Governance, culture and ethics have never been more relevant across Australian business. We have seen a growing lack of trust in institutions, in traditional structures and even in some cases in people’s success. Noting that the full title of the Hayne royal commission featured the word ‘misconduct’, ethical business practices and corporate governance really do matter for today’s boards and management teams. These expectations mean that governance, risk and compliance efforts need to move beyond the traditional ‘tick the box’ approach
Governance Institute’s Ethics Index (third edition), which was issued in 2018 confirms these headlines. The overall Ethics Index dropped slightly in 2018, likely due to the decrease seen for the banking, finance and insurance sector, which perhaps unsurprisingly, was reported as the lowest scoring industry group.
The Australian Financial Complaints Authority (AFCA) chair, David Locke, recently went on record stating that ‘the Hayne royal commission exposed a spectrum of behaviour that ranged from the unlawful to the lawful but unfair and unethical — it’s about… cutting corners, and it’s about there being no consequences for regulatory failure’. He backed this up with the statistic that AFCA were on track to receive 80,000 complaints in its first year of operation.
At the same time, the Australian Securities and Investments Commission (ASIC) appointed an organisational psychologist to assist with its reviews of corporate governance practices in large listed entities. Regardless, of whether you agree or disagree with this decision it is yet another proof point that governance, and in particular the role of culture in governance, is a high priority on the public agenda. The perception of the current governance landscape was summarised by a recent front-page headline, ‘ASIC shrink says corporate culture is broken’ in the Australian Financial Review.
Interrogating integrity is a feature of strong contemporary governance, for all sectors, not just those operating in financial services.
Against this context, boards and management, are racing to understand how they can ensure their corporate culture is one that inspires greater governance, risk and compliance efforts, across all levels of the business. In other words, interrogating integrity is a feature of strong contemporary governance, for all sectors, not just those operating in financial services.
Have the conversation sooner rather than later
It is quite rare that an organisation’s ethical compass is called into question as the result of a one-off catastrophic event. More often than not, it is a number of small issues that build up over time that lead a company into trouble.
From this, our experience from working with companies stresses the importance of taking a proactive approach towards the matter of establishing, and then improving governance.
When having these conversations, it can be tempting to take a light touch approach. But, in order to truly understand your business’ risk you need be honest (brutally so) and interrogate your operations from the ground up, to ensure you are creating a culture and environment that promotes the highest levels of integrity.
Why things go wrong
David Morgan, PKF’s national head of Integrity services highlights five main reasons that an organisation will encounter integrity issues:
- Lacking behavioural integrity through creating a culture that does not encourage open transparency and accountability.
- Too big a focus on fiscal performance which can lead to increased pressure to achieve results at the detriment of all else.
- Ignorance created from a lack of communication within an organisation or an aversion to dealing with difficult situations.
- Inadequate controls in place to identify and respond to issues when they arise.
- The fraud triangle — a term coined by Donald Cressey, a prominent criminologist, who theorises that most fraud cases are made up of three factors: pressure on individuals (personal or workplace), the opportunity to commit fraud and the ability to rationalise the crime.
The importance of culture
Developing an approach to interrogating integrity in the post-Hayne banking commission environment inevitably leads you to consider your organisation’s culture. A strong culture is one that listens and learns. When reviewing your corporate culture ask:
|How do we deliver a truly customer-centric outcome?
|Do we encourage transparency and accountability?
|Do we have a common set of clearly communicated goals and objectives?
|Do we know who all of our stakeholders are?
|Are our communication practices relevant and effective?
|Do we have clear decision making structures in place?
|Do we have a consistent and fair approach to performance management?
|Are we overcomplicating or overthinking our culture measurement processes?
|Do we have appropriate escalation, investigation and disciplinary processes in place?
|Do our hiring processes consider our social license to operate?
| Do we provide the right level of training?
The focus of the last question on your customers points to an important shift in mindset required by today’s organisations to become truly customer centric. We used to talk about a litmus test for good ethics as asking ourselves if we would be proud to go home and tell our family what we had done at work. Today, we need to update this benchmark and think about how a customer would feel about the decisions we are making.
When you think about the ‘fee for service’ scandals that were exposed during the royal commission, it is impossible to think anyone would have believed that if a customer been sitting in the room when the decision was made to charge those fees that they would have been comfortable with it.
At the recent Governance and Risk Management Forums held across the country by Governance Institute of Australia, John Laker AO delivered a keynote address highlighting the fact that ‘transforming culture cannot be seen as a short term project’. As a former chair of the Australian Prudential Regulation Authority (APRA) and co-author of the APRA report, that heavily criticised the Commonwealth Bank of Australia (CBA), he is well placed to comment on trends and precisely why culture and integrity go hand in hand.
Indeed, the APRA report on the CBA highlighted a number of tell-tale markers of poor culture. As well as an under-resourced risk and compliance function and remuneration frameworks that have little ‘sting’ when it comes to remediating poor customer outcomes, APRA flagged another danger: complacency.
Culture is a fluid concept and will naturally evolve and change over time with staff turnover, changing work pressures, new legislative requirements and changing technology.
In a rush to avoid confrontation and seek consensus, APRA noted that favouring collaboration over timely and effective outcomes can reduce critical analysis and professional scepticism. Rationalising
away potential red flags or tell-tale markers are classic signs of complacency, and something that all governance professionals should be alert to.
Reviewing your culture is not a set and forget exercise. Culture is a fluid concept and will naturally evolve and change over time with staff turnover, changing work pressures, new legislative requirements and changing technology. It is therefore imperative that regular checkpoints are scheduled in which to revisit the above questions and respond to any new red flags or capitalise on opportunities.
The most important thing is to have integrity-related conversations focused on identifying how culture, value and ethics impact your organisation. And have these conversations regularly.