Building corporate trust: The right code for the next 25 years
Charles Tilley OBE, Executive Chairman of The CGMA Research Foundation, writes:
25 years on from the creation of the UK Corporate Governance Code the UK can rightly claim to be a world leader in corporate governance. UK corporate governance is widely admired and copied around the world. Its principles-based approach, underpinned by a sound legislative framework ensures that companies have to be accountable and transparent to their stakeholders. And yet, public trust in organisations is in freefall in the UK; not just in business organisations, but in all institutions, both global and national.
The trust deficit is the big challenge for corporate governance over the next 25 years and there are a number of ways in which a revised code can help address this problem by reducing the likelihood of corporate failures and reinforcing the role of the board as the guardians of trust and reputation of the organisation.
Making more of the business model
A well designed, customer focused, business model addresses, in an integrated manner, company objectives, values, opportunities and risks. It links remuneration to performance, and skills. It also provides a basis for strategic reporting and assurance, and helps put sound governance at the centre of corporate decision making. It ensures that metrics are the bedrock of the organisation and that they support all strategic decisions.
In other words, a board with a good understanding of its business model is better able to focus on the key value drivers of the organisation and how they impact each other, leading to both enhanced decision making and risk oversight. It helps to ensure that the board is governing for performance – as well as for conformance.
Under the current UK Corporate Governance Code, companies already report on their business models.
But if the business model can be further embedded as a critical governance decision-making tool in the revised code I believe that it could go a long way to helping avoid the serious strategic mis-steps that lead to corporate failures and undermine trust in businesses.
Encouraging a positive company culture
Another significant factor in the long-term success of any company is its culture and the motivation of its employees. A positive culture means all stakeholders act responsibly not because of external oversight but because it is the right decision for the business itself.
Culture has been highlighted in any number of reports into organisational failure and much recent research has focused on its importance. Specifically, the FRC report, Corporate Culture and the role of boards, published in July 2016 is important in breaking new ground. The report emphasised the need to connect purpose and strategy to culture, align values and incentives and assess and measure outcomes.
Those outcomes, the report suggests, should be assessed over the long-term, even at the expense of short-term financial gain.
Here again the code can play a role improving trust in business, this time by giving clearer guidance about the importance of shaping the right company cultures. The code should highlight, within a principles based approach, the importance of the Board setting the right culture at the top and ensuring that this permeates throughout an organisation in a way that is consistent with its business model.
The right information for governance decisions
The quality of good governance decision-making depends on a range of factors, such as the skills and knowledge of the board. However, it is considerably enhanced by high-quality management information, prepared according to sound principles, such as the CGMA Global Management Accounting Principles.
All organisations need an effective management accounting function and this should be reflected in the new code in the same way as the board’s current responsibility for maintaining effective risk management and internal control systems.
Trust and reputation are critical to an organisation’s long-term strategic success. They underpin all manner of stakeholder decisions - whether investors want to invest, whether customers want to purchase and whether individuals and suppliers want to work with or for a company.
For this reason corporate governance must seek to drive effective decision-making, underpinned by the right behaviours, that promotes better business, trusted by society.
The UK Corporate Governance Code has made the UK a world leader in corporate governance, but the new code is going to be essential if it is to maintain this status and address the trust deficit.