In focus: corporate governance in SMEs

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Corporate culture is under significant scrutiny.

From revelations of corruption in the world of football (FIFA) to revelations that the UBS chief was informed that bankers were rigging the Libor, there seems to be increasing scepticism with regards to the culture of morality within UK business.

Indeed, these are only the stories that broke this morning. Since January alone, the business and finance sector has been plagued with stories of false accounting (Tesco’s) tax evasion (HSBC) and irresponsible lending (Wonga).

Problems with corporate culture aren't just present within large companies. While the consequences may appear more severe for firms losing tens of millions a year, there are also problems within small companies, particularly when it comes the culture surrounding payments.

What is corporate culture?

The parameters of ‘corporate culture’ will differ significantly from organisation to organisation, but generally it refers to the systems of understanding within a company. This not only includes dress-codes and staff welfare, but the way in which the corporation goes about its day-to-day activities such as accountancy, legal work and how it deals with customers.

According to the Culture and Channelling corporate behaviour report (ACCA 2014) “An organisation’s culture should be one of its most important assets as it is heavily linked to decision making, productive capacity and its image.”

“Boards should stive to ensure that they understand their existing culture, have a clear vision of what should be, reflecting the nature and values of the organisation.”

Why is corporate culture so important?

Irrespective of business-size, the corporate culture of an organisation can have a significant impact upon brand identity – particularly in markets where there is a high level of competition. The culture of a corporation is often considered indicative of its unique values meaning that when an organisation’s corporate behaviour is challenged, it can have a significant impact on the level of consumer engagement with the brand.

The impact that weak corporate culture can have upon a brand can be seen when looking at Wonga’s financial performance within the past year. Following claims of false legal letters and irresponsible lending to customers who couldn’t pay back their loans, the brand saw a 31% drop in revenue between 2014/2015 with the amount of people looking for Wonga loans falling by 40%. This was a significant factor contributing to the brand’s £31m losses.

Furthermore, not engaging in responsible corporate behaviour can also have a significant impact on costs. Following a number of high-profile cases since the recession – particularly in the financial sector – regulators are making corporate culture a key issue with The Financial Stability Board now expecting supervisors across the globe to assess finance companies risk cultures.

Similarly, engaging in dubious corporate activity, can have serious consequences for a company’s long-term financial results. At the end of last year (November 2014) it emerged that Tesco had overstated profits by £263m causing the company to be investigated by both the Serious Fraud Office and the Financial Conduct Authority who could charge the company significant fines.

Since the discovery of the over-statements, the firm has had to replace key board members and has announced a £6.4bn loss in the 2014/2015 financial year – the largest in the history of supermarkets.

How is this being regulated?

While the stories of damaging of bad corporate behaviour have a detrimental impact on the perception of British business as a whole, the sheer volumne of misdemeanour has acted as a catalyst to overhaul the powers afforded to regulatory bodies.

In September 2014, the Financial Reporting Council updated its Corporate governance code and since then has seen a significant improvement in the transparency of reporting within the banking and finance sector. The number of companies signed up to the 2012 Stewardship Code has also increased although the FRC still believes that more needs to be done to help managers comply to their commitments.

FRC Chairman Sir Win Bischoff said: “The UK’s strong governance culture encourages companies to list in London and provides assurance for investors. Unfortuantley we do still see examples of governance failures in this area.”

“Changing culture is not an easy task. Our recent guideance on risk management highlighted the need for boards to think hard about how they can better assess whether culture practiced within the company is the same as that which they espouse.”

How do companies make sure they get it right?

Conquering corporate culture is dependent upon striking the balance between promoting the company’s goals and purposes and discouraging bad practice with those in more senior roles leading by example.

It is also important for companies to not only the culture they are looking to achieve, but also to have an in-depth understanding of the culture they have and to develop a plausible strategy to take action. This includes being honest and consistent about the company’s core values, track and monitor the making of decisions, being aware of corporate behaviour and its impact on customers and suppliers as well as investing in the education and hiring of staff members with strong reputation and industry knowledge.

According the to Financial Stability Board’s Guideance, “tone at the top” is one of the strongest influences on corporate behaviour. In a recent ACCA survey, 60% of those polled agreed that this was the most important influence in the work-place.

How does this impact on small business?

In general, regulation for small businesses comes under less scrutiny than larger businesses, however the consequences of gaining a bad reputation can be more significant.

Unlike larger organisations such as Tesco, companies that are newer or smaller in size have weaker brand loyalty meaning that if they get a bad reputation, consumers are more likely to take their custom elsewhere – particularly in instances where the service provided is slow, inefficient or the company continuously fails to deliver on their promises.

Similarly, the impacts of an organisation’s bad corporate attitude can have a detrimental impact that spreads throughout the corporate community. Companies that have a more casual approach to corporate culture in terms of organisation are often associated with inefficiencies such as delayed payments that can have detrimental impact on the whole supply chain. As a result, other companies are unlikely to engage in repeat business.