Least likely to read in an Annual Report: “We failed to comply fully with Principle B of the FRC Code, but we’re working on it”.

Principle B of the FRC Corporate Governance Code 2018 (the Code) states:

The board should establish the company’s purpose, values and strategy, and satisfy itself that these and its culture are aligned. All directors must act with integrity, lead by example and  promote the desired culture.

Principle B https://www.frc.org.uk/getattachment/88bd8c45-50ea-4841-95b0-d2f4f48069a2/2018-UK-Corporate-Governance-Code-FINAL.pdf

The word purpose – an innocent noun, which in my view has endured more than its fair share of abuse – is explained in the guidance to the Code:

A company’s purpose is the reason for which it exists. The board
is responsible for setting and reconfirming the company’s purpose.
A well-defined purpose will help companies to articulate their
business model, and develop their strategy, operating practices
and approach to risk. Companies with a clear purpose often find
it easier to engage with their workforce, customers and the wider
public.

Section 1.12 https://www.frc.org.uk/getattachment/61232f60-a338-471b-ba5a-bfed25219147/2018-Guidance-on-Board-Effectiveness-FINAL.PDF

For example GSK’s Annual Report 2019 addresses Principle B at length in a section of its Annual Report with the following opening paragraph:

Our purpose, values and culture
Our purpose is to improve the quality of human life by helping
people do more, feel better and live longer. This is underpinned
by our values of patient focus, integrity, respect and transparency.
Our purpose and values have always been a source of great
pride for the Board, management and our employees. They help
attract and retain talented people who, as individuals, want to be
part of a Group that contributes meaningfully to society. They
also drive the quality of our relationships with each other, our
patients, consumers and other key stakeholders and ultimately
should enable swifter progress in getting new medicines,
vaccines and consumer healthcare products to our patients
and consumers around the world. Our culture set by the Board
is intended to deliver high standards of business conduct and
promote the long-term success of the company.

https://www.gsk.com/media/5899/corporate-governance.pdf

While I suspect GSK’s reporting on these matters is broadly in line with others in the FTSE100, I wonder to what extent they all focus on the verbs in Principle B in their self evaluation?:

  • establish
  • satisfy (itself)
  • (are) aligned [passive voice!]
  • act
  • lead
  • promote

GSK has clearly established purpose, values and strategy statements as others have done and has set out the process to align these with its culture. But surely, for GSK and others, the actual aligning, as opposed to the process, must be a constant work in progress? That’s a complex task.

I can see how the Board can satisfy itself that the processes are aligned but how does it satisfy itself that its purpose/values/strategy ARE aligned with behaviour?

The problem for GSK and others is illustrated by looking at a comparison between its Corporate Governance Report which starts on Page 75 and it’s introduction page at the start of its annual report:

Our purpose
To improve the quality of human life by helping people do more, feel better, live longer.
Our goal
To become one of the world’s most innovative, best-performing and trusted healthcare companies.
Our strategy
To bring differentiated, high-quality and needed healthcare products
to as many people as possible, with our three global businesses, scientific
and technical know-how and talented people.
Our long-term priorities
Our priorities are underpinned by our ambition to build a more performance focused culture, aligned to our values and expectations.
Innovation
We invest in scientific and technical excellence to develop and launch
a pipeline of new products that meet the needs of patients, payers
and consumers.
Performance
We deliver growth-based performance by investing effectively in our
business, developing our people and executing competitively.
Trust
We are a responsible company and commit to use our science and
technology to address health needs, make our products affordable
and available and to be a modern employer.
Our values and expectations
Our values – patient focus, transparency, respect and integrity.
Our expectations – courage, accountability, development and teamwork.

Introduction page https://www.gsk.com/media/5894/annual-report.pdf

What’s the difference between purpose, goal and long-term priorities? Where in the FRC Code is the word “goal” used or defined? What if the goal conflicts with the purpose, say in terms of “best performing”? Does best-performing mean financially or in terms of improving quality of life or both?

The Code is clear what it means by “long-term” but GSK defines long-term as involving a “performance focused culture”. What does it mean by performance? Financial? Quality of life? Both?

My point is not to question GSK’s reporting – which I use only as a FTSE100 example and which I suspect reports similarly to others on this matter nor is it to question its efforts to reflect its compliance with the Code in its Annual Report – no, my point is to ask how is it possible for any company to state, hand on heart, that it complies with the the first sentence in this Principle?

As for for the second sentence, how is it possible to evaluate truthfully whether or not “all directors” acted “with integrity” led “by example” and  promoted “the desired culture”? How?

Isn’t the real value of the Code its use as a framework for candid private discussion to answer these important questions during the matters arising phase because they matter to the long-term success of the company and to society?

Ciarán Fenton

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