To look at this issue, a group of business watchdogs have collaborated on a report. It identifies indicators of corporate culture – what are the common characteristics of a good one, and what are the warning signs of a poor one?
The financial crisis has focused attention on corporate culture.
The ‘red flags’ that indicate potential problems with corporate culture are outlined along with suggestions of how firms can improve under-performing cultures.
The report and its origin
In December last year, the International Corporate Governance Network (ICGN), the Institute of Business Ethics (IBE) and the Institute of Chartered Secretaries and Administrators (ICSA) held a workshop. The report summarises the outcomes of this workshop, which aimed to identify:
- what makes a good culture
- what threatens a positive culture, and
- how firms should be addressing the issues of culture and governance
What does the report cover?
The report makes some interesting points. Many of these are relevant to financial services firms. Often, they echo the FCA's approach to corporate governance and culture.
Regulators and policymakers have, according to the report ‘come to appreciate that a rules-based compliance approach will not, on its own, deliver healthy behaviour’.
This is in line with FCA thinking. The need for a cultural, rather than checklist, approach to compliance has been a recurring theme for the regulator.
The report identifies three main causes of bad behaviour:
- Corporate stress – which can lead to an ethos of shortcuts and errors. This stress can be caused by the wider business environment, or an autocratic chief executive
- Excessive focus on short-term financial targets. This may lead to firms cutting corners to achieve organisational or market-imposed goals
- A ready tolerance of small breaches of the rules – which, the report says, can easily spiral into larger transgressions. This is often accompanied by a hostile corporate attitude to regulators or rules.
The report draws some clear conclusions:
- A weakening corporate culture needs to be identified at an early stage so that it can be addressed
- Good corporate governance is recognised as critical, but there needs to be a wider view of what this means
- Good governance needs to run through all areas of the business, including the executive committee
- Transparency and openness are important. A culture of challenge helps to create good corporate governance. (This is something the FCA covered in their recent report on research and due diligence of products and services)
- Directors and the board should stay aware of the firm’s current customer experience. Again, this is in line with the FCA’s priorities, particularly the focus on Treating Customers Fairly
What can financial services learn from the report?
One of the report’s conclusions is that improving corporate culture can be a particular challenge if poor governance is the norm across the industry. The defence that ‘everybody is doing it’, the report claims, is ‘a strong warning sign’.
The report says that at the time of the financial crisis, ‘A particular problem facing the banks was that the culture deteriorated across the sector.’ This led to an environment where poor governance and regulatory compliance were seen as acceptable – or even necessary to compete within the market.
The report contains a lot of food for thought for financial services firms. Many businesses will identify with some or all of the issues covered.
So what can financial services firms do to tackle the warning signs of poor culture?
As an employee (whether in the Compliance team or not):
- Be aware of the indicators of a poorly-performing culture – and flag them up if you spot them
- Recognise that good corporate culture is your responsibility – and the responsibility of everyone in the firm
- Challenge entrenched approaches or assumptions
As a business:
- Make organisational expectations around corporate culture well-known
- Lead by example; ensure the board and leadership team model the behaviours needed company-wide
- Make compliance and governance easy to achieve. Examine your processes and ensure they are as efficient as possible. Automate compliance processes where possible. Make sure there’s no excuse for non-compliance
- Encourage transparency; take care over your approach to sanctions. While you can’t turn a blind eye to governance slip-ups, too-harsh penalties might encourage a culture of secrecy
Maintaining a compliant corporate culture
The over-arching message from the report is that culture is the one vital component of a well-governed organisation. As the write-up says, this is not conducive to easy regulation:
‘The conclusion that culture matters is a problematic one for regulators because it involves a qualitative approach. They cannot force companies to have a “good” culture because they cannot define exactly what that means and measure compliance on an objective basis’.
This is undoubtedly the challenge the FCA faces in attempting to regulate on a cultural, rather than tick-box, basis. Financial services firms that work out how to tackle this challenge of in-built governance will steal a march on their competitors as this environment of ‘cultural compliance’ evolves.
If you would like more information on creating a compliant culture within your organisation, you can read our whitepaper - How to embed a compliance culture into your business. You can download a free copy here.