31 October 2022 Open with your browser  

Indicators for establishing Corporate Culture

Written by: Mr. Stanley Cheng – Risk Consultant

The Stock Exchange of Hong Kong Limited (the "Exchange") issued a new Corporate Governance Code in December 2021, which has become effective on 1 January 2022. Section A.1.1 of the Code provides that - "The board should establish the issuer’s purpose, values and strategy, and satisfy itself that these and the issuer’s culture are aligned. All directors must act with integrity, lead by example, and promote the desired culture. Such culture should instil and continually reinforce across the organization values of acting lawfully, ethically and responsibly.”

Nevertheless, the Exchange has not yet provided further explanation on the requirements of corporate culture in the Code on Corporate Governance and as a result, many listed companies may not have a good grasp of how to establish a good corporate culture. This article will outline the indicators for establishing a corporate culture, citing the Exchange's Corporate Governance Guidelines for Boards and Directors, published in December 2021, and the Financial Stability Board's Guidance on Supervisory Interactions with Financial Institutions on Risk Culture: A Framework for Assessing Risk Culture, published in April 2014.

Corporate culture
Corporate culture is broadly defined as the attitudes, behaviors, principles, and values and purposes that drive action together. Corporate culture is also commonly referred to as “The way we do things around here” – Charles Handy, “Understanding Organizations”.

The following indicators are not intended to be exhaustive and do not represent a checklist or end point for monitoring corporate culture. Companies should put forward relevant indicators according to their business, vision and goals, local culture and management structure. These suggested indicators include:

1) Tone from the top
The board and senior management are the starting point for setting core corporate values and expectations, and their behavior must reflect the values they embrace. A key value is the expectation that employees will act with integrity and encourage reporting of observed non-compliant behavior both inside and outside the organization. As leaders, corporate directors have a responsibility to promote, monitor and evaluate the risks posed by corporate cultures and to consider whether these cultures will affect the safety and soundness of the business, and to make changes where necessary.

• Lead by example
The Board and senior management should have a clear understanding of the culture they are pursuing for the business, the behaviors and consequences of that culture, and need to regularly monitor and evaluate the risks associated with the corporate culture. The Board and senior management should share the same expectations of integrity and corporate governance as all other employees and should consistently foster a culture of open exchange of ideas, challenges and debates through behavior, attitudes and words, in order to promote healthy skepticism and better decision-making within their areas of responsibility.

• Evaluate the supported values
The Board and senior management should regularly and systematically assess whether the supported values have been actively promoted to all levels of management and employees with adequate communication to align the culture and values across the organization.

• Ensure a common understanding and awareness of risk
Organizations should have appropriate mechanisms in place to ensure that risk appetite, risk management strategy and business strategy are effectively aligned and incorporated into decision-making and operations at all appropriate levels of the organization. The board and senior management should systematically oversee how each level of management is able to promptly and effectively address issues raised by the board, supervisors and all control functions.

• Learn from past experience
Organizations should regularly assess and communicate recent key risk events and past experiences, including lessons learned from failed and successful plans or executions, and should be seen as strengthening the culture of risk exposure and developing real risks for the future.

2) Accountability
The culture of an organization should include an element of accountability, and employees at all levels should understand the core values of the organization and be aware that they are accountable for their actions. The board and senior management should develop relevant codes of conduct and written policies that communicate the core values of the organization and the expected behaviors associated with each value, as well as the consequences of non-compliance with expected behaviors, to the entire organization.

• Reporting process
Organizations should establish appropriate reporting procedures to allow employees to raise concerns about product defects or illegal acts in a timely manner, even if they do not report specific allegations of illegal acts, and to protect employees from retaliation for making reports.

• Clear consequences
Organizations should formulate internal policies, procedures and codes of conduct to regulate the behavior and conduct of employees, and illustrate with examples and past cases. At the same time, they should also clearly stipulate and explain the consequences of non-compliance, such as the potential impact for career advancement, depending on the severity of the situation or the potential for termination of the employee's contract.

3) Effective communication and challenge
A sound corporate culture promotes an open communication environment and encourages the active participation of employees by encouraging different viewpoints in the decision-making process.

• Effective communication
Between the board and management, and between management and employees, organizations should establish communication channels that allow them the opportunity for transparent and open dialogue, bring different perspectives to the decision-making process, and ensure that each employee's perspective is valued.

• Control functions
Control functions, such as risk management, internal audit, and compliance, have the same status as business lines and can participate in all risk-related decisions and activities. These functions should operate independently with appropriate direct access to the board and senior management, and should establish a process for regular reporting to the board.

4) Incentive measures
Appropriate incentives can encourage and help organizations maintain their ideal corporate culture and motivate employees to act in the overall interest of the business.

• Compensation and performance
Organizations should have an annual employee performance appraisal mechanism and should set goals for each employee to promote the core values and behaviors the business expects. Compensation and incentives (financial and non-financial) should be assessed against expected commitments and responsibilities.

• Talent development
Organizations should understand the key skills employees need and develop relevant training into development plans. Organizations should also provide appropriate training programs for all employees on a regular basis to develop their relevant capabilities.

There is no universal corporate culture in the world. The most important thing is that corporate culture is suitable for the operating environment of the organization and is consistent with its purpose, values, strategy and business model. After establishing its own corporate culture, the listed issuer should regularly check whether the culture is consistent with the current business strategy. At the same time, the listed issuer should also disclose information related to its own corporate culture as far as possible in the corporate governance report, so that all stakeholders in the market can clearly know whether the organization's operating strategy and culture are in line with expectations.

1. Chartered Institute of Internal Auditors, (March 2022). Cultivating a healthy culture: Why internal audit and boards must take corporate culture more seriously in a post-Covid world
2. Financial Stability Board, (April 2014). Guidance on Supervisory Interaction with Financial Institutions on Risk Culture: A Framework for Assessing Risk Culture
3. HKEX, (April 2021). Corporate Governance Guide for Boards and Directors

If there are any aspects which we may assist, please do not hesitate to contact:

Gloria So 
Partner, SW Hong Kong

gloria.so@shinewing.hk (Tel. 3583 8517)


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