Culture by the rule book?

In yet another financial scandal, record fines were announced for six international banks involved in forex rate fixing, despite the not-dissimilar prior Libor scandal. A day later the CEO of the FCA, Martin Wheatley, was reported as saying that fines were having an effect on board culture in the City. But it’s not just banks which have issues with their culture.  In recent times we have also had the huge FIFA scandal and, in retail, Tesco discovered a major overstatement in its accounts.

Corporate culture – ‘the way we do things around here’ – is a major factor in how ‘problem’ behaviours are permitted or encouraged. Martin Wheatley’s comments have brought this to the fore. Corporate culture has also been referred to as the way people behave without reference to a rulebook – the way things are really done. While regulation can create rulebooks, it can’t change the way people think and the values which dictate their behaviour.

For an investor, analyst or broker some sort of clarity as to whether their target investment has a high risk of this type of crisis is an important factor. It isn’t hard to find out what the stated corporate culture is – annual reports tend to put vision, mission, values and belief statements in pride of place. But finding out the real picture is less easy. In his subsequent statement, Martin Wheatley remarked that the problem was further down to the organisation, highlighting the difficulty of knowing whether the global statements penetrate beyond the smooth corporate statements.

While an audit report must show ‘a true and fair’ picture of a company’s financial situation, there are no requirements and little or no opportunity to report on the true culture of the organisation and what drives behaviour across the business.

Cultural audits are common place when it comes to M&A, less so as a tool for understanding risk and performance in the everyday business. Culture stems from values, which derive from the purpose and vision of the organisation. If a company has as its vision ‘to be the most innovative retailer in the UK’ its culture, both formal and informal, must support this or it may need to change this vision. A cultural audit might review how its people are rewarded for their ideas, how they are encouraged to share them, and whether the culture exhibits the degree of risk tolerance necessary to enable innovation.  Are there informal centres of power and information which might block innovation? Is innovation valued across the firm and adequately resourced?

Every board is tasked with preserving and creating value for the future. Investors are also clearly looking for a return on their investments and brokers want to be confident in their advice. In the face of behaviours which have truly threatened the survival of some businesses as well as the security of major economies, there is evidence and logic to prove that the right culture and values can help companies act ethically and ensure a healthy legacy. We need cultural audit to become far more prominent in business.

Anthony Carey
Partner

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