As an intangible concept, ‘culture’ has historically been considered as a softer, HR or personnel issue – something that other people could manage. But societal expectations have changed. Public interest is more important than ever and how a business behaves is key. With an increased regulatory and governance focus, culture is now firmly a board issue and leaders all have to own the cultures that they create.
Culture is a leadership issue
Whilst middle management is clearly integral to the culture for the organisation and leadership is key, the board has to lead by example and think carefully about what messages they send about their values, individual and collective.
A major shift in the new Corporate Governance Code which became effective from 1 January 2019 (the “Code”) is the emphasis on the company’s role in society and the need to engage with all those affected by its success. The Code requires companies to engage with stakeholders other than shareholders, and boards are required to understand the views of the workforce, moving employee engagement firmly to the board agenda.
The UK Financial Reporting Council believes that it is the board’s role to determine the purpose of the company and ensure the company’s values, strategy and business are aligned to it. Directors should not wait for a crisis before they focus on a company’s culture.
Culture is a regulatory issue
Regulators are being called upon as supervisors and enforcers to monitor organisations’ cultures. The FCA is currently focused on transforming culture in financial services. It recognises that there is no one-size-fits-all, but it wants organisations to change and view culture as an important part of leadership and strategy in the same way as risk management.
Whilst I think the FCA needs to provide more guidance to its firms and organisations on what its expectations are on this, I agree with its approach to elevating culture to a board level so that it gets the right level of support and buy-in from board members that it deserves. I also highly recommend a read of DP18/2 Transforming Culture in Financial Services – this collection of essays provides a range of insights into the topic of ‘culture’.
Culture is a financial issue
Poor culture has a business cost. Firms and organisations have to be trustworthy to maintain confidence and be seen to be doing the right thing. With the speed at which scandals can become public, consumers and investors are alive to culture-related risk and we have all seen share values fall soon after stories of poor cultures hit the headlines.
Whilst remuneration plays a significant part in attracting and retaining talent, employees have more job satisfaction at companies that invest in their workforce. Companies with stronger, positive cultures attract the best talent, have less recruitment costs, better retention rates and higher productivity.
Culture can be shaped by various factors, including governance, leadership, incentives, purpose, values and diversity. Ultimately, an organisation’s culture is always going to be led by example. The increased regulatory and corporate governance focus should give culture the respect and priority at a board level that it needs – let’s hope it stays on the agenda for the long term.