Why healthy corporate culture is a dopey goal for your board

In a decade which has not been kind to the reputation of Australian corporate governance, the villain commonly held responsible for corporate collapse, executive misconduct and disruptive stakeholder activism has been located – corporate culture. 

Whether the symptom is:

• a pattern of alleged war crimes within Australia’s elite troops (the word ‘culture’ appears more than 100 times in the redacted publicly released Inspector General’s Afghanistan Inquiry Report)
• the destruction of priceless Indigenous Heritage sites (the Joint Standing Committee on Northern Australia found “Rio Tinto’s conduct reflects a corporate culture which prioritised commercial gain over the kind of meaningful engagement with Traditional Owners that should form a critical part of their social licence to operate“) or
• banks facilitating child exploitation through lax money laundering practices (a reassessment of Westpac’s culture demanded by Australian Prudential Regulation Authority identified ongoing concerns, including that its non-financial risk culture is still “immature and reactive”),

the common theme is that organisational culture is to blame.

And having located the culprit, the remedy is clear – regulators have decided that Boards must fix it! 

• ‘Assess the entity’scultureand its governance; identify any problems with that culture and governance; deal with those problems; and determine whether the changes it has made have been effective’– Recommendation 5.6 of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry.
• ‘Instil acultureof acting lawfully, ethically and responsibly‘– ASX Corporate Governance Principles and Recommendations (the 4th edition) principal 3
• ‘Culture matters to ASIC because poor culture can be a driver of poor conduct. Bad conduct can flourish, proliferate and may even be rewarded in a poor culture. A good culture, on the other hand, can help uncover and inhibit bad conduct and reward and encourage good conduct’ –Speech by then ASIC Chairman, Greg Medcraft, in 2017

The charity sector is not immune. The AICD’s NFP Governance Principle 10 requires that

• ‘The board models and works to instil a culture that supports the organisation’s purpose and strategy’.

And when culture is found wanting, it is often the CEO and Board Chair who are required to pay the price.

Instilling healthy culture – a dopey goal?

Ordinarily, if all of the regulators are agreed that a Board should focus on culture, it would be unwise to ignore them. But stick with us.

Let’s test whether your Board should set instilling a good culture in 2021 against the S.M.A.R.T. test for goal-setting:

SPECIFIC: Culture has become a buzzword that generates plenty of nods and quiet acquiescence. But do we even understand what it is? 

Most definitions describe culture as the combination of a range of factors including vision, values, behaviours, customs, traditions, attitudes, meanings and distinctives. It is perhaps best described as “how things habitually get done around here”. It is a notoriously fluid concept. And that’s even before we start defining the characteristics of the culture that we are seeking to instil. 

A specific goal defines with precision what needs to be accomplished and who is responsible. (FAIL)

MEASURABLE: While there are a range of metrics that are proxies for culture (we have our own at Neometric that measures Relational Proximity), they are actually measuring one or more components of it. 

The Australian Council of Superannuation Investors, and the Australian Institute of Company Directors, have just jointly released a report headed “Governing Company Culture: Insights from Australian Directors”. They conclude “Company culture is complex and difficult to measure“. Their research found:

‘The word ‘culture’ appeared prominently in annual reports. It was included, for example, in the Chair or CEO’s letter in 75 per cent of ASX50 companies.’

It perhaps avoids uncomfortable accountability to speak about a goal that is notoriously difficult to measure, but an effective goal is one that you can meaningfully test yourself against by tracking progress with numbers (FAIL)

ATTAINABLE: Even the regulators agree that finding mechanisms to shift culture is proving difficult. APRA has found in its 2019 Capability Review that boards are struggling to identify appropriate practices to influence culture (p 86). ASIC has confirmed in its Corporate Governance Taskforce Report that Boards are much more effective at examining financial risk than non-financial risk.

A coach doesn’t tell the team to win – she identifies priorities, drills specific plays, and ensures players understand their roles. Similarly, great culture is better understood as an outcome of other specific objectives, rather than as a target in its own right. 

An effective goal will be empowering because it is attainable (or achievable), and so it is best to focus attention on the ingredients of success, rather than the outcome. (FAIL)

RELEVANT: The goal, if achieved, must generate a real benefit. It must align with what the organisation has ultimately set as its purpose. 

If the organisational purpose is clear (discussed further below), numerous studies show that a positive culture generates great outcomes across the organisation, and may account for 20-30% of the differential in corporate performance. (PASS)

TIME-BOUND: Effective goals have a deadline that facilitates ongoing focus and attention. Ideally, a goal will have both an end-date and interim check-ins on progress. 

We know that change is hard, even at the individual level. It is amplified at the organisational level. A key challenge with setting a 2021 goal for your Board of instilling great culture is that achieving change in all of the composite elements of culture within that timeframe will not be achievable for all but the smallest and newest organisations. (FAIL)

Ok, so our Board can ignore culture?

Absolutely not. 

But break down what you are wanting to build and focus on SMART goals.

“There is only one way to eat an elephant: a bite at a time” – Desmond Tutu

We don’t pretend to have a simple answer for Boards that will guarantee a bullet-proof culture. But we have 3 practical SMART steps that we think are worthy early bites, and are consistent with building the foundations for great culture.

1. Define the organisational purpose

Being clear about why an organisation exists is the first step to defining what behaviours are consistent with that purpose. It is becoming increasingly clear that “to maximise profit for our shareholders” is not cutting it.

HBR puts it well: ‘To harness people’s full, lasting commitment, they must feel a deep desire, and even responsibility, to change. A leader can do this by framing change within the organisation’s purpose –the “why we exist” question. A good organisational purpose calls for the pursuit of greatness in service of others.“

Defining the organisation’s purpose in 2021 in a way that engages employees meets all of the SMART criteria, and is a necessary precondition to instilling an enviable culture.

2. Identify defining behaviours that support the purpose 

A second essential ingredient in instilling culture is identifying what is the desired culture. 

The ACSI and AICD culture report surveyed Australian directors and found that “behaviour, and its management, are at the heart of company culture“. They went on “whereas culture as a concept can be nebulous, behaviours are real and have tangible impacts on people, processes and business outcomes.” 

Being clear about “how things are done around here” (including what is not tolerated) is essentially a charter for how we will relate to one another and our stakeholders – or how our impact will be felt by others. Our behaviours build our relationships. It often starts with core values, delivering clarity for all who serve the organisation of what behaviours will define their interactions. This is core to organisational culture (and the impact on key relationships can be measured).

Codifying the organisation’s values in a way that gives specific guidance to the behaviours that are encouraged (and those that will not be tolerated) in the way that staff engage with others makes them tangible, attainable, and measurable.

3. Start at home – Boardroom relationships

The behaviours within the Board room, and displayed among the Board members, can then sensibly be assessed against the desired culture. The Board cannot expect of others what it has not been able to achieve itself. 

This is a powerful (if initially a little awkward) opportunity to objectively evaluate what the Board members should be able to expect of one another in their behaviours in the Board room. The Chair can then hold the Board to account for consistently modelling the behaviours that are agreed to be conducive to the desired organisational culture. 

‘While all levels of management and indeed individuals contribute to culture, what the board says, does and most importantly expects, is absolutely critical in setting the tone for the organisation‘ Greg Medcraft suggested in a speech entitled ‘Tone from the Top’. 

The benefit of taking intentional steps to evaluate and strengthen the relational capacity of the Board, is at least three-fold.

• it models the importance of building relational awareness to the whole organisation
• it strengthens the capacity of the Board to build trust within its members so that it safely balances cohesion and conflict, essential to effective collective decision-making
• it allows the Board to test the clarity and utility of the defined purpose and promoted behaviours in a practical, real-life setting. This generates relational insights that can then be repeated and scaled throughout the organisation and with key stakeholders.

Relational governance starts (but does not end) with the Board

In a previous post, we defined relational governance and explained its value across the organisation.

Because the Board is held accountable for culture, and because culture is perhaps most usefully understood as the way we habitually behave in our relationships with one another, the Board can most powerfully impact culture through curating its own relational strength.