief that culture and, to a lesser extent, stakeholder engagement can’t be measured. The story goes, if it can’t be measured, then it can’t be managed. And, if it can’t be managed then it has no place on the board agenda.

Investors, who are supposed to hold these companies to account, have been placing increasing emphasis on non-financial criteria in their investment decisions through their developing environmental, social and governance functions.

But even among this community there is a perception that sufficient insight can’t be developed to manage culture as an asset.

Such thinking is out of date.

Don’t get me wrong, culture is complicated and intangible. By its nature it is also going to be different within every business and its drivers and outputs will evolve in different ways. But that doesn’t mean there can’t be a systematic approach to measuring and understanding it.

Just as the accounting profession over time developed new insight models into the financial practices of companies, so we will see an evolution in the understanding of culture and proper stakeholder influence.

Some companies have started to move away from not understanding culture at all to gathering first stage insight. They are pulling together data from different parts of the business in an attempt to build a picture of their culture.

This dashboard approach is a valid first step. However, it has two main risks.

• Firstly, it is using data that is often generated for other reasons. A health and safety assessment for example, or from the staff review process. It is not tailored insight, but more pick’n mix.
• Secondly, it is very selective and open to potential unintentional manipulation. The data can become used to justify and report on a desired culture, rather than actually receiving a proper understanding of the real impact of culture within a business and with its stakeholders.

The best practice that investors should look for and demand, is a structured and tailored insight programme that can understand the core cultural drivers and the behavioural impact these have on material stakeholders.

This is not difficult to achieve and, if driven from the top within an organisation, is not difficult to implement. There just needs to be the commitment within the board to undertake it.

As the Governance Code is now set to come into force, the investment community must not accept the corporate excuse that culture is too complicated to understand. This is just no longer the case.

Sufficient insight and measurable data can be given to the board to enable them to gain a better understanding of the true culture of their organisation and where it is failing or succeeding in meeting targets.

As the Code requires, this can then be used and explained within the corporate narrative. And, most importantly, the board can also look to change culture as required — though that is a different challenge entirely.

Published in Financial News, view on 9 August 2018. Read the article here.

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