The Purposeful Board

Customers, investors and regulators increasingly demand that firms act with ethics and social purpose at the forefront of their business model. The FCA has said financial services is at a “tipping point” in a journey to healthy, purposeful, safe, diverse and inclusive cultures that create healthy returns for shareholders. Whilst there are undoubtedly potential challenges or barriers to achieving this ultimate goal, Boards are used to balancing multiple stakeholders’ concerns. But it does beg the question: what does a purposeful company look like in practice and how should purposeful leadership and oversight be exercised at Board level?

Prioritising ‘purpose’

The FCA has emphasised the importance of developing a “purposeful culture”, intended to drive better outcomes for customers and markets, and healthy and sustainable returns for shareholders. They take the view that a firm’s purposeful approach to leadership is central to the development of good conduct and culture, with both conduct and culture depending on a firm’s intentions and ethics. In this context, “purpose” is what a firm and its employees are trying to achieve; not only what constitutes success but also an explanation of how individual conduct will facilitate that success.

The regulatory telescope is clearly focused on the influence exerted by the Board. Boards are expected to have the right composition and be able to clearly articulate, challenge and lead by example when it comes to the ethics and culture of the firm. To do this effectively Boards need to set a purposeful strategy, ensure this is consistently implemented through appropriate governance structures, and use incisive and proportionate measures to maintain oversight of ethics and culture.

Start off with strategy

It is clearly for each individual firm to determine the specifics of their strategy: the regulators will not impose strict requirements around the goals pursued by a business, and it would be inappropriate for them to do so. That said, it is clear that regulators view financial services as playing a unique and essential role in supporting the economy and society and there is an increasingly explicit expectation that social purpose should be central to a firm’s business strategy and approach.

The FCA Discussion Paper published in March 2020 makes clear that the FCA looks favourably on firms who define a business strategy that is informed by, or allied to, a healthy, purposeful culture. Meanwhile, reflecting on how firms have responded to COVID-19 in his speech “The business of social purpose”, Jonathan Davidson said “Purpose has provided firms with a compass to navigate the unchartered waters of this crisis”. Clearly looking to firms to continue this approach in ‘business as usual’ circumstances, Boards should take this cue to consider how their organisation’s core principles and values are aligned to, and inform, their business strategy.

In this respect, the Board has a key role to play in catalysing the cultural expectations to be implemented, clearly defining and articulating the firm’s purpose and values and channelling this into an outcomes-focused strategy prioritising ethical conduct. Once satisfied that the firm’s purpose and strategy are appropriately defined and aligned, it is critical for both to be cascaded through the business via appropriate communication channels and training.

The challenge for Boards is:

• Can you articulate your culture of risk awareness and ethical behaviour in the context of your business goals?
• Is your business strategy supported by clear and measurable statements of risk appetite?
• Can you pinpoint how your purpose aligns with your company values, business strategy and culture?

Does governance go the distance?

Governance is not just about processes and decision-making; where it is successful it is aligned to the business model and values which your firm has set for itself. Your firm’s agreed strategy needs to be embedded and evidenced within governance forums, bringing ethical purpose to the fore with clear delegation from the Board. It is also important for Boards and Senior Managers to reflect and consider how their own approach and governance processes embed the purpose and values which have been agreed and demonstrate principled and effective leadership.

The key is to implement a clear line of decision making, documenting the cascade of authority through levels of governance. Decisions made within the business should be tied back to the strategy set by the Board, and there should be clear and documented ‘escalation triggers’ to the Board, which are defined by reference to outcomes or consequences that reflect ethical as well as quantitative goals.

To support this, the Board needs to be satisfied that outcomes can be tested through the firm’s systems and processes, using appropriate indicators which help measure the successful implementation of ‘purpose’. Boards should consider what oversight infrastructure exists with the firm and how appropriate ethical performance indicators could be integrated within, for example:

• product design processes;
• approval committees; and
• recruitment and promotion.

Effective oversight

A firm’s purpose should resonate through the Board’s ongoing oversight and governance mechanisms, and feed into key decision-making processes and checks and balances based on the core cultural values identified. Boards cannot just set a strategy and watch it happen; they need to seek assurance as to (and have the correct management information to evaluate) the operation of the firm’s business through the spectrum of ethical principles and values which underpin strategy, risk appetite and conduct.

Boards need to understand, and seek reassurance about, both the “tone from the top” and the “echo from the bottom”. Information gathered should then inform decision making and set markers against which strategy can be sustainably articulated and tested. This impacts a wide range of potential ethical ‘touchpoints’ through the business, from product development and marketing, customer complaints handling, workplace culture, employee compensation and whistleblowing procedures.

Boards need to use smart oversight mechanisms to ‘take the temperature’ and delve deeper into culture as it feeds through an organisation. This may necessitate the use of tailored metrics which adequately pinpoint the performance criteria a Board is looking to assess. The Banking Standards Board (BSB) has identified shared purpose as one of the nine characteristics which are likely to be associated with the behaviour and motivation that leads to good outcomes for customers and clients. As part of the BSB’s assessment process an employee survey is conducted to ask participants whether their organisation’s purpose and values are meaningful to the individual and whether there is any conflict between the organisation’s stated values and how it does business. Coupled with feedback from executive/Board interviews and external data, the BSB process is designed to help firms understand the extent to which:

• honesty
• respect
• openness
• accountability
• competence
• reliability
• responsiveness
• personal and organisational resilience and
• shared purpose

are demonstrated by the firm. Boards may find it useful to refer to this framework when evaluating the oversight processes they have set to help guide organisational conduct and culture – do they assess these desired characteristics effectively, and do they allow for specific measurement against conduct objectives?

How we can help

Our extensive work with Boards places us in a unique position to understand what makes firms ‘tick’ and how to drive the articulation and cascade of values through your business. We have a breadth of experience in undertaking conduct reviews, providing advice on management of conduct risk and developing critical insight into firms’ alignment of strategy and purpose with areas of regulatory focus. This enables us to synthesise the multi-faceted demands on our clients and empower Boards to ask challenging questions, engage with your workforce and check that relevant regulatory standards and your firm’s own ethical expectations are being met.