Risk & Economy » Compliance » A ‘shorter, sharper corporate code’, but will it work?

A 'shorter, sharper corporate code', but will it work?

The FRC's new corporate code is a step in the right direction but could still be improved further, says Gillian Lees, Senior Director, Governance & Risk Research, Association of International Certified Professional Accountants (AICPA)

The UK’s reputation as a stable and fair place to do business is undoubtedly aided by the country’s strong corporate governance environment. As the business environment evolves, so too does its governance, meaning that there is always more to do.

While the UK has successfully retained its place as Europe’s number one destination for foreign direct investment (FDI) in the latest EY Attractiveness Survey, there are signs of slippage. The country lost ground, with its market share of all FDI projects secured in Europe falling from 19% to 18%, according to EY.

This suggests that the risks posed by Brexit, along with recent high-profile business failures such as Carillion, have the potential to undermine the UK’s position as a top business destination. At this pivotal time for the UK, trust and integrity are even more important because the UK will need to hold fast to its reputation as a good place to do business.

It is therefore encouraging that the Financial Reporting Council’s (FRC) Corporate Governance Code has been updated. The new Code brings us into the 21st century, addressing trust in business by requiring companies to ensure they have the right company culture and diversity of board experience and skills.

The updated Code is a positive step forward, but there is room for improvement. One area underplayed is the importance of having a sound understanding of the business model, which is instrumental in creating long-term value and earning trust.

Business model success

Despite the necessity of having a good understanding of the business model, our report, Purpose Beyond Profit: The Value of Value- Board Level Insights, found that only 24% of business executives have confidence that they are capturing the right information on the business model, including what, how and by whom value is created.

Business model understanding is critical to decision-making and risk management, and can help avoid the serious strategic mis-steps that lead to corporate failures. As the updated Code is embedded into the business environment, we should not lose sight of the need to apply business model understanding to risks and opportunities.

To help with this, the Association of International Certified Professional Accountants (the Association) recently published the CGMA Business Model Framework to help boards, senior executives and staff quickly and easily gain an understanding of their organisation’s business model.

The primary benefits of this revolve around the organisation’s ability to define, create, deliver and capture value for its key stakeholders. It is supported by a series of guides, including Managing the Trust P&L – a toolkit for boards, which explains how companies can use the framework to measure and manage trust.

By linking value to trust in this way, companies can gain a deeper understanding of what they most need to be trusted for and by whom so that they can direct their efforts and resources effectively to build a trusted reputation over the long term.

Look to all stakeholders

In a business environment where value is increasingly derived from intangible assets such as brand, customer experience, relationships and intellectual capital, it is clearly important to engage with the workforce as a key stakeholder group to identify issues affecting the business and its employees.

The FRC’s new Corporate Governance Code rightly places emphasis on the workforce, but it is also crucial to consider the needs of other stakeholders, such as customers and suppliers. As the CGMA Business Model Framework emphasises, companies must identify and prioritise the needs of all their key stakeholders, including society. If too much emphasis is placed on one area, there is a risk that opportunities or challenges will be missed elsewhere, for example, the failure of a key supplier or customer.

Under the Code, companies are expected to either appoint a worker to the board, nominate an executive director responsible for representing staff or create a separate employee advisory council. However, there is a danger that these requirements are too prescriptive and may simply be implemented as a tick-box exercise without any benefits.

To prevent this from happening, companies should go beyond the requirements of the Code and consider how best they can engage with the workforce to build a high-performing and ethical culture. This approach should be aligned to the key value drivers of the organisation – in other words, the business model – so that companies can gain a deep understanding of what employees need in order to do their jobs better.

Employees are also a valuable source of feedback on a range of issues, such as customer trends and problems, so it is also essential for companies to ensure that they have both whistle-blowing arrangements in place as recommended by the Code, but also other less formal communications mechanisms to facilitate a healthy flow of information around the business.

Businesses should therefore also take a broader view through initiatives such as employee satisfaction surveys to understand the needs of the workforce. They should seek to identify suitable Key Performance Indicators (KPIs) to help them focus and act on the most important employee-related issues impacting on the overall success of the business.

Despite some limitations, the new Corporate Governance Code is shorter and sharper and should go a long way towards improving trust in business. It will help to create an environment in which strong, ethical and successful businesses can flourish while reducing the risk of serious governance failures, such as the Carillion crisis, taking place in the future.

That said, there is room for improvement. In an age of disruption, it is crucial that organisations understand their business models and how they are evolving to enable them to create value for the long term – and for the benefit of all their key stakeholders.

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