News March 2016 Speech by Sir Win Bischoff, Chairman, FRC, at Financial Times Banking Standards Conference, Time for

Speech by Sir Win Bischoff, Chairman, FRC, at Financial Times Banking Standards Conference, Time for change… spotlight on behaviour, competence and culture.

10 March 2016

On 08 March, Sir Win Bischoff, Chairman, Financial Reporting Council, addressed the audience at the Financial Times Banking Standards Conference on improving corporate behaviour. The plain text version of Sir Win Bischoff's speech can be found below. Read or download the formatted version (PDF).

Sir Winfried Bischoff
Financial Reporting Council
Financial Times Banking Standards Conference
Sheraton, Park Lane W1J 7BX
08 March 2016
Session: 14:45-14:55

Good afternoon, I am delighted to be here to speak on the importance of improving corporate behaviour. In a world where corporate scandals can appear common place, companies with a strong cultural sense will stand out. Embedding a healthy corporate culture, through improving behaviour, is therefore vital to the success of any business.  Regarding the subject of this conference, most of you will feel that the understanding and nurturing of culture is important in banking. So it is but not only in banking. The levels of distrust of institutions and the expectations of their continuing bad behaviour have reached epic proportions.   This is why we at the Financial Reporting Council are highlighting good corporate practice through the establishment, under our leadership of what we call the Culture Coalition, a group of organisations specifically focused on culture, on which I will comment a little later. 

Let me start by giving you some background on the work of the FRC. Our mission is to promote high quality corporate governance and reporting in the public interest. Trustworthy information and trustworthy behaviour support the needs of investors and generate confidence in boards and are important elements in demonstrating good culture.

In turn, high standards of corporate governance and reporting are important for the fair and effective functioning of the capital markets. That benefits investors, companies and the wider public interest. Apart from maintaining codes and standards for corporate governance, investor engagement and corporate reporting, the FRC is also responsible for audit and other forms of assurance, and for actuarial information. We monitor corporate reporting and auditing standards. We oversee the accountancy and actuarial professional bodies in their regulatory roles; and we operate independent disciplinary schemes for accountants and actuaries. Our Financial Reporting Lab helps companies and investors collaborate on improvements to reporting.
Ultimately it is for boards, preparers, auditors and other professionals to implement the standards we set; our role is to support them as far as possible by reinforcing best practice and providing a regulatory framework that is seen as realistic, helpful and proportionate. This is why over the next three years, we intend to work with our stakeholders to encourage improvement rather than to introduce new requirements that add to the regulatory burden.  This is not deregulation, but giving the regulated the opportunity to make existing regulation work. A three year time out, so to say.  
As part of this, we want to see behaviour improve through a healthy corporate culture. This is high on the FRC’s agenda and is also very important to me. There have been many examples over the past decade of what a good company culture can do and what a poor culture can lead to. How could for instance, Volkswagen, one of the most reputable car makers in the world, admired for its technical excellence, its long term approach and its global and iconic nature, apparently engage in behaviour, which at the very least, questions its culture. Volkswagen has started to take steps to rectify what occurred but enormous damage has been done in the eyes of its customers, its staff and its shareholders- never mind the public at large.
Rather closer to home though, we have seen with LIBOR and Foreign Exchange how failings in corporate culture can lead to consequences, not just of a financial nature.  When there is a healthy culture, the systems, the procedures, and the overall functioning and mutual support of an organisation exist in harmony. When this is not the case, the potential for disaster is just around the corner.
For the UK economy to prosper, business needs to have a corporate culture which creates trust in business, reduces company failings and serves the needs of wider society.
Codes put forward principles for best practice that make bad behaviour less likely to occur; and public reporting can make it harder to conceal such behaviour. But, by itself, a code does not prevent inappropriate behaviour, strategies or decisions. Only the people, particularly the leaders within a business, can do that.
In order to establish an appropriate culture, a board must define the purposes of the company and what type of behaviours it wishes to promote in order to deliver its business strategy. This suggests, and I strongly stress, that culture is particular to any company, sui generis therefore and not general.  It involves establishing your own culture, asking questions and making choices: how to align values and purpose to the company’s strategy; how to integrate new leaders into that culture, particularly at times of merger or acquisition; how to maintain culture under pressure; how to decide whether different parts of the business should operate different cultures, and how actively to communicate culture in order for shareholders to engage in constructive discussion. To do all this, the board must ensure sufficient internal audit arrangements are in place and pay attention to their findings. In that context, we at the FRC expect external auditors to employ a good dose of professional scepticism rather than accept matters at face value. So should internal auditors.
This leads me back to the work of our Culture Coalition which I mentioned at the outset. It is a collaborative effort with the IIA (Chartered Institute of Internal Auditors), CIPD (Chartered Institute of Personnel and Development), CIMA (Chartered Institute of Management Accountants), IBE (Institute of Business Ethics) and City Values Forum. It proposes “to assess how effective boards are at establishing company culture and practices, and embedding good corporate behaviour, and to consider whether there is a need for promoting good practice”. We have had a very encouraging response from many individuals and organisations, including within the banking sector. Our aim is to deliver practical, market-led observations, not, I hasten to add, a Code, to help boards and companies establish and embed their desired culture.
Through our project worksteams we have gained useful insight into, for example, the extent to which you can and should measure indicators of culture and what sorts of indicators are useful. What is clear is that there is no one–size–fits-all and that the indicators selected for assessment should be tailored to each company’s circumstances.
The roles of the board as against executive management will also be highlighted. The board’s role is to influence and identify a desired culture and to assess and monitor it. Management’s role is to drive and embed that desired culture throughout the organisation. The two are harmonised when the purpose and values of the company are linked to its strategy and business model.
To conclude, values, behaviours and corporate culture are central to the way an organisation achieves its objectives. When these are integrated into its business model, good and sometimes great things will follow, financially as well as reputationally.
Trust in banking we know is at an all-time low, but there is no reason to think that what works for the non- financial sector should not work for the financial sector itself.
Thank you for listening.