The UK Financial Reporting Council (the FRC) has just published a report entitled “Corporate Culture and the Role of Boards“. This is the result of a mammoth project kicked off in early 2015 by a round-table with FTSE100 chairmen.  Content for the report was produced by a survey of 44 chairmen and 33 company secretaries and interviews with 22 chief executives and 58 chairmen, all from FTSE350 companies.

The report covers many aspects of the actions and behaviours of a company in establishing, communicating and maintaining its culture and values.  Unsurprisingly, one of the topics covered is executive remuneration and incentives.

It is emphasised that, despite the mounting regulation governing transparency and disclosure, there has been an increasing lack of public confidence in the link between executive pay and company performance.  This “is something that should be of the utmost concern to boards and remuneration committees, which could do more to apply a cultural and values lens to the design of remuneration policies and individual remuneration decisions”.  The report refers to the paper published in February 2016 by ICSA, the governance institute, which identified flawed executive remuneration practices and misaligned incentives as one of the indicators of bad business culture and behaviour.  It makes it clear that a company is expected to ensure that its recruitment, performance appraisal and reward structures reflect and support not only its strategy and business model, but also its culture and values.  The setting of executive pay should be considered in the light of reputational risk to the company and the balance of financial and non-financial performance targets attached to remuneration should encourage corporate culture and values.

Investors are encouraged to consider their role in influencing a company’s behaviour and the way in which their requirements affect company incentives.  Shareholders should ask questions of the board to ensure that incentives are structured in a way that does not encourage undesirable behaviour and to establish how the culture and values of the company are supported by the remuneration structure.

Next year, the FRC is to review its Guidance on Board Effectiveness published in 2011 and it welcomes feedback on the report to culturecoalition@frc.org.uk.