December 10, 2018

You think your company culture is fine…but how do you really know?

Assess Culture

by Elizabeth Arzadon

The CBA Prudential Inquiry into conduct at the Commonwealth Bank of Australia sparked a surge in discussion about cultural risk in Boardrooms across the country. The cost of remediation, litigation, reputational repair and regulatory consequences when issues arise that are attributed to culture, has highlighted that this ‘soft and fluffy’ issue can frequently have very hard financial consequences. In reality, cultural challenges are often the result of a shift between decisions that were deemed socially and politically acceptable in the recent past, and new ways of thinking. The fact that most organisations within an industry all operate on a similar set of assumptions decreases the likelihood of any individual firm seeing that the tide is shifting….before at least one firm takes a tumble and is held up as an example. But the facts are cold comfort for those firms who are made examples of, and the Directors who govern them. And the question exists: as a Director, do you want to be in a position to predict where issues may appear and manage them strategically, or be forced into playing catch-up?

The difficulty lies in enabling Directors to really see the existence of cultural issues, especially those occurring deep within their organisation, before a major incident occurs and they become fodder for public discussion. Deliberately, Non-Executive Directors are not embedded in the organisations they govern: they attend a limited number of meetings per year, depend heavily on management reporting to ascertain how the firm is performing on a range of dimensions, and are often given the royal treatment when they visit the shop and factory floor. The ability to identify emerging cultural challenges in such a context would almost require a sixth sense.

On the other hand, commentary on culture often highlights ‘tone from the top’ as a critical driver of culture. Non-Executive Directors are in a better position to personally judge the tone of a CEO and senior leadership, from their interactions with the Board, reporting and communications. However, drawing solid conclusions on the likelihood of cultural problems within a business on the basis of perceived ‘tone from the top’ alone is an error-prone approach for two reasons. Firstly, senior management and the Board are on the same ‘team’ in governing their institution. This creates an unconscious bias towards empathising with the challenges they face, and less likelihood of recognising when these pressures may actually be resulting in decisions and behaviours that send a problematic message to staff. Secondly, whilst a poor tone from the top is very likely to result in cultural issues below, the reverse is not always true. Senior leaders can, and often do, set an excellent tone with sincere intentions and strong purpose. But cascading this tone, and executing in line with it, doesn’t happen magically: sometimes it’s not tone from the top that fails, but tone from the middle.

Which brings us back to an uncomfortable reality: it might be difficult, but Boards do need to somehow get a handle on the issue of culture. For institutions governed by APRA, CPS220 makes Boards explicitly responsible for understanding cultural strengths and weaknesses, and addressing the latter. But with various corporate scandals and even the MeToo movement, the same expectation is developing amongst customers, shareholders, and politicians in all sectors. In short, culture is a material risk for many, if not most organisations, and their Boards.

There is no easy answer, but it is absolutely possible for Boards that are willing to consider the issue carefully, and some simple, practical sign-posts can make it easier. From nearly 20 year studying organisational culture and its impact on a range of outcomes including performance and risk, the following are three things that might help Directors get a better handle on the issue of culture in their firm: myths to avoid, riskiest issues to look for, and most effective steps you can take as a Director.


Top 3 Myths

Misinformation is problematic because it often leads to wasted effort, inertia and blind-spots. What are some common myths that Directors should avoid when reflecting on the issue of cultural risk?

1. Culture is entirely subjective.

The field of organisational psychology is dedicated to understanding organisational phenomena, including culture, in a robust, evidence-based way. Ignoring culture because ‘it’s not measurable’, or relying on ‘gut feel’ to sniff out issues, is akin to trusting a company’s financial health without looking at any P&L data. The fact is: it might be difficult to reduce the entirety of an organisation’s culture into a single set of numbers, but there are credible scientific techniques for assessing culture. Using a combination of quantitative and qualitative data, Directors can ensure their conclusions about culture are valid and reliable, which means they can trust and act on them with confidence.

2. Organisations have one culture.

This myth is less widespread than a decade ago, but still tends to creep in unconsciously – for example, when evidence of a positive culture in one area of a business comforts and overshadows examination of culture in other areas. Critically, culture almost always differs between levels, business lines, functions, geographic locations and teams. The implication: assessing culture at an organisation-wide level is almost meaningless – it isn’t the ‘average’ that matters, but the tail.

3. Bad things happen because of bad people.

It is common to attribute instances of bad behaviour to bad people. This explanation provides a relatively straight forward action, and reassurance that the issue will not recur. Unfortunately, history has shown that bad behaviour is often not the result of inherently bad apples, but of ‘corrupting barrels’. This creates a sobering ethical consideration for Directors: how to ensure they are governing organisations that exert a positive influence on their people, not a negative one.


Top 3 Issues

What makes culture ‘risky’? The same thing that makes other issues risky: a high likelihood of it occurring, and very negative impact if it does. The following three cultural characteristics are relatively common challenges (hence more likely in a generic sense), and tend to have a compounding effect when they do occur. Together, this makes them risky cultural issues that would be worth paying close attention to.

1. Good intent, poor execution.

Flowing on from myth 3 above, cultural challenges often develop when management does not understand the unintended side effects of their well-intentioned decisions. There is frequently genuine surprise at the gap between messages leaders think they are sending, and how these messages are being received. As a result, a multitude of problematic behavioural norms can emerge, without management being aware – behaviours that impact not only management of risk, but can also undermine all manner of other outcomes from customer service and sales, to costs, efficiency, innovation and staff morale. Directors might be wise to spend more time considering the unintended impact of management proposals on staff behaviour, not just the intended ones.\

2. Constant action, no reflection.

As a whole, the corporate world today tends to be action-oriented: quarterly targets, constant cost pressure, capacity constraints. Pressure to make quick decisions, deliver at pace, and demonstrate results, often develop into a behavioural norm that prioritises quantity and speed of output, over careful consideration and thought. The consequences of such norms aren’t difficult to see, but can be harder in a culture where time to reflect is rare. Directors should be alert to a culture that is so focused on time-bound delivery and results, that insufficient time is spent on thought, analysis and debate.

3. Problematic social silence.

There is a layer of culture which is largely unspoken: implicit assumptions and norms that often develop unconsciously and are simply accepted as ‘the way we do things around here’. On a range of topics, this isn’t a problem, but in certain domains, this layer of unspoken assumption can morph into ‘social silence’ – an unspoken ‘don’t ask, don’t tell’ agreement to stay quiet about aspects of the culture that many individuals know are problematic, but no one wants to escalate for a variety of reasons: fear of consequences, a sense that nothing will change even if issues were raised, an avoidance of being perceived a ‘trouble-maker’ or not part of the team. Addressing such norms requires far more than simple encouragement to ‘speak up’, or installation of a whistle-blower program, but rather requires attention to the multitude of drivers in the formal and informal environment that created them.


3 Things Directors Should Focus On

When it comes to culture deep within a firm, it can be tempting to thinking Non-Executive Directors just have to trust management. But we’ve all heard the boiling frog analogy. The concept of independent boards developed partly to address a host of common biases that stop management from seeing what is right in front of their face ….especially when they might be part of the problem, however well-intentioned. So, what are the three most effective things you might be able to do about culture as a Non-Executive Director?

Looking deeper. If a Board wants to understand the cultural strengths and weaknesses within their firm, it needs to look below senior management. Almost every engagement survey will show: senior leaders present a rosier view of their world – not because they are trying to conceal anything, but because they often genuinely experience the organisation differently to those at lower levels. Understanding the reality of a work environment for more junior staff, including the pressures and influences on their behaviour, is critical to knowing whether cultural norms exist at the front line which could be creating hidden risk.

Looking closer. Reporting on the issue of culture, and especially its root causes and impact on risk, is under-developed in most organisations. Engagement survey results and staff turnover stats typically give only the patchiest of information on cultural strengths and weaknesses. If Boards are to understand culture, they need to ask management for more robust data, and have the opportunity to discuss patterns, observations and root causes of this information directly with management. Boards need to satisfy themselves independently that cultural challenges are being addressed, not just rely on management to tell them everything is under control.

Looking ahead. Perhaps the biggest opportunity to improve governance of culture is by taking a more proactive stance. At present, Boards and management in many organisations tend to believe culture is adequate (if not strong), right up until the point where a serious incident occurs, and problems become clear. By the time culture has become an issue, it is deeply entrenched and difficult to remediate. A more constructive mindset would be one that anticipates likely pressures on behaviour, and takes steps to actively manage them. Research and practice show a range of variables which heighten the risk of cultural pressure: for example, periods of out-performance, a shift in strategic direction, or geographical expansion. Evaluating the presence of such factors as they emerge, and explicitly managing cultural risks that arise from them, would take less effort, money and angst than solving issues after they inevitably appear.

Culture is often seen as a woolly, intangible issue. To make it practical requires us to put culture into the context of key business problems being solved. A clear scope helps everyone to see how culture produces tangible behaviours, that help or hinder tangible business outcomes. In Australia today, the business problem du jour is risk and conduct, and many lessons are being learned about the way culture can create serious problems. With time the cycle will shift, and those institutions who have truly grasped the method of leveraging culture will be well-positioned to apply this capability to more uplifting challenges like innovation, brand and growth.