Tackling culture-related mistakes: Insights from the Royal Commission

60-second summary: Three mistakes

1: Failing to understand the Board’s role in, and impact on, culture

How to avoid: i. Get aligned; ii. Reset practices; iii. Engage the CEO, CHRO & Executive

2: Failing to gain transparency and traction

How to avoid: i. True culture indicators; ii. First hand voices; iii. Board tone

3: Focusing narrowly on profit and performance

How to avoid: i. Reset Board mindset; ii. Rebalance attention; iii. Revisit purpose

The 6-minute read:

Last week, Commissioner Hayne’s Final Report of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry landed with great weight. It was scathing of the behaviours and inactions of Boards and senior managers alike, and it signalled far-reaching self-reflection and review, stopping short of major reform.  As we now have seen, NAB lost their Chair and CEO in the aftermath, and it won’t be surprising if more casualties follow.

While focused on the financial services sector, the Report’s ramifications are extensive and reveal some powerful learnings for Boards and CEOs across all industries. As noted by Commissioner Hayne, many of these learnings sit where culture, governance and leadership intersect.

So what was missing that caused essentially good Directors and Executives to fail to see the signals of misconduct, unethical behavior and mismanagement in their organisations? As I’ve reflected on these missing ingredients, three key—but avoidable—mistakes stand out.

Mistake 1: Failing to understand the Board’s role in, and impact on, culture

“There can be no doubt that the primary responsibility for misconduct in the financial services industry lies with … those who managed and controlled those entities: the Boards and Senior Management.” - Commissioner Hayne’s Final Report, p4

It’s pretty clear. Commissioner Hayne’s view is that the misconduct buck stops with the Board and senior managers. He describes how Directors and leaders ‘set the tone’ for the behaviours that appear in the organisation,  and it’s this tone and the culture that it creates that either enables or prevents inappropriate behaviours and actions.

Before we go further, it’s probably useful to recap just how culture comes about:

CULTURE - BEHAVIOURS - BELIEFS - EXPERIENCES - DRIVERS

In brief, culture is the word we use to describe commonly-accepted patterns of behaviour developed over time in an organisation. These behaviours are driven by beliefs about how things are done, how things work and what’s really valued.  Beliefs stem from the myriad of experiences a person collects during their tenure. What drives these experiences? It’s leader behaviour first and foremost—what those above them are seen to do, say, decide, tolerate, walk-by, support (or not), along with the symbols they create. It’s also driven by what happens to a person when they’re recruited, on-boarded, developed, rewarded, promoted and exited. These things shape, and are shaped by, culture. 

So culture is created and sustained by Board and Executive behaviour, their actions and in-actions, as well as the symbols and systems they initiate and support. And this gets to the heart of the issue. Boards and Executives are now on notice to:

(i) be hyper-vigilant to the impact of the messages they send; 

(ii) proactively govern culture and behaviour risks; and 

(iii) determine and enact how they’ll craft a positive, ethical culture from the top down.

What practical actions might you as a Board take to avoid this mistake?

1.    Get aligned - Learn about, share and agree on perspectives and drivers of culture, so you can understand, align around and oversee them.Agree on your language, principles and the specifics of your Board’s role in culture and people governance, and how you’ll achieve this.

2.    Reset your practices -Determine what’s missing from your current practices and agenda. Adjust how and when the Board focuses on culture and behaviour discussions and oversight.

3.    Engage the CEO, CHRO and Executive team –Work closely with these key individuals to help them understand your new focus, expectations and what you need from them. Listen to their views and what they need from you in return. Jointly agree on the mandate you will collectively pursue around governance, leadership and management of cultural drivers.

Mistake 2: Failing to gain transparency and traction

“..too often, boards did not get the right information about emerging non-financial risks; did not do enough to seek further or better information where what they had was clearly deficient; and did not do enough with the information they had to oversee and challenge management’s approach to these risks.” - Final Report, p395

How is it that Boards fail to have line-of-sight into the behavioural patterns in their organisation, and miss taking action? In my experience, it’s understandable when you consider that:

1.    Deep discussions about behavioural patterns in the organisation, and the governance of their drivers, typically don’t feature on many Board agendas

2.    Directors often rely on sources provided via the CEO and their senior team, so their view is filtered and limited by what those individuals feel comfortable sharing

3.    Aggregated measures of satisfaction, engagement and/or Employee Net Promoter Scores reported to the Board are completely inadequate and only tell a fragment of the real culture and behaviour story

4.    Very few customer and employee voices are typically heard in the boardroom, particularly when Directors don’t have first-hand contact with those who deliver the customer experience

5.    Deep HR or ‘people and culture’ expertise doesn’t reside at many of our Board tables, and the invaluable insights and knowledge of the CHRO are often not well leveraged1

So how might your Board avoid this mistake?

1.    True culture indicators – Review and upgrade how you currently gain insight into culture and behaviour.  Together with the CEO and CHRO, get clear on the exact information you need to make better judgements and decisions. Collectively dig into what makes the current culture tick, the direction in which you need to shift it and which levers you’ll focus on. Often it’s the shift that counts, rather than where the culture is right now, so having multiple, robust measures of behaviour works best.

2.    Firsthand voices - Identify ways for your Board to hear as many voices as possible, as directly as possible. Who mightbe invited to give deeper perspectives, and hold a mirror up for you? How might Directors have more direct contact with the “front line”? Consider establishing a “People’s Voice” advisory group to the Board. Review upward feedback processes throughout the organisation. Hear what people are saying about the behaviours and beliefs currently being reinforced by leader behaviour, decisions and systems, such as how andwho the organisation hires, rewards, develops, promotes and exits.

3.    Board tone - Evaluate the tone your Board sets for the Executive team, and explore how this impacts the organisation’s culture.Your Board needs to have a reputation for enabling people to feel ‘safe’ to be open and transparent, and brave enough to take things to the top. If this isn’t happening, it’s a good indication that your tone needs a reset. Last month I wrote about setting the tone from the top—check it out here. 

Mistake 3: Focusing narrowly on profit and performance

“Directors must exercise their powers...in good faith in the best interests of the corporation... And that demands consideration of more than the financial returns...to shareholders... The longer the period of reference, the more likely it is that the interests of shareholders, customers, employees and all associated with any corporation will be seen as converging on the corporation’s continued long term financial advantage.” - Final Report, p402-3

Refreshingly, Commissioner Hayne calls for Boards to act in the organisation’s best interests, if they’re to deliver longer-term financial gain. And in his view, the best interests of the corporation are only served when the interests of shareholders, customers and employees are duly considered.

The mistake our financial services firms have made, it seems, has been to focus narrowly on driving shareholder value. As a consequence profit, performance and sales volumes have taken higher value.  Leader conversations, the remuneration system, the content of learning and development systems, recruitment criteria, etc. all skew to reinforce those messages—often at the expense of integrity, customer focus and trust. Ultimately, corporate reputation and the social license to operate suffers.

The learning here is to ensure your Board pays sufficient attention to what I call the 4-times bottom line: the combination of profit, employees, customers, and society. Only when our people receive consistent signals that all four are important will we see cultures and behaviours shift in the desired direction—and positive performance will follow.

So as Boards, how do we make this happen from the top?

1.    Reset the Board mindset – Explore individually and collectively the beliefs that currently drive your focus in relation to the 4x bottom line. How are these shaping your behaviours, actions, decisions and signals? Define the new Board mindset and principles for operating, and new habits to practice that reinforce these. Invite those who already hold this mindset in to speak. 

2.    Rebalance your attention - Review where your Board’s attention has been, and where you want it to be in 12 months’ time.How much of your focus, time and attention is given to profit, over your employees, customers or society? Review your Board’s annual agenda and build in actions and activities that reinforce your new focus areas. 

3.    Revisit your purpose – Consider the organisation’s purpose, and imagine designing a completely new purpose-centric organisation from the ground up. What would it look like? What would it focus on? What would it deliver? What wouldn’t it deliver? What type of people would be hired, developed and rewarded? What would leaders reinforce? Even in this imaginary exercise, you may start questioning many of today’s systems, practices, products, and services. Perhaps it’s time for the Board to lead a program of review and realignment to purpose? Or perhaps it’s time to review the purpose?!

Conclusion

Commissioner Hayne’s Final Report raises valuable insights into the areas that Boards and CEOs in any industry can benefit from, addressing long-term financial advantage. 

As he states, the fortunate thing is that action taken to address gaps in any one of the areas of culture, governance or leadership directly benefits the others. And those who take charge of the Board’s role in setting culture, who seek greater transparency of behavioural patterns, and who focus on the 4-times bottom line, will set the pace in their respective industries.

So, I’m curious: We’ve covered a lot of ground here, and any one of these points could be the subject of its own article. Let me know in the comments where you’d like me to do a deeper dive, and I’ll focus on that next.

To explore any of these ideas or discuss your own situation, please email me at elisa@futurecrafters.com.au. My passion is to help you build the assurance, transparency and momentum you need to govern people with energy, grow performance and build a future-fit workforce. Warm regards, Elisa

 1 One percent of ASX100 NEDs have an HR background - The Challenge of Attaining Growth, Blenheim Partners/MSGM, 2015