While focused on financial services organisations, regulators such as ASIC have indicated that the banking royal commission recommendations on culture will be the standard that will be applied to all organisations in exercising their supervisory duties. Also, the ASX Corporate Governance Council has released the 4th edition of its Corporate Governance Principles and Recommendations (Principles and Recommendations), of which Recommendation 3 relates directly to culture.
All of this means that culture is no longer an esoteric, warm and fuzzy concept, but a source of potential individual liability of boards and individual directors if there are lapses of culture resulting in misconduct/and or loss. Not necessarily misconduct of directors themselves, but potentially the misconduct of a middle manager in the organisation whose actions can be traced back to a lapse in the overall culture of the organisation.
In our view, culture has never been an esoteric, warm and fuzzy concept, but a key driver of marketplace succes
In our view, culture has never been an esoteric, warm and fuzzy concept, but a key driver of marketplace success. There has always been a potential upside for organisations that measure and manage culture in achieving sustained success, and a potential downside (sometimes catastrophic) for organisations that do not manage their culture — usually by falling into the trap of the end justifying the means, driven by shareholder primacy.
Banking royal commission Recommendation 5.6
The starting point for understanding the role of a board in assessing and managing culture is Recommendation 5.6 of the banking royal commission, which states that financial services entities:
‘…should, as often as reasonably possible, take proper steps to:
- Assess the entity’s culture and governance;
- Identify any problems with that culture and governance;
- Deal with those problems; and
- Determine whether the changes it has been made have been effective.’1
Commissioner Hayne went to great lengths to emphasise that Recommendation 5.6 involves more than just ‘measuring an entity’s risk culture’2 and is much more than a ‘box-ticking’ exercise. On measuring culture Commissioner Hayne observed.
‘Its proper application demands intellectual drive, honesty and rigour. It demands thought, work and action informed by what has happened in the past, why it happened and what steps are now proposed to prevent its occurrence’3
Hayne stated clearly that the ‘primary responsibility for misconduct…lies with the entities concerned and those who manage and control them: their boards and senior management.’4
Furthermore, he did not hold back in stating that to ignore Recommendation 5.6 would be ‘foolish and ignorant’.5
While Recommendation 5.6 was specific to the Financial Services sector, ASIC has recently established a ‘why not litigate’ approach to enforcement. This enforcement philosophy should be viewed in the context of the ASIC Corporate Plan 2019–2023 which highlights corporate culture and governance as a key area of focus for ASIC, ‘prioritising enforcement cases that hold individuals to account for governance failure that result in harm’.6
Added to this is Recommendation 3 of the Principles and Recommendations, which requires a listed entity to ‘instil & continually reinforce a culture of acting lawfully, ethically & responsibly’.7
With ASX Corporate Governance Council applying an ‘if not, why not’8 approach to the adoption of Recommendation 3, there could be potential market implications for listed entities that are not able to clearly demonstrate how they are instilling and continually reinforcing a culture of acting lawfully, ethically and responsibly.
It can be argued that the combination of Hayne Recommendation 5.6 and ASX 4th Edition Recommendation 3 provides a clear framework for ASIC and other regulatory bodies to assess whether an entity’s directors and officers have fulfilled the business judgment rule under s 180 of the Corporations Act 2001 (Corporations Act).
In other words, unless company directors and officers can demonstrate that they have taken reasonable steps to assess culture and governance, they are potentially in breach of their obligation to discharge their power and duties with care and diligence under s 180.
So, this begs the question — what is culture?
Even though organisational culture has been an area of rigorous academic research, it has been the subject of debate over the years. It has been a term that has been used loosely in various contexts professionally, in the mainstream media and colloquially.
Fortunately, Commissioner Hayne provided us with a clear definition. He defined culture as, ‘the shared values and norms that shape behaviours and mindsets within the entity’9
Or more simply Commissioner Hayne observed that culture is ‘what people do when no one is watching’.10
In our view, Hayne Recommendation 5.6 and Recommendation 3 of the Principles and Recommendations, provide a clear and compelling obligation on boards and company officers to measure culture — to assess the ‘shared values and norms that shape the behaviour and mindsets in a company.’
Companies and boards that are not planning to assess and manage culture are ‘foolish and ignorant’ (to quote Commissioner Hayne), and potentially expose individual directors and company officers to litigation for failing to exercise the required care and diligence required by s180 of the Corporations Act.
|Here is what Commissioner Hayne had to say about companies not planning to measure and manage culture:
‘To ignore this recommendation (5.6) would be foolish and ignorant. It would be foolish because one the chief lessons Financial Services entities must take from the work of the (Hayne Commission) is that every entity is and must be accountable for its culture and what it does. It would be ignorant because those who will not learn from history will repeat it’11
Developing a culture strategy
Having established a clear imperative on Boards to measure and manage culture, the challenge for many organisations and directors is how to do this. The answer lies in taking a rigorous and disciplined approach to the assessment and management of culture.
Organisational culture has been well researched for many decades. Fortunately, there is a high degree of alignment between the definition of culture used by Commissioner Hayne and the views of 2 of the leading academic thinkers and researchers in this field.
Ed Schein defines culture as , ‘…the accumulated learning of the group that is a pattern or system of beliefs, values and behavioural norms that come to be taken for granted as basic assumptions and eventually drop out of awareness’12
Or to put it another way in his own words, ‘Culture is telling you moment to moment what to do.’13
He also suggests that knowing this then the management of culture is probably the most important thing that leaders do, and added that if they are not managing culture then it is undoubtedly managing them.
Rob Cooke defines organisational culture as, ‘the behavioural norms and expectations, shaped in part by shared values and beliefs, that guide organisational members in how they should approach their work and interact with one another.’14
Much of the recent discussion on organisational culture within Australia has focused on risk and managing the downside of poor behaviour. Yet it should be clear from the Hayne, Schein and Cooke definitions that there are considerable upside opportunities to be gained from focusing on behaviours which optimise results, are in pursuit of doing the right thing, treat people fairly and equitably and build trusting relationships, achieving sustainable results over the long term.
Organisational context: A roadmap for change
For a culture strategy to be more than a ‘box-ticking’ exercise, culture should be viewed in the context of an overall organisational construct — the key drivers of culture and how culture contributes to optimal organisational outcomes.
We have developed a model which shows these relationship (Figure 1)
Figure 1: Stagira Consulting model for cultural transformation
© 2019 Stagira Consulting Pty Ltd All rights reserved
We recommend that organisations start with the end in mind, and for commercial organisations this is usually sustainable marketplace success. Most organisations are usually clear about what success looks like for them. However, we do encourage organisations to define marketplace success in more than just financial or profit terms.
The key to marketplace success is to provide an experience to stakeholders that builds strong sustainable relationships and partnerships founded on trust. Commercial success is fundamentally about developing quality relationships — between people and brands/products/services on the one hand, and customers/consumers on the other.
Strong relationships build good outcomes such as customers staying with you, recommending your products and services to others, and having a greater willingness to do more with you. The key to strong relationships is the behaviour that stakeholders experience, or attribute to an organisation, its people or brands/products/services, as they interact with these.
Clearly, there are some behaviours that build strong trusting relationships and others diminish or destroy relationships. In a fast-changing, increasingly transparent and networked world, it is vitally important to behave in a way that builds strong trusting relationships and provides a positive experience to all the stakeholders.
Central to this model is organisational culture — the ‘shared beliefs, norms and expectations’ — that shape the actual behaviour which impacts upon a range of desired outcomes. Culture impacts directly upon operational excellence, how well everyone works together to meet the needs of external stakeholders.
Research has shown that the behaviour of leaders has the greatest impact on organisational culture.
Culture also has a direct impact upon the experience that people have as they work together within an organisation, and consequently on their levels of engagement or passion and commitment to do a great job for customers, etc.
Research has shown that the behaviour of leaders has the greatest impact on organisational culture. Hence an investment in building the insight, desire and capacity of leaders to change, to develop a more constructive style and to encourage others to behave in a more constructive way, is essential in order to achieve sustainable cultural change.
The start point for developing a culture strategy is gaining an understanding of the current culture, from which insights can be gained, culture targets can be set and actions agreed to achieve desired outcomes.
Hayne Recommendation 5.6 states that entities should take proper steps to assess culture. In other words, take proper steps to assess the ‘shared values and norms that shape behaviours and mindsets within the entity’.
So, what does assess mean? The Oxford Dictionary definition is ‘to estimate or evaluate the nature, ability or quality of something’.
Assessment can involve either:
- The judgment or opinion of a person or group based on what they think eg, ‘I think we have a culture of innovation’
- Qualitative evaluation using agreed criteria and feedback from a selected group, or
- Quantitative evaluation, ie measurement, using a statistically reliable and valid instrument.
Our view is that 5.6 Hayne Recommendation involves much more than mere judgment or opinion. Indeed Commissioner Hayne stated that the proper application of 5.6 requires ‘intellectual drive, honesty and rigour.’
Assuming statistical reliability and validity, a quantifiable evaluation or measurement will nearly always produce a higher quality evaluation than a qualitative assessment. It will also allow for more accurate remeasurement as recommended in 5.6.
Qualitative assessments can be very useful in digging more deeply into areas which a quantitative assessment may not measure.
Let’s use a simple example to illustrate this point.
Imagine you are purchasing a car and have found one that you really want to buy. However, you are not sure whether it is going to fit into the garage. You could:
- Use your own judgment (which could be biased by the fact that you really want this car)
- Seek other people’s views, that is, make a qualitative evaluation. The quality of the assessment will be driven by whether people have seen the car and your garage, their ability to estimate 3D dimensions, combined with the number of informed views sought
- Take out a tape measure and measure both the car and the garage., that is, make a quantitative evaluation
You can see in this simple example that a quantitative evaluation will produce a higher quality answer to the specific question.
A qualitative approach may have produced the same outcome, but without the same degree of reliability. However, in the process of seeking informed views, other information that may not have been initially sought may have be unveiled, for example, that the same car could be found cheaper online.
Therefore, in assessing culture, quantitative and qualitative both have an important role to play:
- Quantitative to produce a statistically valid, reliable and externally normed measure that allows future measurement, tracking of progress and more accurate reporting.
- Qualitative assessment to uncover underlying mindsets, to gain a better and deeper understanding of the results, and to seek feedback on items not measured quantifiably
Can culture be quantifiably measured?
Measuring the size of a car is straightforward. But what about quantifiably measuring the ‘shared values and norms that shape behaviours and mindsets within an entity’. Is this even possible?
The measurement of culture is widely regarded as very difficult, if not impossible, by many organisations. The reality is that several decades of rigorous scientific research on organisational culture has produced reliable and robust measurement instruments.
However, the vast majority of companies in Australia are not measuring culture — which puts them potentially at odds with Hayne Recommendation 5.6 and ASX 4th Edition Principle 3. Before we discuss how to measure culture, let’s examine our view as to why many Australian organisations are not measuring culture. We believe the following key reasons are contributing to this situation.
An over-reliance on the views of CEO’s on culture
As mentioned earlier, the least robust assessment of culture is the mere judgment or opinion of one or a handful or people. In the absence of a rigorous measurement and independent inquiry, the board’s understanding of organisational culture maybe influenced by the opinion of the CEO.
This is not to suggest that a CEO would not represent their perspective in good faith.
However, the potential pitfall of board’s relying on untested judgments and opinions of the CEO was demonstrated in a recent survey and white paper published by AHRI and Insync in September 2019. Amongst their findings on workplace culture was the insight that ‘CEO’s have trouble seeing culture problems’[i]
Survey data presented in their paper showed a significant gap between CEO’s views on cultural markers in their organisation and the views of others (including executives/senior managers).[ii]
This should ring alarm bells for all boards who may have previously relied on the views of CEO’s, and perhaps other members of the senior leadership team, on the culture of their organisation. The new requirements on boards necessitate a higher level of due diligence including the use of independent and statistically valid and reliable tools.
Many companies are under the misapprehension that they are already measuring culture
Many companies think they are measuring culture, when in fact they are measuring something different.
A review of the annual reports and sustainability reports of ASX100 companies show many organisations using measures such as talent and/or engagement, but do not articulate any as measures of culture.
Both talent and engagement are very important people measures for marketplace success. However, they are not measures of culture.
Let’s briefly distinguish between talent, engagement and culture, which is shown in Figure 2.
Figure 2: People Strategy assessment framework
© 2019 Stagira Consulting Pty Ltd All rights reserved.
Talent. There is no doubt that attraction, retention, development and deployment of talent against the strategic aspirations of an organisation is critical. The quality of an organisation’s talent sets the high-water mark for marketplace success. Organisations almost universally understand the importance of talent, and use measures such as bench strength, diversity and training hours per employee to track progress.
Engagement — simply having talented people is not sufficient to achieve sustained marketplace success, unless talented people are also passionate about the organisation and its products/services, believe in its purpose, and strive for results. Engagement surveys are a highly effective method of measuring these attributes, and are popular amongst most organisations
Culture — as discussed — the shared values and norms that shape behaviours and mindsets within a company.
It is more than possible, and unfortunately common, for a talented, highly engaged workforce/team to underperform, or worse still, produce catastrophic results if the underlying culture is suboptimal.
to underperform, or worse still, produce catastrophic results if the underlying culture is suboptimal.
The ball-tampering scandal
There is no better case study to highlight this than the Australian men’s cricket team at the time of the ball-tampering scandal.
The Australian cricket team at the time was full of high-quality players. The engagement and passion of the team of the team to succeed was probably at the highest level.
However, the culture was one that could be characterised by a toxic and unhealthy competitive desire to win at all costs. A culture that appears to have been nurtured over some time and by the cricket association itself.
To use the language of Commissioner Hayne — the shared values and norms that shaped the behaviour and mindsets of the team at the time was that winning was everything, even if that involved cheating. Indeed Cameron Bancroft, the junior member of the team that actually tampered with the ball, stated that he did so in order to fit in.17
This distinction between talent/engagement and culture is why Recommendation 5.6 is so key and requires careful consideration and action. Many of the poor examples of behaviour exposed in the banking royal commission were from lapses or failures of culture from large successful financial services companies, that at the time were reporting high engagement scores and strong talent measures.
It is imperative that all companies understand this distinction, and it is important that boards seek independent verification and measures of culture. Boards that are not tackling culture and continue to rely on (or be under the impression that) engagement scores and talent/diversity targets are measures of culture, will not be meeting the requirements of 5.6. Remembering that Commissioner Hayne described ignoring 5.6 as ‘foolish and ignorant’.
This is not to say that we don’t view talent, diversity and engagement as important organisational measures critical for marketplace success. Quite the opposite. We only seek to emphasis that they are not measures of culture.
How to measure culture quantitatively?
There are several survey instruments on the market that purport to measure culture in a quantitative way. However many of these instruments actually measure engagement, organisational climate (how people feel about the organisational) or constructs other than culture.
Organisations should be careful to only use culture diagnostics that are evidence based, statistically valid, reliable and based on researched norms (what we call the ‘gold standard’). We have 25 years’ experience in measuring and managing culture across multiple companies, leading cultural transformation strategies initiatives or partnering with organisations, and only use tools that meet these criteria.
It is the board’s responsibility to ensure that there is an independent assessment of culture and that management are taking the appropriate actions to address any gaps between actual and desired culture.
In conclusion, our recommendation is that all board directors and people in roles which advise boards should for their organisation:
- Ensure there is a culture strategy that:
- is aligned to your organisational strategy (‘with the end in mind’)
- articulates clear cultural goals
- articulates values designed to shape the desired behaviours
- hardwires the desired behaviours throughout the organisation
- is informed by measurement of current Culture in a best-practice, independent, objective, reliable & valid way
- ideally quantitatively
- and/or qualitatively
- Invest sufficient time, energy & financial resources to meet your obligations regarding culture
- Review and monitor the strategy regularly
- Hold the CEO and executive team accountable for delivering