With governance and culture firmly in the regulatory spotlight, what is expected of today’s boards and how can it be achieved?
How can boards meet the regulators’ expectations, and discharge their regulatory obligation, by ensuring strong governance and embedding the right culture?
Pressure on the boards of regulated firms is mounting.
Whilst the UK regulators appreciate that their expectations of boards should be proportionate to the risk-profile and size of the firm (and any wider group), good governance remains paramount for all regulated firms – particularly given the ever-increasing focus on ESG.
In high level terms, from a regulatory standpoint, the desired outcome for an effective board is one that:
- Establishes a sustainable business model accompanied by a clear and consistent strategy;
- Articulates and oversees a clear and measurable statement of risk appetite against which major business options are actively assessed; and
- Meets its regulatory obligations, is open with the regulators and sets and maintains a culture that supports prudent management.
It is perhaps the final point that is proving most challenging given the rapid rate of regulatory change and the regulators’ increased focus on improving culture.
What is the board’s role in relation to culture and how can it meet expectations?
Boards are expected to articulate and maintain a culture of risk awareness and ethical behaviour for the entire organisation to follow in pursuit of its business goals and in-line with its over-arching purpose.
This calls for the right culture in the boardroom itself. The Chair must set the tone around the board table and foster open, inclusive discussion that challenges executives. This expectation aligns with the prescribed responsibility under the Senior Managers Regime for “leading the development of the firm’s culture by the governing body as a whole”.
Secondly, the culture that the board wishes to embed within the entire organisation needs to be maintained by executive management through leadership, governance processes and incentives. The board must then actively oversee the firm’s culture, with a focus on independent non-executives holding executives to account in this regard.
Senior management must take ownership over cascading the firm’s corporate purpose to the business, driving forward new initiatives, monitoring progress with the board’s cultural objectives/targets (e.g. in relation to D&I, incentives, conduct standards etc.) and reporting to the board regarding the same. In dual-regulated firms, the senior manager with the prescribed responsibility for “overseeing the adoption of the firm’s culture in the day-to-day management of the firm” will often take the lead on this (generally, the CEO).
In successful cultural change programmes, understanding the link between conduct and culture is key. In this regard, as part of the FCA’s 5 conduct questions initiative, the FCA asks: “How does the Board and ExCo (or appropriate senior management) gain oversight of the conduct of business within their organisation and, equally importantly, how does the Board or ExCo consider the conduct implications of the strategic decisions that they make?” The production and review of high-quality management information with appropriate conduct metrics will be critical for this purpose.
Governance and culture in the context of remote or hybrid working will be a focus in the year ahead.
We are seeing the FCA move away from its heavy focus on ‘the tone from the top’ and, instead, begin focussing on supervising how firms are embedding cultural awareness and stewardship at all levels of the organisation (and, in particular, middle management and frontline business staff). To do this, firms are encouraged to focus on developing ‘tone from above’ (which is the example set by immediate line managers) and ‘tone from within’ (described by the FCA as one’s individual mind-set, preferences, beliefs, habits, and pre-dispositions).
Mark Steward, the FCA’s Enforcement Director, summarised the importance of these concepts in a recent speech, stating: “‘Tone from the top’ is necessary for setting the parameters, the expectations and the examples; ‘tone from above’ reinforces the ‘tone from the top’ at local levels and ‘tone from within’ requires every person in the organisation to be personally accountable and engaged.”
Governance and culture in the context of remote or hybrid working will be a particular focus for FCA supervisors in the year ahead. In this regard, the FCA has made clear that it expects firms to be able to prove that appropriate governance and oversight and that “An appropriate culture can be put in place and maintained in a remote working environment”.
Setting, embedding and maintaining the right culture will be a key challenge for boards in 2022. Successful implementation of SMCR (including embedding the individual Conduct Rules) is likely to be a focal point for firms in meeting this challenge, and we can expect more from the FCA on this ever-evolving topic, as it further establishes itself as a culture regulator.
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This document provides a general summary and is for information/educational purposes only. It is not intended to be comprehensive, nor does it constitute legal advice. Specific legal advice should always be sought before taking or refraining from taking any action.