Opinion

How to improve corporate governance culture

4 min read

23 July 2014

The professional body for internal auditors has recently issued a report on corporate culture. Culture is at the heart of good governance.

Boards need to set the tone from the top, have a clear statement of corporate values and remain true to these values. Unsurprisingly, internal auditors recognise that they have an important role to play. More revealingly, their institute recognises that new conversations need to be forged to allow this to happen in the most positive manner.

It is perhaps a regret that in its latest proposed revisions to the UK Corporate Governance Code the Financial Reporting Council has not taken the opportunity to further highlight corporate culture and ethics. However, there is a growing realisation that governance is all about culture, ensuring that an organisation knows where it is heading, why and how it will achieve its goal. Internal audit is one of the vital feedback loops to ensure that an organisation is delivering to its mission.

At the heart of good corporate governance lies the vital relationship between culture, strategy and performance. The only way in which a company is able to ensure that it is delivering the right type of business growth is through performance analysis and appraisal.

The Chartered Institute of Internal Auditors presents a challenge both to its membership and to company chairmen: to create an improved dialogue between the internal audit function and the board on the significance of culture within an organisation. The Institute wants to see a change to the manner in which internal audit is carried out with a greater focus on cultural indicators in order to better understand the qualities of an organisation, the behavioural habits espoused by an organisation and, ultimately, improve the manner in which these are identified and measured.

Companies need to get better at both understanding non-financial performance and being held to account in respect thereof and live more visibly by their stated values. The Chartered Institute of Internal Auditors recognises that new skills need to be developed in order to focus on more qualitative methods of review.

Good governance policies must:

  • set clear direction for an organisation;
  • display the vibrancy of a company’s governance;
  • be proportionate and appropriate;
  • be compatible with the business; and
  • be regularly monitored.

If the banking and media sectors are put to one side, the vast majority of UK companies are operated and managed in a good way. However, companies do need to get better and pointing out to shareholders and other stakeholders the manner in which values are reflected into the business. Companies need to become more open to all types of review and assessment, whether by peers, internally or by outside specialists. Understanding the motivations for such self-analysis is vital.

A company’s internal audit function has an unrivalled ability to work with the chairman and other persons focussed on organisational effectiveness to identify, understand and express how effectively a company lives up to its culture and ethical position and then measures itself against such criteria.

Edward Craft is a partner at Wedlake Bell LLP