Conference theme: Purpose and Values- How Does It Drive

Transcription

1 Sir Winfried Bischoff Chairman, Financial Reporting Council Launch of SIAS Corporate Governance Week Conference theme: Purpose and Values- How Does It Drive Governance? Mandarin Orchard Singapore 18th September am Good Morning. I am delighted to be here today to launch the 8 th SIAS Corporate Governance Week. Singapore s emphasis on governance in its widest form are aspects which I have long admired. I lived and worked in Hong Kong for some 12 years in the seventies and early eighties and even then Singapore stood out in these areas. THE IMPORTANCE OF GOVERNANCE Purpose and values, sometimes summarised and shortened to culture, have become concepts much talked about in the last five years, yet their very existence is questioned in the media and in certain countries by politicians. The debate goes right to the heart of the limited liability company the privilege of limited liability in fact - which lies at the core of our market economies

2 We in the United Kingdom, you in Singapore, and other countries have increasingly and correctly focussed on governance. It is the keystone of successful business and, coupled with a healthy corporate culture, creates a framework that supports the values that drive long-term investment. THE COMPLY OR EXPLAIN PRINCIPLE Since the creation of the UK s Corporate Governance Code, which is now in its 25 th year, the quality of corporate governance has been greatly enhanced and is now rightly globally renowned, benefiting UK society in the long-term through jobs, growth and prosperity. Interestingly our model and its comply or explain principle has been copied, or more appropriately perhaps, accepted in Asia, Japan for example, and Singapore. It allows companies to respond effectively to evolving market circumstances, because it offers flexibility in how they apply the principle to their own particular situations and business models. Hard rules don t cope easily with the variety of global or indeed local business and are often more difficult to change or unravel than to create. In addition to the comply or explain approach, the unitary board and strong shareholder rights are prerequisites of a system of governance which allows initiatives and entrepreneurialism to flourish while being mindful of societal concerns. But more can be done. Compliance with the Code s provisions in the UK is high. For 2016, full compliance with the Code by FTSE 350 companies (the 350 largest companies by market capitalisation) was a new high of 62% with the FTSE100 being at 72%. While the non-complier companies generally provided good explanations our monitoring shows that some explanations are of poor quality. We have called on shareholders, and it is really in their interest, as much as in our duty, to challenge companies where they do not believe that explanations given are sufficiently persuasive

3 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 people, particularly the leaders within a business, can do that. This leads me to the importance of establishing a healthy corporate culture. HEALTHY CORPORATE CULTURE Culture in business is a key ingredient in delivering long-term sustainable performance. When there is a healthy culture, the systems, the procedures, and the overall functioning and mutual support of an organisation exist in harmony. This brings enhanced integrity, confidence, long-term success and ultimately trust. A poor culture is in my view a significant business risk in itself. For this reason we at the FRC led a coalition of parties that produced a report on Corporate Culture and the Role of Boards in Our research found that in order to establish an appropriate culture, a board must define the purpose and values of the company, and what type of behaviours it wishes to promote in order to deliver its business strategy. It involves establishing a company specific corporate 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 a healthy governance under pressure; how to decide whether different parts of the business should operate different cultures, and how actively and transparently to communicate values, purpose and behaviours in order for shareholders to - 3 -

4 engage in constructive discussion, and for society to acknowledge the benefits generated by responsible companies. DIVERSITY AND SUCCESSION PLANNING Once a good culture is in place, it does not stop there. The ongoing success of the company is rooted in diversity and succession planning. A Board must determine the balance of skills, background and experience required by the senior executives and non-executive directors. Boards as a whole need thoughtfully to consider also the links between diversity, strategy and business values. Diversity avoids the danger of group think. Culture and values, both by their very nature, encourage long-term thinking. THINKING LONG-TERM By contrast budgets, quarterly reporting and financial plans, though entirely necessary, are essentially short-term. In some western countries, it is the lack of planning for the long-term that is thought to be a serious short-coming. Asia, in my view, is better at focusing on the longterm. That may have something to do with the nature of shareholdings in your companies which are often sizeable, concentrated and frequently family influenced. Families, in my experience, generally advocate a more long-term strategy. When speaking about the long-term I can do no better than to recommend to all of you the article by Professor Joe Bower and Lynn Paine in the Harvard Business Review of May-June this year. They argue cogently and refreshingly that in managing for the long term it is the - 4 -

5 company s health and not shareholders wealth that must be management s priority. The assumption that boards and management are the agents of shareholders is wrong, they argue. Rather their duty legally is to the company as a whole. Of course shareholders are an integral part of the company and its purpose and values, but only one part. Employees, customers, suppliers, the community and even the environment also play a part and have a stake in the company. As you might imagine this highly influential thought piece has led to debate and controversy in the United States, not least amongst the new class of activist shareholders! THE ROLE OF THE BOARD IN CULTURE One of the observations in our Culture Report was the role of the Board in establishing, not only the right behaviours but also the right incentives and disincentives. In doing so, the Board must be credible in the eyes of shareholders but also of employees. Employees are expected to display the right behaviour, and the Board should similarly set the standards for the senior management and then observe their behaviour and critique it if necessary. That in turn means careful thought has to be given to how culture is measured and reported. Of course it is true that corporate culture is intangible. But it can be measured through conduct and outcomes, and much information is already available to companies to do so. Health and safety reports, environmental assessments, customer satisfaction data, employee turnover, diversity initiatives, exit interviews, whistleblower incidents and actions, conduct selfassessments and engagement surveys are all good examples. It is what you choose to measure and how you analyse and interpret it that is important. At the same time culture is company specific and there is no one size fits-all. The indicators selected for assessment should therefore, be tailored to each company s circumstances

6 CORPORATE GOVERNANCE AND THE PUBLIC The UK remains in a good position globally, with high levels of trust and confidence in companies among investors, but worryingly lower levels among the public. Corporate governance must be such as to establish and maintain that respect and trust also with the public. I note from the latest SGTI rankings that Singapore is on the right track. Standards of corporate governance among Singapore-listed companies are improving in a continuous upward curve. It is now acknowledged that business both here and in the UK should and can deliver fair outcomes across all of society as well as to investors. In an age of increasingly global comparisons, five chairmen of European corporate governance bodies in France, Germany, Italy, The Netherlands and United Kingdom decided, on a wholly private sector rather than government or European Union directed basis, informally to set up a Chairmen Corporate Governance Forum. Its purpose is to compare, learn from best practice and move towards more common standards, while being aware of the difference in these five countries of legal and historic governance requirements. We meet every eight months or so and will continue to do so even after Brexit. I mention this initiative since it may have application for Asia, and you in Singapore may find it deserves consideration. In doing so, I want to stress, however, that there are two desirable attributes. One, the Forum should be relatively small; two, it should be the result of a private sector initiative. At a time when geopolitics and world economics look less certain, this kind of co-operation and convergence becomes ever more important

7 CONCLUSION I have in this talk tried to show how purpose and values drives governance. I would go further to the slightly amended exam question, Do purpose and values drive governance? My answer is an emphatic YES. Thank you for listening