Culture seems to be one of the buzzwords in the Corporate Reporting world this year. But what is it and is it possible for companies to report on in a meaningful way?
What is culture?
The FRC defines corporate culture as ‘a combination of the values, attitudes and behaviours manifested by a company in its operations and relations with its stakeholders’. Strongly linked to a company’s values, Corporate Culture is, simply put, the way that a company does things – what is expected and considered acceptable. It is something rather nebulous and hard to put in to words but can have a powerful effect on everything that a company does and can open up or limit its options – from the type of people that it can attract to the investment decisions it makes and the valuation it is given.
How the Board, and the Chief Executive in particular, conduct themselves will set the culture within a company – the acceptable way of doing things trickles down from the top.
Why is culture important?
This is why good governance and board culture are so important. It is widely recognised that a healthy culture drives business success and value creation. Openness, accountability and constructive engagement with stakeholders are key to achieving this. It is hard to define and even harder to monitor and measure and is constantly changing because it is the lingering effect of every interaction that a company has. To get an insight into a company’s culture look at how executives are treated when they present to the Board. The degree of deference and formality required, the levels of respect given and the amount of openness shown are all indicators of how things are done throughout a business.
How, then, can companies report on their culture and where should it sit in the Annual Report?
Since the launch of the FRC’s Culture Project in 2015 there has been increased engagement by the Reporting community on board and corporate culture. Discussions in the Annual Report have moved from being confined mainly to the ‘People’ section of the Report, measured largely by employee engagement, in to the ‘Governance’ section recognising the Board’s critical role in establishing a healthy culture. The Culture Project set out to understand how Boards can shape, embed and assess their culture; and to identify and promote best practice. The first results were published in July 2016 in ‘Corporate Culture and the Role of Boards’. This Report gives an insight in to what companies are doing and practical suggestions on how to embed a healthy culture throughout an organisation.
The challenge for Reporters now is to find a way of articulating their company’s culture throughout the Annual Report and in particular showing how it influences the Business Model and Strategy. Being clear about why a company exists, what it’s purpose is, must be the starting point. From here the values and culture will inevitably influence the strategy that is adopted to achieve this purpose. Successfully reflecting this in the front of the Annual Report is what the best reporters will be doing this year. The appetite to do so is certainly there. The difficulty will be in communicating something that is hard to be explicit about. For some, the building blocks are already in place and it will be a matter of framing the information to shine a light on this important but elusive topic.
Remember the famous words attributed to Peter Drucker: ‘Culture eats Strategy for breakfast’. The companies that get it right and communicate it successfully will attract investors and be properly valued by the market. This is an opportunity not just for value protection but for value creation.