Speech by Sir Win Bischoff, Chairman, FRC, at the Deloitte Global Forum 2016
News types: Speeches
Published: 22 June 2016
The plain text version of Sir Win Bischoff's speech
Sir Win Bischoff
Chairman
Financial Reporting Council
Deloitte’s annual Risk, Regulatory and Public Policy Forum
Parco Dei Principi Grand Hotel, Via Gerolamo Frescobaldi, 5 - 00198 Rome
22 June 2016
The importance of the auditor when establishing a corporate culture
Good afternoon.
I am delighted to be here in this beautiful venue nestled within a city historically renowned for its innovations which, many could argue, together with Florence and Bologna, lead to the foundations of the financial markets. So when in Rome, what better subject to speak on than corporate culture. When this is established in the appropriate, company specific manner, it will return financial services to its rightful place as an important component of a prosperous economy.
Europe has had a good reputation for corporate governance but 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 behaviour have become unacceptable. 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 in the United Kingdom, are highlighting good corporate practice. We have established under our leadership, 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. Much of this is known to you.
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. 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 , 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 through a healthy corporate culture.
There have been many examples over the years of what a good company culture can do and what a poor culture can lead to. Many of us will be familiar with the failings of the multinational Italian dairy and food corporation, Parmalat, which ultimately led more broadly to misgivings about the quality of governance in Italy’s boardrooms. More recently, we saw Volkswagen engage in behaviour which at the very least questioned their culture. Both have suffered the consequences as severe damage has been done in the eyes of their customers, staff and shareholders.
Applying a stakeholder-centric approach that delivers value is a vital requirement for corporate success and is an essential indicator of trust. A positive culture is one that seeks to put the stakeholder first, backed up by incentives, clear communication and training opportunities, and continuing monitoring across the organisation.
I have seen from experience that organisations which fail to respect and value their stakeholders will ultimately fail because their clients desert them. This requires senior leadership to be aware of stakeholder expectations and to make customer service a priority for their workforce.
Many companies have applied this approach and reaped the rewards.
In short, when there is a healthy culture, the systems, the procedures, and the overall functioning and reinforcing support of the organisation exist in harmony.
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. 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 , I hasten to add, a Code.
Through our project worksteams we have gained useful insights, 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 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.
The annual report still stands out as a key measure for companies to communicate with shareholders and the other stakeholders on culture. Black Sun recently reviewed the annual reports of the FTSE100 and found that only 13% provide detailed explanation as to why they are committed to creating value, the stakeholders they impact and an explanation of the value that is generated. Also, only 14% discuss their corporate culture and its impact on strategy and performance. There is clearly room for improvement here. In this context let me stress that I disagree with the view held by many that “culture eats strategy for breakfast”. I firmly believe that the two are inextricably linked and form a symbiotic but vital relationship.
Soon we will be publishing our Report of Observations, based on all the findings of the Coalition. We will be sharing case studies of different approaches that have worked for companies. We intend to explore the findings further at our annual FRC conference in London on 20 th September, Culture to Capital: aligning corporate behaviour with long term performance.
What is the relevance of all of this to you at Deloitte? Well, first of all you are focused on your own culture, purpose and values. My colleagues and I are well aware of how important you and the most senior management of the firm view this. I commend you for what you are doing, while acknowledging that there is always more to do.
But there is a second aspect. Nobody is in a position to develop a better feel for the culture of an organisation than its auditor. I suggest that you are able – more than anyone- to draw the attention of the Chairman or the Board as a whole, or its CEO, to shortcomings and potential failures as you become aware of them. This is not a duty specifically prescribed in any auditing manual, but is a responsibility you may well agree you have towards investors. Perhaps even towards what is broadly considered the broader public interest.
To conclude, values, behaviours and corporate culture are central to the way an organisation achieves its objectives. By weaving a healthy corporate culture into the business model, we are not just contributing to the overall success of our own business but, in your role as auditors, creating in the organisations you audit an environment on which investors can rely. In that way, importantly, you and we create sustained growth in the economy. And that, looking back at the history of this city, is the system that has benefited so many over the past five hundred years.
Thank you for listening.
Sir Win Bischoff
Chairman
Financial Reporting Council
Deloitte’s annual Risk, Regulatory and Public Policy Forum
Parco Dei Principi Grand Hotel, Via Gerolamo Frescobaldi, 5 - 00198 Rome
22 June 2016
The importance of the auditor when establishing a corporate culture
Good afternoon.
I am delighted to be here in this beautiful venue nestled within a city historically renowned for its innovations which, many could argue, together with Florence and Bologna, lead to the foundations of the financial markets. So when in Rome, what better subject to speak on than corporate culture. When this is established in the appropriate, company specific manner, it will return financial services to its rightful place as an important component of a prosperous economy.
Europe has had a good reputation for corporate governance but 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 behaviour have become unacceptable. 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 in the United Kingdom, are highlighting good corporate practice. We have established under our leadership, 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. Much of this is known to you.
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. 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 , 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 through a healthy corporate culture.
There have been many examples over the years of what a good company culture can do and what a poor culture can lead to. Many of us will be familiar with the failings of the multinational Italian dairy and food corporation, Parmalat, which ultimately led more broadly to misgivings about the quality of governance in Italy’s boardrooms. More recently, we saw Volkswagen engage in behaviour which at the very least questioned their culture. Both have suffered the consequences as severe damage has been done in the eyes of their customers, staff and shareholders.
Applying a stakeholder-centric approach that delivers value is a vital requirement for corporate success and is an essential indicator of trust. A positive culture is one that seeks to put the stakeholder first, backed up by incentives, clear communication and training opportunities, and continuing monitoring across the organisation.
I have seen from experience that organisations which fail to respect and value their stakeholders will ultimately fail because their clients desert them. This requires senior leadership to be aware of stakeholder expectations and to make customer service a priority for their workforce.
Many companies have applied this approach and reaped the rewards.
In short, when there is a healthy culture, the systems, the procedures, and the overall functioning and reinforcing support of the organisation exist in harmony.
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. 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 , I hasten to add, a Code.
Through our project worksteams we have gained useful insights, 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 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.
The annual report still stands out as a key measure for companies to communicate with shareholders and the other stakeholders on culture. Black Sun recently reviewed the annual reports of the FTSE100 and found that only 13% provide detailed explanation as to why they are committed to creating value, the stakeholders they impact and an explanation of the value that is generated. Also, only 14% discuss their corporate culture and its impact on strategy and performance. There is clearly room for improvement here. In this context let me stress that I disagree with the view held by many that “culture eats strategy for breakfast”. I firmly believe that the two are inextricably linked and form a symbiotic but vital relationship.
Soon we will be publishing our Report of Observations, based on all the findings of the Coalition. We will be sharing case studies of different approaches that have worked for companies. We intend to explore the findings further at our annual FRC conference in London on 20 th September, Culture to Capital: aligning corporate behaviour with long term performance.
What is the relevance of all of this to you at Deloitte? Well, first of all you are focused on your own culture, purpose and values. My colleagues and I are well aware of how important you and the most senior management of the firm view this. I commend you for what you are doing, while acknowledging that there is always more to do.
But there is a second aspect. Nobody is in a position to develop a better feel for the culture of an organisation than its auditor. I suggest that you are able – more than anyone- to draw the attention of the Chairman or the Board as a whole, or its CEO, to shortcomings and potential failures as you become aware of them. This is not a duty specifically prescribed in any auditing manual, but is a responsibility you may well agree you have towards investors. Perhaps even towards what is broadly considered the broader public interest.
To conclude, values, behaviours and corporate culture are central to the way an organisation achieves its objectives. By weaving a healthy corporate culture into the business model, we are not just contributing to the overall success of our own business but, in your role as auditors, creating in the organisations you audit an environment on which investors can rely. In that way, importantly, you and we create sustained growth in the economy. And that, looking back at the history of this city, is the system that has benefited so many over the past five hundred years.
Thank you for listening.