The UK’s top employers have been chastised for taking a ‘tick-box approach’ to good governance, including on issues of diversity and company culture.
A report from the Financial Reporting Council (FRC), the independent regulator responsible for setting and monitoring compliance with the Corporate Governance Code, accused FTSE 100 firms of failing to create effective company cultures. It said many substituted a clear purpose for “slogans or marketing”.
The report added that while large listed companies prioritised “strict compliance”, many were unable to demonstrate actions taken to improve governance issues, or to link them back to their company strategy.
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Sir Jon Thompson, chief executive of the FRC, said employers were focusing on “box-ticking compliance” at the expense of effective governance and reporting, and accused companies of doing a disservice to stakeholders by “paying lip service to the spirit of the code”.
The Corporate Governance Code sets out best practice on several leadership areas, including remuneration, boardroom accountability, company culture and diversity. It was revised in 2018 following incidents such as the high-profile collapse of outsourcing firm Carillion and concerns about executive pay levels.
The update intended to force improvements to leadership in listed companies, while encouraging dialogue about key issues such as diversity and culture.
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The FRC recognised boards were on the whole now taking company culture seriously, and highlighted multiple “encouraging” chair statements confirming this. But it said more work must be done in “setting the tone from the top and achieving buy-in from management and employees”.
Overall, there was limited discussion of assessing and monitoring culture, the report uncovered. It found the main tool used to measure culture was employee engagement surveys, with most focusing on the metric of survey completion rates – an approach the report criticised as insufficient in providing a true picture of a company’s culture.
“Many companies are grappling with defining purpose and what an effective culture means with too many substituting slogans or marketing lines for a clear purpose,” the report said.
Ed Houghton, senior research adviser for human capital and governance at the CIPD, said it was clear most organisations had yet to produce a clear strategy for achieving healthy corporate cultures.
“There are still too many instances of boilerplate reporting, and not enough focus on reporting material risks and opportunities relating to culture and the workforce, or a clear illustration that employees are being engaged on all the key issues that impact on their productivity and job quality,” Houghton said.
He added that company boards trying to improve culture and employee relations would “fail fast” if they did not utilise the knowledge and insight of their HR functions. “Far more external interest is being paid to people issues and the behaviour of boards as a result of various corporate governance scandals and the global financial crash of 2008, and so transparency should be top of the agenda,” said Houghton.
“As a result, HR must take the lead in encouraging transparent reporting, and in particular effective narrative reporting, when it comes to workforce issues – for example, gender pay gap reporting and CEO/workforce ration reporting.”
The FRC’s report uncovered limited reporting around diversity, and said while many claimed to have a D&I policy, targets and action plans were unclear. It added that most reports focused on gender diversity at the expense of other areas including age, disability and LGBT+.
Several FTSE 100 companies did, however, comment on ethnic diversity and included plans and targets to improve this area, the FRC reported. Others explained how elements of CEO remuneration packages were linked to diversity.