Consider the following statement: ‘I am proud to work for a company that has the highest standards of integrity and which passionately protects its people and reputation.’ Written in 2023 by the group chief executive, the sentence concludes a personal message accompanying his company’s code of business conduct.
The statement is a typical piece of modern corporate communications. Ordinarily it might be considered unremarkable. But this one is different, because the CEO here is Nick Read and the company is Post Office Limited.
The big question about corporate governance at the Post Office is: where was the board?
Trust
Integrity matters. The trust that successful businesses build with their stakeholders depends on it. One lesson from the Post Office scandal is that public trust in a business is quickly eroded when its values are not reflected in the behaviour of its people at all levels.
The role of the board of directors is crucial. The board is responsible for establishing good corporate governance and ethics. That responsibility is discharged through the decisions and actions that directors take, both in good times and in bad. Under pressure, the decision-making and the conduct of the board can be poor.
Directors are always responsible for their own actions
The UK corporate governance code provides a clear signpost of best board practice. Principle B of the code states: ‘The board should establish the company’s purpose, values and strategy, and satisfy itself that these and its culture are all aligned. All directors must act with integrity, lead by example and promote the desired culture.’
The code here identifies two distinct aspects of leadership and tone at the top: board oversight of corporate culture and values; and the personal conduct and example-setting of the directors themselves. Each is critical and neither is certain. There are guidelines to help with board oversight, but directors are always responsible for their own actions.
Bad behaviour
Fundamental to integrity is compliance with the law. This should be a baseline expectation of all directors. However, personal conduct is hugely influenced by circumstances – good behaviour is not guaranteed.
Take fraud. It is rising fast – BDO’s latest annual FraudTrack report shows UK fraud more than doubling in 2023. Much of the increase is from cybercrime, but occupational fraud threats remain. Here, directors’ actions are often central to scandal – see the continuing investigations into the collapses of mini-bond seller London Capital & Finance and the bakery chain Patisserie Valerie.
Most concerning are reports of abuse of the government’s Covid-19 support, especially the Bounce Back Loan Scheme, with losses officially estimated as between £3.2bn and £6.4bn. The authorities’ focus is on directors. Director disqualifications are escalating – the Insolvency Service disqualified 932 directors during 2022/23, 459 of whom were involved in Covid-19 support scheme abuse cases, and criminal prosecutions of directors are continuing.
Three elements are present in every fraud: motivation, opportunity and rationalisation
Fraud characteristics
The American criminologist Donald Cressey would recognise these trends even though he developed his ‘fraud triangle’ behavioural model back in the 1950s. The model explains why certain people in the workplace are prepared to violate trust and commit fraud. Three elements are present in every fraud: motivation, opportunity and rationalisation.
Modern directors, trying to cope with the pressures of the pandemic while being offered generous and easily accessible government funding, fit effortlessly into the model:
- Motivation. Most directors tried to access loans to keep their business going, and some were primarily motivated by greed.
- Opportunity. The government’s plan to provide quick access to money offered a lifeline for companies struggling to survive, and some directors took advantage of the absence of credit checks.
- Rationalisation. Fraudsters, from Nick Leeson to Sam Bankman-Fried, seek to rationalise their actions, and continue to do so.
Nothing provokes more anger and dismay among the directors I work with than the abuse of these support schemes and the government’s failure to investigate all cases.
The message is clear: good governance is linked to healthy culture
Directors’ oversight
Risks of director misconduct can be mitigated by appropriate controls and through scrutiny and challenge around the boardroom table. Resources for directors on overseeing culture are available from the Financial Reporting Council (FRC), enabling boards to gain assurance that the conduct of their employees aligns with corporate values.
The 2016 FRC report Corporate Culture and the Role of Boards defines business culture as ‘a combination of the values, attitudes and behaviours manifested by a company in its operations and relations with its stakeholders’. It declares that a healthy culture both protects and generates value, while emphasising that boards play an important role in influencing culture and supporting executives when embedding it.
The message is clear – good governance is linked to healthy culture.
The FRC’s follow-up report in 2021, Creating Positive Culture, develops this and provides helpful observations for boards on how to create a positive culture, thereby improving performance. Its tips include:
- Leadership comes from the top through the actions and attitudes of directors, but the workforce must feel engaged and able to contribute.
- Trust, empathy and psychological safety are crucial to fostering positive culture.
In my experience, if everyone is encouraged to speak up without fear, then whistleblowing and confidential reporting lines become more effective, providing boards with crucial information about what is really happening in their business.
Unanswered questions
Many questions remain in the Post Office scandal, including about its corporate culture. Others are highly relevant to accountants:
- Why did the external auditors fail to raise red flags around shortfalls in the Horizon IT system?
- Did the expert witnesses in the subpostmaster trials put their obligations to their clients above their duty to the court?
- What level of training, guidance and supervision did the Post Office board provide to its investigators?
Corporate governance at the Post Office has largely escaped scrutiny so far. Here, there is one overarching question looming – where was the board?
