For Website-21The Financial Reporting Council (“FRC”) has published its report on culture: Corporate Culture and the Role of the Board – Report of Observations

For a very long time I have argued that culture is at the heart of governance and in particular risk management. So nobody could be more delighted than me that the FRC has picked up the challenge of culture in our economy. The references to culture in the Guidance for Directors on internal control and risk management was one of the reasons that I considered that to be one of the best documents on risk management ever published by the FRC, or any other regulator for that matter.

The FRC’s ambitions

So I was equally delighted when the FRC announced that it was going to do more work on the subject. It is exciting to read in the press release that this “research” will help us to understand the contribution of culture to long term sustainability. Nothing could be further from the truth. This report adds nothing to the sum of our knowledge.

Naively, I had assumed that the FRC would go with the direction of travel that has seen titans of the academic world such as Professor Power research the subject of risk culture, or even in our own more modest way, the contribution of the Institute of Risk Management and our document on the subject that was published under my Chairmanship. Instead we have the disappointment of a document that takes us back to state of the art thinking of the 1980’s rather than something new and exciting that will take us forward to the 2020’s.

The context

We have seen something like 300 years of corporate failures and scandals in the UK, starting with the South Sea bubble. Post Maxwell, Sir Adrian Cadbury provided us with a great stepping stone that has shaped Corporate Governance right round the world. The Global Financial Crisis afforded regulators including the FRC with an opportunity to re-evaluate our approaches. Of course the poisonous cultures and failed risk cultures of the banks were very largely the cause of the GFC, but the banks have not been gently nudged in the right direction to improve their cultures: they have been prosecuted, bashed by regulators and generally harassed by all and sundry until they began to address the cultural questions. An early part of that was the guidance developed by the FSB for banking regulators not only on culture but also on risk culture.

What we got

And in that context, what do we now get from the FRC? Something like 62 pages of platitudes:

  • How chairmen and chief executives are vital to the culture;
  • How non-executive directors should probably be involved, but poor individuals, they find it hard;
  • How culture is so very important, but it really is difficult;
  • How important it is for directors to exhibit their corporate values;
  • How hard pressed heads of internal audit want to do work in this area, but their boards are not ready.

Actually that last point is one of the most telling points of the whole document: boards of FTSE companies have NOT got corporate culture under control. What is more ONLY 44 of them could be bothered to respond to the FRC’s survey carried out for this report.

What we need

I am delighted that 58 Chairmen and 23 Chief Executives were able to spare the time to discuss this subject. And I am sure that some are extremely knowledgeable on it. But once again the FRC is being held hostage by those it sees as its principal stakeholders: the cooperative Chairmen of FTSE companies, who, quite frankly hide amongst their colleagues sufficient amongst them (perhaps the less cooperative ones) who do not understand the importance of culture let alone risk culture and who right now are incubating the next corporate failure. In this post-Brexit world of disaffection from a significant proportion of the population, the FRC should not owe its primary responsibility to Chairmen, or even necessarily to shareholders, but rather to the wider community that is so adversely affected by major corporate failures and it should force change onto all boards because the public has a right to know that our public companies are led according to the best and most stringent rules on corporate governance, including how boards discharge their responsibilities to manage culture and risk culture.

So rather than see some wishy-washy platitudes with “suggested” topics for boardrooms to discuss, when they get round to it, it is time for the FRC to commission first class research from people who have genuinely thought about the subject – both academics and practitioners. And then we can talk constructively about the importance of culture versus risk culture and just how we can measure and manage both of them.

Richard Anderson is an experienced Risk Management professional, who was on the board of the Institute of Risk Management for six years, and was Chairman for three years. A Chartered Accountant by training, and a former partner in a big-4 firm, Richard now runs his own risk management consulting firm: AndersonRisk Limited. His writings on risk culture are available at http://andersonrisk.com/publications/downloads/

Contact: www.AndersonRisk.com | RCA@AndersonRisk.com | +44 (0)7807 780284

 

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