Corporate Culture

Corporate culture: It’s time for boards to dress for success

Debates about regulating organisational culture are frequently dogged by the assertion that it’s impossible to define good culture, let alone prescribe it.

That’s like saying there can’t be rules that people must wear clothes because everybody is a different shape or size. They need to be dressed and it’s easy to see when they’re not. Everything else is a matter of judgement.

Whether an organisation’s culture leaves it exposed is harder to discern. One size clearly doesn’t fit all, but strong cultures still share much in common.

Respect, integrity and trust are the foundation of strong values however they are expressed. The different ways organisations articulate them can be a powerful indicator of their individual cultures, from established institutions to challengers and start-ups.

Directors have a strong appetite for cultural change

Improving corporate culture is a major priority for boards. The AICD’s Director Sentiment Index has consistently found it’s among the main issues keeping directors awake at night. The latest six-monthly survey indicates corporate culture is a greater concern than increasing revenues or profits, attracting new talent, or digital innovation.

More than 90% of directors say their boards are trying to change the culture in their organisation, with over a third (36%) describing that effort as substantial.

It’s hard to imagine any other area where the drive for change is so widespread. But that’s where agreement often ends.

Assessing culture doesn’t stop with boards

Regulators are raising their voices and their expectations about organisational culture.

They are drawing a clear line about their own responsibilities: corporate culture is a matter for the board and management and can’t be regulated. But dismissing that as a hands-off approach would be a mistake. ASIC and APRA, which were themselves criticised by the Hayne Royal Commission, are examining culture with renewed vigour.

“Culture matters to ASIC because poor culture can be a driver of poor conduct,” said Commissioner John Price in a speech to the Australian Health Practitioner Regulation Agency (AHPRA) in February 2019.

“Looking at cultural problems can give us an early warning of where things might be going wrong to help us disrupt bad behaviour before it happens and catch misconduct early. Importantly, it helps with identifying not just individual instances of misconduct but broader, more pervasive, problems.”

It means while culture might not be regulated, its outcomes certainly are.

APRA can impose additional capital requirements on organisations with a higher risk profile, including where those risks relate to shortfalls in governance and culture. It has recently done so for all four of Australia’s retail banks, imposing a total of $2.5 billion in additional regulatory requirements until remedial actions have been completed.

Mind games in the boardroom?

News that ASIC is having an organisational psychologist observe board meetings at 21 major Australian companies has sparked intense discussion. It’s part of the work by the regulator’s new corporate governance taskforce, which is looking at practices in large ASX-listed organisations.

While some directors are crying foul, it’s not entirely surprising.

In May 2019, APRA released its report on industry governance, culture and accountability self-assessments. Following the prudential regulator’s ground-breaking governance inquiry into CBA, it requested 36 major banks, insurers and super funds review themselves against the inquiry’s findings. A notable revelation from the self-assessments was “the generally positive assessments boards and senior leadership teams had of their own performance, even when they had identified serious weaknesses in their institutions”, according to APRA Deputy Chair, John Lonsdale.

Boards that are happy to set the tone from the top but prefer to confine their oversight to lower levels speak volumes about their own self-awareness and accountability. They can expect greater scrutiny from regulators, shareholders and the wider community. Greater consequences are also likely to follow, with ASIC adopting a ‘why not litigate’ approach to enforcement.

Boards who aren’t actively involved in setting, monitoring and improving their organisation’s culture will find they’re emperors who need new clothes.

Learning from the past and adapting for the future

The pressure on boards to take proactive action on organisational culture has never been greater.

Directors face a familiar challenge with this growing role – information overload. They are faced with a dizzying array of content with few signposts to what is most relevant.

Unquestionably, there is huge value in going directly to the source. The reports from the Financial Services Royal Commission offer unvarnished facts accompanied by wise insights. But Commissioner Hayne’s final report exceeds 500 pages, and that’s without the second volume which exclusively comprises case studies.

APRA’s initial inquiry into culture, governance and accountability was hailed as offering an unprecedented level of detail on actual practices, shortfalls and required improvements. The report was described by Prime Minister Scott Morrison, then Treasurer, as ‘required reading’ for all Australian boards.

Adding to the conversation are the numerous consultants and commentators who have written about organisational culture from angles ranging from headline-grabbing ire to methodical analysis.

A practical model specifically designed for directors

Directors need tailored resources and tools to help them navigate their responsibilities for organisational culture on their individual boards. Diligent’s governance specialists have developed a unique model for boards to monitor the pulse of their organisations.

The Culture Compass provides a practical approach for boards to consider culture from a range of perspectives:

Join in

Model every aspect of culture in the board’s own operations and behaviour.

Look out

Monitor information from beyond the management team and outside the organisation.

Get down

Go into the business to find out what is happening and connect with a mix of people.

Follow up

Take swift, decisive action when warning signs are identified.

Diligent’s complimentary report, Culture Club, explores each of these angles and gives specific examples of steps that directors can take to engage with and improve culture across their own organisations.

Find out more by registering your details to download a free copy of our report.

Understanding the needs of directors is at the heart of Diligent’s business. The evolving solutions we offer are supported by rigorous consideration of the challenges facing boards now and into the future. Diligent’s focus on modern governance combines tailored insights with ease of use and accessibility.

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