Directors must take corporate culture more seriously following recent company failures, according to the head of the UK audit regulator.
“A series of company collapses linked to unhealthy cultures — whether that be BHS, Carillion, Greensill or Patisserie Valerie — have demonstrated why cultivating a healthy culture, underpinned by the right tone from the top, is fundamental to business success,” said Sir Jon Thompson, chief executive of the Financial Reporting Council.
A report by MPs in 2018 found there had been a “rotten corporate culture” at Carillion. The report accused Carillion’s directors of “recklessness, hubris and greed” by prioritising their own financial rewards over the interests of employees, pensioners or the people who relied on the company for services such as the delivery of school meals.
Auditors have warned of a “post-Covid organisational culture crisis” at UK companies and called on regulators to impose stricter rules on directors to avoid a repeat of recent corporate scandals.
Almost two-thirds of auditors believe the FRC should amend the UK’s corporate governance code to give directors greater responsibility for promoting, monitoring and assessing their corporate culture, according to a poll by the Chartered Institute of Internal Auditors.
More than half of internal auditors, who are employed by companies to assess their risk management and governance, said they had never been asked by their board or audit committee to report on corporate culture or equality initiatives.
The growth of remote and hybrid working during the pandemic had increased the focus on corporate culture as a risk factor for companies.
Hybrid working had created a “culture crisis” for companies by eroding staff loyalty and by making it harder to retain talented employees and easier for individuals to conceal fraud, the CIIA said last year. Companies have been locked in a “war for talent” as a tight labour market has allowed employees to earn significant pay rises by switching jobs.
Auditors themselves have also faced scrutiny over their role in recent corporate collapses. The external auditors of retailer BHS, outsourcer Carillion, lender Greensill Capital and café chain Patisserie Valerie have all either been fined or placed under investigation since the companies collapsed.
The audit industry has campaigned for proposed corporate governance reforms to hand company directors more responsibility for overseeing internal controls at their companies.
“Company directors must start taking corporate culture more seriously,” said Thompson, whose organisation oversees corporate reporting by the UK’s largest companies and the audits of their accounts.
However, he stopped short of agreeing that the corporate governance code for premium-listed companies should be strengthened. The code already “makes clear the board’s responsibility to promote, monitor, and assess the culture”, he said.
Human resources and risks related to recruiting and retaining staff were the threats with the biggest potential effect on companies’ culture, according to the survey of more than 100 senior internal audit executives.
Inclusion and equality was identified as the second-biggest risk, while health and safety and staff wellbeing were third.
“Recent culture-related scandals have unfortunately shone a spotlight on the impacts associated with an unhealthy organisational culture — including catastrophic damage to reputation, public trust, and value,” said John Wood, chief executive of the CIIA, which has about 10,000 members in private, public and voluntary sectors in the UK and Ireland.
The survey’s findings, due to be published on Monday, “demonstrate those at the top do not appear to be taking the risks associated with corporate culture seriously”, said Wood.