Corporate governance reform vital to address organisational “culture crisis”

The UK government recently outlined its plans to overhaul corporate governance and audit, with the aim of restoring trust in big business and preventing further corporate scandals following the collapses of Carillion and Patisserie Valerie, among others.

The proposals for achieving this include new reporting requirements, making directors of the country’s largest firms more accountable for significant failures in their corporate reporting, and replacing the Financial Reporting Council (FRC) with a new regulator, the Audit, Reporting and Governance Authority (ARGA), which will have enhanced enforcement powers.

However, there is little in the proposed reforms that directly address the issue of unhealthy corporate cultures, according to Lucy Fergusson, partner at Linklaters.

As a result, there remains “widespread concern” that much of the reform agenda will be left to the UK Corporate Governance Code rather than legislation and not all companies will step up to the mark, said Hywel Ball, EY UK chair, in a statement.

Tone at the top

Gavin Hayes, head of policy and external affairs at the Chartered Institute of Internal Auditors, shares similar sentiments on the issue.

“[The] UK Corporate Governance Code must be further strengthened regarding corporate culture.”

“Indeed, a recent survey of senior internal auditors found that over 65% believe the Code should be further strengthened in regard to the responsibilities of company directors to promote, monitor, and assess the corporate culture.

A healthy corporate culture must be driven by those at the top exercising and demonstrating the right behaviours and values in their everyday roles, to avoid a Greenshill-style failure, according to Hayes.

“Critically this has to be about good leadership and the right tone from the top. With the right leadership and the right tone from the top you’re over half way there.”

Other industry practitioners agree that the reforms alone aren’t enough to combat the culture crisis, with Stuart Brown, director and head of technical and compliance at Duncan & Toplis, agreeing that positive changes to culture must be driven from the top down.

“Whatever legislation may state, or whatever guidance may be presented, culture can only be changed through the combined efforts of individuals wanting to make a genuine difference to how their business operates”, he says.

The UK Corporate Governance Code does not do enough to address the culture crisis at the top of large businesses. It must be obligatory, with consequences for companies that fail to fulfil the requirements, according to Brown.

“For the Code itself to exert enough pressure to create change, it must be mandatory and must contain requirements that must be adhered to in order to be classed as being compliant. Non-compliance must have clear and measurable consequences.”

UK SOX dropped

Speaking to Accountancy Age about the decision to drop the adoption of a UK SOX style regime, James Astley, partner at UHY Hacker Young, says that the “tone at the top” is crucial in determining the approach that businesses take towards accounting issues and broader corporate governance.

“On that basis there should be a proper analysis of what the practical impacts of SOX in the US have been. However, we don’t think that the audit profession should use the debate over a UK SOX to distract from the idea that auditors can improve the quality of the audits they undertake.

“We recently went through a review of our own audit compliance and training systems and introduced more intensive training and more internal reviews of audit work. We’ve also included enhanced training on professional scepticism and the challenging of management by auditors,” says Astley.