Speech by Sir Win Bischoff, Chairman, FRC, City Week 2016
News types: Speeches
Published: 11 May 2016
The plain text version of Sir Win Bischoff's speech can be found below.
Sir Winfried Bischoff
Chairman
Financial Reporting Council
City Week
The Kia Oval, London
09 May 2016
Session: Culture and Conduct: Towards Personal Regulatory Responsibility
Good afternoon.
I am delighted once again to be taking part in City Week, a conference which over the past six years has been instrumental in the debate on the future of our financial markets. Sustainable growth is vital to the success of the UK’s financial markets and so creating a trustworthy investor playing field is of utmost importance. For the purpose of today’s session, I would like to focus on the importance of corporate culture.
In recent years corporate scandals have been all too frequent. Since the financial crisis of 2007/8, the levels of distrust of institutions and sadly the expectations of their continuing bad behaviour have reached unacceptable levels. In my experience, embedding a healthy corporate culture, through improving behaviour, is vital to the success of any business. This is why we at the Financial Reporting Council are highlighting good corporate practice through the establishment, under our leadership of what we call the Culture Coalition, a group of organisations specifically focused on culture, on which I will comment a little later.
Let me start by giving you some background on the work of the FRC. 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. That benefits investors, companies and the wider public interest. 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. We monitor corporate reporting and auditing standards. We oversee the accountancy and actuarial professional bodies in their regulatory roles; and we operate independent disciplinary schemes for accountants and actuaries. 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. This is not deregulation, but giving the regulated the opportunity to make existing regulation work. A three year time out, so to say.
As part of this, we want to see behaviour improve through a healthy corporate culture. There have been many examples over the past decade of what a good company culture can do and what a poor culture can lead to. Volkswagen and, more recently Mitsubishi, two of the most reputable car makers in the world, admired for their technical excellence and global, iconic nature, apparently engaged in behaviour, which at the very least, questions their culture. Volkswagen has started to take steps to rectify what occurred, and I am sure Mitsubishi will do the same, but enormous damage has been done in the eyes of their customers, staff and shareholders - never mind the public at large.
Closer to home, we have seen with LIBOR and Foreign Exchange how failings in corporate culture can have severe consequences, not just of a financial nature. When there is a healthy culture, the systems, the procedures, and the overall functioning and mutual support of an organisation exist in harmony. When this is not the case, the potential for disaster is just around the corner.
For the UK economy to prosper, business needs to have a corporate culture which creates trust in business, reduces company failings and serves the needs of wider society.
Codes put forward principles for best practice that make bad behaviour less likely to occur; and public reporting can make it harder to conceal such behaviour. But, by itself, a code does not prevent inappropriate behaviour, strategies or decisions. Only the people, particularly the leaders within a business, can do that.
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. This suggests, and I strongly stress, that culture is sui generis to any company, and not general. It involves establishing your own culture, asking questions and making choices: how to align values and purpose to the company’s strategy; how to integrate new leaders into that culture, particularly at times of merger or acquisition; how to maintain culture under pressure; how to decide whether different parts of the business should operate different cultures, and how actively to communicate culture in order for shareholders to engage in constructive discussion. To do all this, the board must ensure sufficient internal audit arrangements are in place and pay attention to their findings. In that context, we at the FRC expect external auditors to employ a good dose of professional scepticism rather than accept matters at face value. So should internal auditors.
This brings me back to the work of our Culture Coalition which I mentioned at the outset. It is a collaborative effort 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. It proposes “to assess how effective boards are at establishing company culture and practices, and at embedding good corporate behaviour, and to consider whether there is a need for promoting good practice”. We have had a very encouraging response from many individuals and organisations. Our aim is to deliver practical, market-led observations, not , I hasten to add, a Code, all designed to help boards and companies establish and embed their desired culture.
Through our project worksteams we have gained useful insight into, for example, the extent to which you can and should measure indicators of culture and what sorts of indicators are useful. What is clear is that there is no one–size–fits-all and that the indicators selected for assessment should be tailored to each company’s circumstances.
We will also highlight the role of the board as against that of executive management. The board’s role is to identify and then influence a desired culture, and thereafter to assess and monitor it. Management’s role is to drive and embed that culture throughout the organisation. The two are harmonised when the purpose and values of the company are linked to its strategy and business model. Rather than culture eating strategy for breakfast, as is the by now well known phrase, it should be a case of culture and strategy having a symbiotic relationship.
We are currently writing a Report of Observations based on all the findings of the Coalition. We intend to publish them in the summer and we intend to explore them further at our annual FRC conference on 20 th September, Culture to Capital: aligning corporate behaviour with long term performance.
To conclude, values, behaviours and corporate culture are central to the way an organisation achieves its objectives. By weaving a healthy corporate culture into your business model, you are not just contributing to the overall success of your business but, creating an environment on which investors can depend. In that way, importantly, you and we create sustained growth in the UK economy.
Thank you for listening.
Sir Winfried Bischoff
Chairman
Financial Reporting Council
City Week
The Kia Oval, London
09 May 2016
Session: Culture and Conduct: Towards Personal Regulatory Responsibility
Good afternoon.
I am delighted once again to be taking part in City Week, a conference which over the past six years has been instrumental in the debate on the future of our financial markets. Sustainable growth is vital to the success of the UK’s financial markets and so creating a trustworthy investor playing field is of utmost importance. For the purpose of today’s session, I would like to focus on the importance of corporate culture.
In recent years corporate scandals have been all too frequent. Since the financial crisis of 2007/8, the levels of distrust of institutions and sadly the expectations of their continuing bad behaviour have reached unacceptable levels. In my experience, embedding a healthy corporate culture, through improving behaviour, is vital to the success of any business. This is why we at the Financial Reporting Council are highlighting good corporate practice through the establishment, under our leadership of what we call the Culture Coalition, a group of organisations specifically focused on culture, on which I will comment a little later.
Let me start by giving you some background on the work of the FRC. 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. That benefits investors, companies and the wider public interest. 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. We monitor corporate reporting and auditing standards. We oversee the accountancy and actuarial professional bodies in their regulatory roles; and we operate independent disciplinary schemes for accountants and actuaries. 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. This is not deregulation, but giving the regulated the opportunity to make existing regulation work. A three year time out, so to say.
As part of this, we want to see behaviour improve through a healthy corporate culture. There have been many examples over the past decade of what a good company culture can do and what a poor culture can lead to. Volkswagen and, more recently Mitsubishi, two of the most reputable car makers in the world, admired for their technical excellence and global, iconic nature, apparently engaged in behaviour, which at the very least, questions their culture. Volkswagen has started to take steps to rectify what occurred, and I am sure Mitsubishi will do the same, but enormous damage has been done in the eyes of their customers, staff and shareholders - never mind the public at large.
Closer to home, we have seen with LIBOR and Foreign Exchange how failings in corporate culture can have severe consequences, not just of a financial nature. When there is a healthy culture, the systems, the procedures, and the overall functioning and mutual support of an organisation exist in harmony. When this is not the case, the potential for disaster is just around the corner.
For the UK economy to prosper, business needs to have a corporate culture which creates trust in business, reduces company failings and serves the needs of wider society.
Codes put forward principles for best practice that make bad behaviour less likely to occur; and public reporting can make it harder to conceal such behaviour. But, by itself, a code does not prevent inappropriate behaviour, strategies or decisions. Only the people, particularly the leaders within a business, can do that.
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. This suggests, and I strongly stress, that culture is sui generis to any company, and not general. It involves establishing your own culture, asking questions and making choices: how to align values and purpose to the company’s strategy; how to integrate new leaders into that culture, particularly at times of merger or acquisition; how to maintain culture under pressure; how to decide whether different parts of the business should operate different cultures, and how actively to communicate culture in order for shareholders to engage in constructive discussion. To do all this, the board must ensure sufficient internal audit arrangements are in place and pay attention to their findings. In that context, we at the FRC expect external auditors to employ a good dose of professional scepticism rather than accept matters at face value. So should internal auditors.
This brings me back to the work of our Culture Coalition which I mentioned at the outset. It is a collaborative effort 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. It proposes “to assess how effective boards are at establishing company culture and practices, and at embedding good corporate behaviour, and to consider whether there is a need for promoting good practice”. We have had a very encouraging response from many individuals and organisations. Our aim is to deliver practical, market-led observations, not , I hasten to add, a Code, all designed to help boards and companies establish and embed their desired culture.
Through our project worksteams we have gained useful insight into, for example, the extent to which you can and should measure indicators of culture and what sorts of indicators are useful. What is clear is that there is no one–size–fits-all and that the indicators selected for assessment should be tailored to each company’s circumstances.
We will also highlight the role of the board as against that of executive management. The board’s role is to identify and then influence a desired culture, and thereafter to assess and monitor it. Management’s role is to drive and embed that culture throughout the organisation. The two are harmonised when the purpose and values of the company are linked to its strategy and business model. Rather than culture eating strategy for breakfast, as is the by now well known phrase, it should be a case of culture and strategy having a symbiotic relationship.
We are currently writing a Report of Observations based on all the findings of the Coalition. We intend to publish them in the summer and we intend to explore them further at our annual FRC conference on 20 th September, Culture to Capital: aligning corporate behaviour with long term performance.
To conclude, values, behaviours and corporate culture are central to the way an organisation achieves its objectives. By weaving a healthy corporate culture into your business model, you are not just contributing to the overall success of your business but, creating an environment on which investors can depend. In that way, importantly, you and we create sustained growth in the UK economy.
Thank you for listening.