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New obligations and opportunities in assessing company culture

Culture is now in the sights of the regulators and set to become a boardroom issue

An organisation’s culture is defined as the habits of the people within it and the way they behave. In the workplace the day-to-day interplay between these habits and behaviours can determine what practices are accepted, expected, rejected or rewarded.

These factors have long been on the HR radar. They can determine what kind of employee a company attracts, what behaviours they adopt to progress through the ranks, and how long they are likely to stay.

While good culture can help build a successful organisation, poor culture can lead to unethical behaviour, regulatory breaches, reputational damage and a long-term reduction in share price. As such, culture is now in the sights of the regulators and set to become a boardroom issue.

New requirements

Until recently the Financial Reporting Council (FRC)’s Corporate Governance Code asked only that boards play a key role in ‘establishing the culture, values and ethics of the company’.

However, the revised Corporate Governance Code published last month contains new provisions requiring boards to 'assess and monitor culture’ and 'seek assurance that management has taken corrective action’ in cases where it is 'not satisfied that policy, practices or behaviour throughout the business are aligned with the company’s purpose, values and strategy'. The board’s activities, and any action taken in this area, should be explained in the annual report.

It is likely, therefore, that boards will be turning to their HR colleagues in the coming months, looking for assistance with their new obligation to assess and report on the culture of the business.

Existing tools

HR professionals faced with this new challenge already have some relevant tools at their disposal. A recent paper by the Institute of Business Ethics listed the range of internal data to which companies already have access that can shed light on the culture of their organisation. Included on the list were employee surveys, exit interviews, staff turnover, grievance data, promotion decisions and absenteeism rates.

While many organisations collect this data it is not always analysed as an indicator of corporate culture, with only certain datasets regularly communicated to the board – most notably employee surveys and whistleblowing. This looks likely to change as boards decide how best to report on their assessment and monitoring of company culture to meet the FRC’s new requirements. One way of doing this might be to review the information collected via employee surveys.

HR teams can also assist boards by identifying the existing indicators in their own organisations that will help determine the health of the culture and evidence that behaviour throughout the business is aligned with company values. These could either be from surveys or other datasets as outlined above, but may also cover other areas of the business such as health and safety and customer surveys. Once identified these culture indicators should be regularly monitored and reported on to the board.

Culture drivers

From our work conducting tens of thousands of interviews with employees, customers, suppliers and shareholders, as part of our responsible business assessments, GoodCorporation has identified 10 key drivers of good company culture. These include:

  • A strong ethical tone from the top
  • Trust in management to do the right thing
  • Whether employees feel supported to do the right thing
  • Fair treatment of employees and other stakeholders
  • Confidence in raising concerns

From these drivers we have identified a list of statements that can be used to undertake a culture health check. By asking employees about the extent to which they agree with these statements an organisation can obtain statistical data about the strength of its culture. Responses can then be explored by skilled interviewers to provide a more qualitative understanding of the reasons behind them.

Using these culture statements, GoodCorporation conducted a nationwide survey of 2,000 UK workers from a range of industries and seniority levels to assess current perceptions of culture in the UK workforce, and to act as a benchmark for our clients.

The survey found that 25% of the UK workforce believes their managers would bend the rules to get the job done, with only 50% feeling able to say that senior managers really believe in doing the right thing at work. Sixty per cent were proud to tell people who they worked for and a similar number (59%) said they thought their organisation had a strong ethical culture.

The next step

While there is no established methodology as yet for measuring and reporting on corporate culture, the approach outlined above would provide HR teams and subsequently the board with a robust analysis, which would indicate the strength of their culture and the extent to which the right behaviours are embedded.

Boards will need a variety of information sources, so HR teams charged with this task could be the catalyst for bringing together the various indicators that might already exist. They may also need to identify other culture indicators (as outlined above) to ensure that a complete and holistic overview of company culture is monitored and reported to the board.

Poor corporate culture is increasingly regarded as a business risk in itself, while a strong healthy culture is seen as a sign of long-term sustainability. Compliance with the UK Corporate Governance Code will require boards to demonstrate how well culture is monitored and the steps being taken to address any weaknesses identified. The HR function in particular will play a critical role in helping to get this right.

Michael Pollitt is a business ethics consultant and Debbie Ramsay is a director at GoodCorporation