Corporate culture — how well are you managing this risk?

Company directors are being challenged like never before to keep a close eye on their corporate cultures. ASIC, APRA and more recently Prime Minister Malcolm Turnbull have all strongly emphasised the role that corporate culture plays in driving employee behaviour.

There is a strong view that scandals such as CommInsure’s denial of legitimate insurance claims, misconduct in the financial planning arms of the Commonwealth Bank, National Australia Bank and ANZ, and Westpac and ANZ’s alleged rigging of the bank bill rate have resulted from poor organisational cultures where staff and executives were allowed to get away with and, in some cases, even encouraged to behave unethically.

Regulators have culture in the cross-hairs

These cases have not only drawn intense public criticism, they have also sparked a fierce debate about whether current criminal laws should be extended to cover directors and management where an organisation breaches obligations as a result of an undesirable culture.  

Both ASIC and APRA have specifically signalled that they see corporate culture as a ‘key risk area’, due to the strong connection between poor culture and poor conduct. Both regulators are actively reviewing company practices which they say are directly linked to culture, including promotion processes, reward and incentive structures, recruitment and training policies, whistleblowing policies, complaints processes, staff engagement and the like.

The upshot is that corporate culture and its impact on customers, stakeholders and company reputation is now a mainstream issue, whether or not a company is in the financial services sector. The potential exposure of boards and senior executives in the culture stakes also means that boards need to be far more diligent in their oversight of this escalating risk.

What can directors do to manage culture risk?

For directors, it can be very challenging to understand the degree to which the company’s culture — namely, the actual values and behaviours of those in the organisation — truly reflects its desired culture. Boards need to understand if there is a disconnect between the company’s stated and ‘lived’ values and behaviours, because it is only the lived culture as reflected in grassroots behaviours and customer interactions that matters. 

Getting hold of data so that culture can be measured is the challenge. Research shows that the C-suite can often have a different sense of how the culture is operating from others in the organisation. The executive team works in a daily environment of clarity, purpose and accountability, which they understand well and their behaviours reflect this. However, others at lower levels of the organisation may not have a similar clarity, purpose and accountability or understand these matters as well. However, at present, there is usually no data on this within organisations for the C-suite and board to consider.

Various tools can assist boards with this, such as stakeholder and employee engagement surveys, as well as leadership behaviour surveys that reflect how others perceive the lived culture and behaviours. The calls for directors to step out of the boardroom and spend time talking to employees at all levels in an organisation can also assist, as it can be beneficial for employees to see the board taking an interest in these matters and directors can interact directly with employees beyond the C-suite to get a sense of how the standards of conduct are operating beyond the pages of a policy.

The board is ultimately responsible for deciding the nature and extent of the risks it is prepared to take to meet strategic objectives. It sets the risk appetite of the organisation, which explicitly articulates the attitudes to and boundaries of risk that the board expects senior management to take. Questioning management about culture, in a manner that elucidates information, is part of any board’s approach to it oversight of risk management.

Time for action

Chair of Virgin Australia, Elizabeth Bryan, has said that a company’s culture needs to be seen as a key issue for management and boards in a similar way that companies in the dangerous goods industries had to learn to take safety seriously in the past. In the Australian Financial Review as recently as 22 March 2016, she said, ‘company culture has to take the same journey. And we are way behind. Many companies are only just beginning to discuss culture.’

Whether this a conversation that’s just started in your company, or even if you believe your approach to measuring culture is already taking shape, there’s no question that in the current climate all organisations need to address this risk with far greater focus and attention. A board’s work is not done until its aspirations and ideals are reflected in the deeds and actions of every individual in the organisation. 

Governance Institute has published Risk management for directors: A handbook. This resource is designed for those seeking clarity on the interaction between governance and risk management to avoid confusion in the responsibilities of those with an oversight role and those with an implementation role. It also covers the linkage between risk management and culture, with questions for consideration by directors when reviewing if senior management has taken the necessary steps to monitor and manage the organisation’s material risks consistent with the board’s risk appetite.

The handbook is free to download. We welcome your feedback on this publication.

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