Philippa Ellis, Governance & Investor Relations
Not a day seems to go by without some headline homing in on yet another corporate scandal with its genesis often attributed to a lax or loose corporate culture. In Australia it has most recently focused on the wealth management and life insurances divisions of the major banks. ASIC Chairman, Greg Medcraft weighed into the debate last year arguing that culture is a key driver of conduct with good corporate culture being a driver of best practice, or ethical conduct and vice versa. He also noted that while a values-led corporate culture is important in supporting ethical conduct, for this to become embedded in corporate culture, it is critical that the leadership team cascades the company’s values to the rest of the organisation. “Leaders need to ensure that company values are understood throughout the organisation, and are “lived” by employees as part of their day to day roles.”
Australia is by no means alone in grappling with this issue. Recent research carried out in the UK focused on the role of the Board and examined how this has developed to incorporate cultural oversight, the indicators relied on to measure culture and the extent of the Board’s role in shaping organisational culture. The study, undertaken for the All Party Parliamentary Corporate Governance Group by London based corporate advisory firm Lintstock, canvassed the views of over 300 participants. They included Board Directors, Company Secretaries, CEOs, institutional investors, external and internal audit and human resources professionals.
“Culture can be a nebulous subject, fostering plenty of words but sometimes eluding succinct articulation.” – FTSE 250 Chairman.
The following summarises the key findings from the Lintstock report which in many respects also reflects the views articulated by ASIC in relation to the importance of role modelling by the leadership of corporations.
Culture, defined as “a combination of the values, attitudes and behaviours manifested by a company in its operations and relations with stakeholders”, was rated by most respondents as being in the top 3 factors core to the success of an organisation and an overwhelming 80% of respondents felt it was in the top 5.
The Board is seen as the ultimate guardian of an organisation’s culture but it is management, under the Board’s oversight, that creates the culture as it is experienced from day to day.
A desired goal for most Boards was ensuring that culture was an integrated component of the Board’s oversight in all areas and particularly as reflected throughout the Board’s deliberations on areas such as strategy, performance and risk. A number of respondents however felt that there would be benefit in the Board addressing culture as a standalone agenda item in order to ensure there is agreement as to the Board’s role.
Ideally the Board and management of a company set the culture together. While the Board has a role in articulating the desired culture of an organisation, it was recognised that a significant part of the influence on culture comes from demonstrating appropriate behaviours. In that context it will always be management that carries the weight of responsibility for shaping the way companies treat their staff and set the standards of behaviour that everyone is expected to follow in dealing with each other as well as customers, shareholders, suppliers and other stakeholders important to the company’s licence to operate.
Interestingly most respondents felt that the Chief Executive and top management team have a greater impact on an organisation’s culture than its history or the vision of the company. Also the influence of corporate codes and KPIs on culture came a distant second to selecting the right Chief Executive and setting an appropriate “tone at the top”.
It was stressed that the Board needs to draw on multiple sources of insight to obtain a rounded picture of the company’s culture and that there is no “silver bullet”. The Chief Executive holds the primary assurance function for the Board but other roles such as the risk, internal audit and human resources functions also have a part to play.
The foremost source of feedback on culture was seen to be employees, although it was emphasised that the Board needs to ensure it gets a rounded view of employee sentiment rather than relying too heavily on any one information source.
While there was no universal consensus on the insights external sources could bring to culture many felt that external stakeholders such as customers, shareholders, suppliers, regulators and analysts could also provide valuable feedback.
The Lintstock report shows broad agreement on the importance of culture and the increasing and deliberate Board emphasis placed on it. However the breadth of opinion and practice reflected in the views of the respondents suggests there is still some way to go before the Board’s role in this area is fully established.
Looking forward, most respondents felt that further developments in culture would improve the effectiveness of their companies and saw it as a dynamic part of the life of an organisation which is in need of constant nurturing and reinforcement, even when a healthy culture is in place.