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A crack down on cultural appropriateness

The Financial Conduct Authority, the Financial Reporting Council  and others are making promotion and maintenance of a healthy workplace culture a franchise issue.

A happy workforce is a productive workforce“, so goes the old adage. To that end, many HR policies and procedures are designed to ensure that employees feel respected, supported and safe at work. Perhaps more than any other feature of the workplace, they create its “culture”. Yet recent trends suggest that an organisation’s culture can impact far more than endorphins and output.

Culture clubbing

Consider the Financial Conduct Authority (“FCA“), where a clear articulation of non-financial (mis)conduct is informing its regulatory philosophy and approach to investigation and enforcement. The FCA is increasingly treating poor workplace culture as responsible for financial misconduct. “Culture in financial services is widely accepted as a key root of the major conduct failings that have occurred within the industry in recent years“, according to the FCA. Put another way, financial misconduct is a symptom, culture the cause.

Indeed, the FCA announced in August 2018 that it was investigating 61 cases relating to governance or culture, up from 15 in April 2017. It also commissioned a collection of 28 essays from academics, industry leaders and regulators entitled Transforming Culture in Financial Services. Topics range from “A Duty or a Culture of Care?” to “The permafrost problem: from bad apples to excellent sheep“. Clearly mere compliance with the technical requirements of the FCA Handbook is no longer enough.

Further, the FCA has taken aim at a wide range of cultural failings. Last week, it announced a full-scale investigation into the culture at Royal Bank of Canada, after reports emerged that a number of employees alleged they were unfairly dismissed for whistleblowing. This comes off the back of a successful Employment Tribunal claim for whistleblowing recently brought by a former employee (currently subject to appeal). But the FCA has also been busy handling a 220-percent increase in complaints of bullying, harassment, homophobia  amongst others. “Misconduct is misconduct” Megan Butler, the FCA’s Director of Supervision (Investment and Wholesale), told the Parliamentary Women and Equalities Committee in June 2018.

Ms Butler went on to describe sexual harassment as “misconduct which falls within the scope of [the FCA’s] regulatory framework“; and sanctions for discrimination, harassment or sexual misconduct as relevant to the “fit and proper” assessment under the Senior Managers and Certification Regime (currently in force for banks, building societies, insurers and PRA-designated investment firms and due to be rolled out to all FCA-only authorised firms by 9 December 2019). Her colleague, Christopher Woolard, Executive Director of Strategy and Competition, agrees: non-financial misconduct is “on the same footing” as traditional financial misconduct. The FCA is making clear that approvals and authorisations may just as likely be withdrawn for, say, sexual harassment as for market abuse or insider dealing.  HR, Risk, Compliance and Legal all now have a seat at the table in determining whether employee behaviour in regulated firms goes beyond a pure HR or employment-related action or sanction, into a much wider regulatory consequence going to the fitness and propriety of its senior managers, its wider employee population and potentially the organisation itself.

Intangible assets

In many ways, the FCA’s approach is part of a broader trend of subjecting organisations’ “intangible” qualities to heightened scrutiny. For instance, the Financial Reporting Council’s new Corporate Governance Code, which came into effect on 1 January 2019, insists that boards of listed companies not only assess and monitor culture, but also establish their company’s “purpose” and ensure that it aligns with their values, strategy and culture. Similarly, gender and – potentially – ethnicity pay gap reporting seek to expose the slippery spheres of glass ceilings and unconscious bias.

Institutional investors have also been getting in on the act. This week, State Street Global Advisors called on the boards of 1,100 companies to review their cultures and to explain their alignment with strategy. This follows Blackrock and Vanguard, both of which have in the last 18 months written to companies demanding an explanation of, among other things, their social purpose.

Culture Vultures

The first takeaway from the above is the importance of having HR policies and procedures which actually bite. Increasingly, an organisation’s culture will be expected to be more than a theoretical bullet-pointed dream. The second is that, far from being solely the domain of HR, compliance with policies and procedures is becoming ever more a franchise issue. Top brass need not only to be intimately acquainted with what an organisation stands for, but should, moreover, strive to be living embodiments of it.

Which leads to perhaps the most important point. Boards and senior managers need to treat “culture”, “purpose” and other seemingly nebulous concepts with the same seriousness and passion as they do profit. Gone are the days where the bottom line is everything.  “If your culture doesn’t like geeks, you are in real trouble“, Bill Gates once said. But if your culture doesn’t like culture itself, things could be far worse.

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