Proposed new governance rules will require every business to test its values

The Financial Reporting Council (FRC), UK based, is perhaps the most influential source of governance advice around the world, as originator in 1992 of the widely copied Corporate Code. Now, the FRC has torn up its previous code, with a radically rewritten version for consultation that stresses long-term success and proposes a new requirement for businesses to test its values across the business, from top to bottom.

The proposed text, issued last month, says that “Directors should embody and promote the desired culture of the company. The board should monitor and assess the culture to satisfy itself that behaviour throughout the business is aligned with the company’s values. Where it finds misalignment it should take corrective action. The annual report should explain the board’s activities and any action taken.

[For full disclosure, I have been a member of the FRC Stakeholder Advisory Council, representing the co-operative sector and a keen advocate for this change]

Sir Win Bischoff is Chairman of the FRC, and explains that “a Principle promoting the importance of the intrinsic value of corporate culture is a new addition to the Code. Building trust in business has to start in the organisation and forming a healthy corporate culture is integral to the credibility of a company.

For co-operatives, a requirement like this has been in place since 1995, which established a global set of values and principles, now widely used in laws and regulation around the world. Co-operatives UK will shortly be publishing a new international review by Professor Johnston Birchall of governance across large co-operatives, showing how the sector has given life to these core values and principles across widely varied cultures. Done well, values can create a powerful alignment across the business.

The FRC consultation runs up to the end of next month, and once the new code is issued, all companies with a premium listing on the London Stock Exchange are obliged to report against the code.

So, how can companies test their values?There are a range of options and if you want to guide to the field, including co-operatives as a case study, then an introductory toolkit for values in business is set out in my 2016 Routledge short book, Values: how to bring values to life in your business.

As a gift to shareholder companies coming to values for the first time in a serious way, here is a Checklist on Values in Business that I have used in the co-op sector.

Articulating values Does the organisation have an agreed statement of shared values? Are these values published and available? Are the values translated into expectations around everyday behaviour?

Leadership on values Is the strategy and direction of the organisation informed by its values? Do those with responsibility lead by example?

Governance on values Does the board consider values and track performance and risk in relation to them? Does the board consider external assurance and stakeholder feedback in relation to the values of the organisation? Are values integrated in the framework of policies approved by the board for the business?

The values fit Are the values in line with the core purpose or founding story of the organisation? Are the values the right ones, in terms of their fit with the wider market and society within which the organisation operates?

Ownership and awareness of values Do those involved in the business know what the values are? Do those in the business believe that the values are ones that they care about? Do the values inform the conversations, communication and planning of those within the business?

Integration of values Are values integrated in human resource management – such as performance review, learning and development and colleague recruitment and induction? Are values integrated into commercial relationships – such as buying decisions, supply chain management, and partnerships? Are values integrated into marketing – such as communication, product and service design and innovation?

Accountability on values Do values form part of the accountability framework of the business to its ultimate owners, for example in dialogue or in the articles of association? Do values form any part of what the business reports on or discloses externally? Are the interests and perspectives of stakeholders considered in the way that values are handled?

One thought on “Proposed new governance rules will require every business to test its values

  1. The collapse of Carillion, whilst its executives continue to be paid huge amounts, long after they ceased to work for the company, and whilst shareholders have been paid huge amounts in dividends, shows that a change to the laws on Corporate Governance is long overdue.
    John Kay and Aubrey Silberston nearly 20 years ago set out the legal reality that shareholders do not own the capital of the companies whose shares they own. There is no reason a shareholder should have any more say in the running of such companies than do bondholders, a bank who lends money to the company, a landlord who lends land or property to the company, or an equipment company that leases equipment to it.

    A limited company is a legal entity in its own right. It owns the capital, as such an entity, and it is the company, not the shareholders, who are merely lenders of money to it, who should exercise control over the company’s capital, in the same way a homebuyer exercises control over what colour they paid their house, not the bank that gave them a mortgage to buy it!

    There should really be no effective difference in the corporate governance of a company than there is with the corporate governance of a worker owned co-operative. The company itself can only rationally be considered to be comprised of the associated producers within it, workers and managers. It is they who should exercise democratic control over how its capital is used, and what executives, if any, are employed to carry out those decisions.

    Germany already has gone part way to that with its co-determination laws. The EU’s Draft Fifth Directive on Company Law also proposed expanding that across the EU, and the Bullock Report in the 1970’s, made similar proposals. But, the practice in Germany, and elsewhere shows the limitations of such co-determination, because they always end up with the shareholders having the controlling influence. There is no reason that shareholders should have any say, especially as limited liability means they are not even responsible for the damage their decisions, and those of the executives have on the company and wider society.

    Labour should commit itself to a thoroughgoing reform of the laws of corporate governance, reducing the rights of shareholders down to those of bondholders and any other money lender, and making it compulsory for the workers and managers (as workers themselves) of the company to determine corporate policy, and the appointment of directors. That would remove all of the talk about the cost of nationalising various companies. Why spend money nationalising what already has been socialised, when all that is required is to recognise the socialised nature of he existing capital, and to simply reflect that socialised ownership by the introduction of democratic control, by the owners of that socialised capital?

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