FRC must address “glacial” efforts to improve UK corporate culture

The Financial Reporting Council (FRC) must increase efforts to ensure that company directors take corporate culture more seriously, according to Gavin Hayes, head of public policy and external relations at the Chartered Institute for Internal Auditors (CIIA).

“When the UK Corporate Governance Code is next reviewed, there needs to be much greater emphasis on the role of the board in terms of monitoring and assessing the corporate culture.”

Hayes points to the regulator’s amendment of the code in 2018, which urges company boards to establish and monitor the purpose, values and culture of the organisation. However, in the years since, progress on the matter has been “glacial”, he argues.

He also suggests that the FRC has a significant role to play in terms of offering relevant support and resources to company boards.

“The FRC could be doing a lot more in terms of providing guidance and toolkits to company directors to support them in meeting these requirements.”

According to a new research report by the CIIA and AuditBoard, 65 percent of senior internal audit executives believe that the FRC should act further and strengthen the UK Corporate Governance Code. This “reaffirms and reflects” the regulator’s slow progress since 2018, Hayes argues.

But according to Sir Jon Thompson, CEO of the FRC, the code is already clear on this matter.

“The UK Corporate Governance Code makes clear the board’s responsibility to promote, monitor, and assess the culture, and I urge businesses to ensure they are compliant,” he said in a statement.

“As the audit regulator, we want to see progress accelerated in this area. Internal audit has a vital role to play in providing assurance and reports to the board that the culture is healthy.”

The FRC recently addressed this subject in a December 2021 report, reiterating that “good governance is aligned to a positive corporate culture”.

For Hayes, this step represented intent and proactivity from the regulator.

“I think there are signs that the FRC are really starting to focus on this,” he says.

“Boards have a really critical role to play”

The CIIA report is unflinching in its criticism of UK company directors. They must “get a grip” on unhealthy corporate cultures, it states.

Hayes argues that the significance of this was clearly demonstrated by the collapse of Carillion in 2018, pointing to the organisation’s “rotten corporate culture”, as described by BEIS’ report on the matter.

As a result, he argues, it’s critical that the board makes a concerted effort to articulate the purpose and vision of the business, and that this “cascades” down the organisation.

“This [Carillion and other scandals] has obviously helped to shine a spotlight on the risks associated with an unhealthy corporate culture, in terms of the damage that it can do to reputation, public trust, and ultimately long-term sustainability,” he says.

“So, we really would expect all boards to be articulating and establishing what culture they want, in line with the company’s strategy, values and missions.”

The report also highlights the “need for internal audit engagement”, with it criticising the lack of it within many UK businesses.

Over 50 percent of senior internal audit executives have not been asked by the board or audit committee to provide reports on corporate culture, it says.

“Internal auditors have an important role to play in supporting boards to embed, assess, and monitor the culture,” said Richard Chambers, senior internal audit advisor of AuditBoard in a statement.

“Whilst there has been progress it is clear far more need to step up.”

This is echoed by Hayes, who argues that audits of corporate culture should be integrated into all audits of the company.

“We would like to see internal audit being a lot more proactive in its approach to corporate culture,” he says.

“They shouldn’t just be waiting for the board or the audit committee to come to them.”

According to the CIIA report, 74 percent of internal audit functions plan on auditing culture either this year or next.

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