Will the new Audit, Reporting and Governance Authority be sharpening its enforcement pencil?

UK companies just received a resounding ‘C Minus’ from the FRC and a ‘see me!’ in the margins of their Annual Reports from Sir John Thompson, CEO of Financial Reporting Council. This matters for all public and larger private companies. Not least because the FRC is becoming the Audit, Reporting and Governance Authority with, it says ominously, new powers to ‘engage with’ companies about governance reporting.

Purpose, culture, and strategy

This is the first year in which all UK premium listed companies reported on their application of the 2018 UK Corporate Governance Code (Code). And the FRC is unimpressed.

“As part of our assessment, we were looking for a high standard of reporting which demonstrated that boards had considered matters beyond process and reassessed issues such as company purpose, culture, and strategy, in order to set them at the heart of governance.  Whilst we have found examples of good reporting, overall, we are disappointed with the response to the new Code.”

Strong stuff. And the FRC goes on “too often companies who are not compliant with the Code, do not declare non-compliance but offer vague explanations, and continue this pattern year on year. This approach demonstrates a disregard for implementing good practice and questions whether the leadership of the company is fully committed to good governance and transparency”.

“Too often the objective appears to be box-ticking at the expense of effective governance” says CEO Sir John Thomson. “This is a disservice to the interests of stakeholders, is not in the public interest and undermines trust.”

Crikey.

So, where is FRC (enforcement Authority in waiting) looking for improvements? “As a result of this year’s review”, they say, “we expect improved reporting in:

  • Companies to have a well-defined purpose and to clearly show the progress towards achieving it
  • Discussion of the issues raised, topics considered, and feedback received during engagement with shareholders and employees
  • Clearly show the impact of engagement with stakeholders, including shareholders, on decision-making, strategy and long-term success
  • Increased focus on assessing and monitoring culture, including consideration of methods and metrics used
  • Increased attention and better reporting of succession planning, diversity and board evaluation”

One clear thread emerges. And that is the failure to comply with:

Principle B that “the board should establish the company’s purpose, values and strategy, and satisfy itself that these and its culture are aligned”.

The Review finds that, rather shockingly, only 21% of Company Reports “described a purpose that was clear” and 76% failed to show how the Board satisfied themselves with the alignment of purpose with culture.

“Many Boards appear not to be exercising their oversight function to ensure that company purpose works as a driver for the company”

declares the FRC. Culture and purpose “should be led from the top and aligned with values and strategy as noted in Principle B of the Code”.

The FRC is clear that this is a strategic imperative and not a matter of marketing or reputation management. Boards that persist in misunderstanding that may get a sharper response in future. “Company culture supports the success of the strategy, and if a board embeds a culture that is supported by the employees, then companies should have a motivated and high performing workforce which delivers the outcomes necessary for long term success”.

This is all very well. But many Boards are left wondering “how”, particularly if they thought they’d actually met the requirement to ‘establish a purpose’.

Assess and measure purpose and culture

One key answer is in understanding the FRC’s thinking that companies are failing to assess and measure purpose and culture. Traditional Engagement Surveys “have significant limitations” according to the FRC and “few companies look beyond the figures to better understand poorer scores”.

Better companies, they say had “introduced specific culture surveys”.

Fortunately, Boards have a timely ally in a relatively new process of measurement and analysis created in a partnership between entrepreneurs and leading thinkers at Cambridge University. The Contexis Index® measures with precision how purpose is working to transform culture in real businesses in real time. It assesses where and why it is blocked. And provides detailed analysis and recommendations for practical action in every part of the business.  There is no better way to understand and bring to life purpose in the business today. And satisfy the requirements of the Governance Code.

The Index has been adopted by organisations in 26 countries. It creates numbers that are robust. And analysis that is practical and actionable. As a Director in one large Bank commented

“The reaction to driving the sense of purpose has been dramatic, with our Index scores showing a significant improvement. This is reflected in how the team is interacting and the overall spirit within the team. The work we have been doing has shown fantastic results – an increase of 30% in positive behaviours across the business would see significant results within team engagement and commercial performance”

The CEO of a London-based Fintech agrees:

“without purpose, a company can only flipflop around without truly consolidated, effective effort. What Contexis has developed with its Index is a very clever way to measure the impact of Purpose on Performance, enabling companies to really motivate their teams. Contexis Index did it for us!”

As the new Authority burnishes its powers to enforce, Boards would do well to explore this new methodology. There is no better way to understand and bring to life purpose in the business today. And satisfy the requirements of the Corporate Governance Code

“In 2021 we will be revisiting our Culture report to support further improvements in embedding and monitoring culture” says FRC. We have been warned!

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Photo by NeONBRAND on Unsplash