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Sir Win Bischoff
Financial Reporting Council
Culture and Conduct Forum for the Financial Services Industry
12 July 2016
Stewardship as a lever for cultural change
Good afternoon everyone.
You have already heard from a host of high profile individuals who have eloquently and persuasively spoken about the various aspects of culture, and how it is shaping financial services today.
I have been asked to talk about stewardship as an aspect of, and a lever for, cultural change.
But before I do, that I want to give you a brief introduction to the work of the Financial Reporting Council, much of which, I suspect, you will already know.
Our mission is to promote high quality corporate governance and reporting in the public interest. Trustworthy information and trustworthy behaviour support the needs of investors and generate confidence in Boards, and are important elements in demonstrating good culture.
In turn, high standards of corporate governance and reporting are important for the fair and effective functioning of the capital markets. Apart from maintaining codes and standards for corporate governance, investor engagement and corporate reporting, the FRC is also responsible for audit and other forms of assurance, and for actuarial information. As a consequence, we operate independent disciplinary schemes for accountants and actuaries, but not, it may be a surprise for you to learn, for directors of companies unless they are members of these professions. Lastly, our Financial Reporting Lab helps companies and investors collaborate on improvements to reporting.
Ultimately it is for Boards, preparers, auditors and other professionals to implement the standards we set; our role is to support them as far as possible by reinforcing best practice and providing a regulatory framework that is seen as realistic, helpful and proportionate. This is why over the next three years, we intend to work with our stakeholders to encourage improvement
rather than to introduce new requirements that add to the regulatory burden. We do not
consider this to be deregulation in the traditional sense
, but a means of giving the regulated the opportunity to make existing
regulation work. A three year pause
so to say. As part of this, we want to see behaviour improve by promoting a healthy corporate culture.
This leads me on to the work of our Culture Coalition. It is a collaboration with the IIA (Chartered Institute of Internal Auditors), CIPD (Chartered Institute of Personnel and Development), CIMA (Chartered Institute of Management Accountants), IBE (Institute of Business Ethics) and City Values Forum. Independent Audit, an advisory and consulting firm, conducted many of the surveys and interviews with chairmen, CEOs and company secretaries on this matter. Our joint aim has been to highlight good practice and to promote the importance of a healthy corporate culture in sustaining growth and protecting value. We have had a very pleasing response from many individuals and organisations, encouragingly not all saying the same thing! Our aim is to deliver practical, market-led observations, not
changes to the UK Corporate Governance Code.
Through our project workstreams we have gained useful insights, the most important of which is that there is no one–size–fits-all and that the cultural indicators selected should be tailored to each company’s circumstances.
In order to establish an appropriate culture, a board must define the purposes of the company and what type of behaviours it wishes to promote in order to deliver its business strategy. It involves establishing your own culture, asking questions and making choices.
Through the research of the Coalition, the role of the Board against that of executive management when setting culture, has been scrutinised. Boards and executives play different
roles. The Board’s role is to influence, assess and monitor culture; whereas, the executives’ role is to drive and embed culture throughout the organisation.
The CEO has emerged as the one single person with the most influence on culture. But Boards have responsibility for selecting, performance-managing, and holding CEOs to account. Middle management, needs to be persuaded, and if necessary, tasked to embed the values throughout the organisation. They do this by engaging staff and aligning HR processes from the early job advert to training and development, all the while having structures which both reward good, and punish poor, behaviour.
Investors have an important role to play and should engage with companies to build understanding of their long term strategy and how culture supports this. That brings into focus the Stewardship Code, the success of which has so far not been as significant as that of the Corporate Governance Code, but encouragingly it is now creating its own momentum and buy-in.
We know many investors and companies approach engagement in a spirit of trust, openness and constructiveness which are key elements in any corporate culture. This is encouraged by the Stewardship Code which launched in 2010. It was developed to achieve a number of objectives: to help build a critical mass of investors that are willing and able to engage with the companies in which they invest; to increase the quantity and quality of engagement between companies and investors; and to help clients of asset managers differentiate between them by judging how they carry out their stewardship responsibilities.
We encourage investors to explain their stewardship policies and practices through the Code, thereby hopefully improving transparency about their relationships with companies, including behaviours and values.
Overall the results of our enquiries were acceptable, but we are concerned that a number of signatories are not fully demonstrating their commitment to the Code’s principles. This is why we are moving to distinguish between signatories who report well and prove their commitment to stewardship, and those where improvement is necessary.
In that context I believe investors should also look at their own culture, not just at the culture of the companies they invest in.
Our aim is to raise the quality of reporting and bring more transparency to the market. In assessing whether stewardship is being implemented appropriately, we will look at the quality of explanations. This is a first step towards better stewardship and engagement and will provide the baseline for future monitoring.
Of course establishing a culture of stewardship will take time even while real progress is being made. The investment landscape is changing. Portfolios are increasingly global which places more demands on both companies and investors. Since we believe the globalisation of investment will continue, we must consider ways to meet the challenge this represents. Stewardship requires all of those in the investment chain to be considering issues in the context of comply or explain and applying independent judgement to their decisions.
The interests of wider stakeholders are an increasing component of corporate success and an essential indicator of trust. Interestingly this may have been a factor in the Referendum result. A positive culture which balances the stakeholders’ interests, backed up by clear communication to citizens is a good start!
It makes common and commercial sense; organisations which do not respect their stakeholders will underperform. This requires senior leadership to be familiar with stakeholder expectations. Meeting them should be a clear priority for everyone, including their workforce.
Soon we will be publishing our Report of Observations,
based on all the findings of the Culture Coalition. We will be sharing case studies of different approaches. We will explore the findings further at our annual FRC conference in London on 20th
September, Culture to Capital: aligning corporate behaviour with long term performance.
To conclude: the values, attitudes and behaviours which make up corporate culture are central to the way an organisation achieves its objectives. By weaving a healthy corporate culture into the business model, you are not just contributing to the overall success of your own business but creating an environment on which investors can rely. Stewardship leverages this by enhancing reputation and accountability. In that way, importantly, you and we create sustained growth in the economy.
Thank you for listening.