In his introduction to the report, Sir Winfried Bischoff, chairman of the FRC, said: ‘There needs to be a concerted effort to improve trust in the motivations and integrity of business. Rules and sanctions clearly have their place, but will not on their own deliver productive behaviours over the long term.’

The regulator says research based on the annual reports of FTSE 100 companies shows that while 48% define the values of the company, and 35% the purpose, only 14% discuss their corporate culture.

Bischoff said: ‘A healthy corporate culture leads to long-term success by both protecting and generating value in the UK economy. It is therefore important to have a consistent and constant focus on culture, rather than wait for a crisis. A strong culture will endure in times of stress and change.

‘Through our research, it has become clear that establishing the company’s overall purpose is crucial in supporting and embedding the correct values, attitudes and behaviours.’

The FRC’s research found that 89% of respondents, felt the role of the chairman is influential or very influential and 54% viewed the role of non-executive director as influential or very influential.

 When chairmen were asked how much attention they give to setting the tone through leading by example, 58% said ‘we do enough for now’ and 36% answered ‘some – but we could do more’.

One issue highlighted in the report is the question of pay, which is described as a ‘sensitive issue in the UK’ which affects the standing of business in society. There have been number of shareholder rebellions over executive pay packages during this year’s reporting season.

The report states: ‘Unfortunately the continuing inconsistent alignment between executive remuneration and company performance and between the remuneration of senior executives and employees has led to a lack of public confidence. This has taken place despite increasing regulation to improve transparency and accountability.

‘Remuneration practices are often cited as a driver of poor behaviour. The incentives created by performance related pay, and the corresponding impact on employee behaviours, is something that should be of utmost concern to boards and remuneration committees, which could do more to apply a cultural and values lens to the design of remuneration policies and individual remuneration decisions.’

Role of internal auditors

The report also highlights the role of internal auditors in assessing and monitoring company culture. It states: ‘Internal auditors will need to develop a broader set of skills than has been traditional, and place more emphasis on asking questions about why certain behaviours occur and understanding the pressures that are driving the behaviours. However, IA can suffer from a perception it is a backwater and is not always valued as highly by management.’

The report goes on to state: ‘In the future, there is, perhaps, the potential for internal audit and external audit to collaborate in this area as they do in relation to assurance around financial and non-financial controls, but the IIA’s survey shows that only 6% collaborate on culture at present.’

The IIA undertook its own survey with 220 heads of internal audit as part of the culture coalition initiative. This found that 31% of boards across the public and private sectors have not established or articulated what sort of corporate culture they want and only around a third (36%) assess the extent to which values are manifested in the behaviour of all staff within the organisation.

The results indicate that nearly 20% of respondents plan to include cultural aspects in their audit work in the coming year, but more than a quarter said that they had no plans to audit culture in the next 12 months.

Dr Ian Peters, IIA chief executive, said: ‘Auditing culture is not an exact science. Many organisations struggle to define their culture, let alone incorporate it effectively into their risk evaluation and assurance processes. But it is essential that they do so.’

The FRC report makes a number of recommendations for best practice for companies to consider. These are recognising the value of culture; demonstrating leadership; being open and accountable; embedding and integrating values; assessing, measuring and engaging on culture evaluation; aligning values and incentives; and exercising stewardship.

The FRC says it intends to reflect on the information gathered and any feedback to the report to inform its guidance on board effectiveness review, and will continue to work with the coalition partners to encourage debate on culture.  

The FRC report is the culmination of the Culture Coalition, a collaboration with CIMA, the City Values Forum, the Institute of Business Ethics (IBE), the Institute of Internal Auditors (IIA) and the Chartered Institute of Personnel Development (CIPD), and includes contributions and case studies from based on interviews and other research with more than 250 chairmen, CEOs and other senior executives, from the UK’s largest companies.

Essential reading

Find out more about corporate culture in practice at Costa Coffee at Organisational culture and the corporate risk agenda