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Capturing culture in corporate reporting
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An announcement of a project on the topic of corporate culture by the Financial Reporting Council reflects an interest in the softer aspects of corporate performance. If you can influence behaviours, then you can influence outcomes, the thinking goes. It sounds simple but is it? The FRC’s project is “to gather practical insight into corporate culture and the role of boards”. So, why the current interest? Why is corporate culture in particular important? How well are companies reporting culture currently? And, what are the most obvious challenges to any beneficial change?

Diverse factors would seem to be fuelling this interest, among them: a budding awareness of the role hidden assets play as value drivers; the search for better reporting of people and human capital; and; a developing appreciation of integrated reporting with its associated underlying six capitals and integrated thinking. But, despite these trends, there are too many companies that consider mere compliance to the letter of the law in their external reporting as sufficient, ignoring the spirit of the regulation. That is almost certainly not what Government or the regulator intended with a principles-based reporting framework and ethos. So, presumably, the official thinking goes that if you can perhaps nudge Boardrooms into paying more attention to the culture of their organisations leadership on this issue will resort to higher reporting standards?

Corporate or organisational culture is an expansive management topic, much researched by academics. One simple definition is, in a nutshell, ‘the way we do things around here’. Culture comprises some common components: vision, values, practices, people, narrative and context. This all feels very tangible and something that a Board ought to be able collectively to deal with. And the many established outcomes of an effective culture are compelling. A strong performance-oriented culture will witness far better growth. Other research reports the benefits of a healthy and robust culture to be: competitive edge, consistency, efficient employee performance, team cohesiveness, high morale, strong company alignment towards goal achievement. What Board would not want to fine tune culture?

So, what’s the catch? The reality is that influencing culture positively is difficult to the point of being largely unmanageable without assiduous long-term attention. Positive company leadership is only one of a multitude of triggers that determine an effective culture, although arguably the most important one. One has to wonder if Boards at large with the demands of quarterly results have the patience for the long-haul nature of cultural reinforcement and change? It will require them to model and role play desired values and consequent behaviours, and possibly even re-design their organisation to achieve optimal outcomes.

If cultural leadership seems challenging, the reporting of organisational culture is no less demanding. On the one hand a company can take a tick box approach – spelling out its vision, declaring its values and explaining its people policies and practices in its Strategic Report. This is formulaic but does at least establish that the company is on paper addressing the key cultural issues. Will that be enough to persuade investors of the existence and performance accelerating effect of a thrusting corporate culture? Probably not! On the other hand a company can demonstrate the dynamism of its culture through the forceful presentation and articulation of its strategic thinking and management in a cohesive narrative, of which those cultural elements – vision, values, practices, people, context etc. – are woven into the rich tapestry and intuitive framework of a compelling narrative. The persuasive nature of the content will demonstrates the reporting company’s strategic leadership. Companies as diverse as Unilever, United Utilities and Marks and Spencer fit into this high-octane category. The vast majority of FTSE350 companies take the more formulaic approach, if even that in many cases.

The benefits of a potent narrative that visibly embodies strategic leadership and a thrusting corporate culture are conclusive. Investors too are sensitive to the higher-level potential of evident dynamic culture with corresponding benefit to market performance. Whatever the findings of the FRC’s project, addressing culture effectively will be a bigger task than many realise, not least the many in the boardrooms of UK plc. Capturing culture in corporate reporting simply compounds the challenge. It is worth the candle to investigate. It could be a long journey for most.