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People Risk: The Board Governance Series – Article 2

By: Ian Doyle and Melissa Grundy

Yes, Boards are accountable for corporate culture

Boards are being forced to focus on the link between corporate culture and corporate scandals.

The Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry (Hayne Royal Commission) has laid the failures it has identified at the feet of poor corporate culture. Inevitably this has led to a debate about where accountability for these failed organisational cultures lies.

Some Directors have suggested that they should be entitled to look solely to the CEO to ‘own’ the corporate culture. This approach is not appropriate for two reasons – the governance accountability of the Board and its involvement in the key drivers of organisational culture.

Governance accountability of the Board

This approach completely ignores the governance accountability of the Board. In all areas of risk facing an organisation, the Board is accountable for establishing a meaningful governance framework.

As with any part of the Board’s governance framework, People Risk requires the Board to provide guidance to Management and to adequately monitor the identified risks. In relation to culture, this Board guidance should cover both a broad strategic description of the desired culture and the clearly defined Board tolerance for unacceptable cultural drivers such as leader behaviour and organisational systems.

Boards are generally reasonably adept at setting broad organisational values and identifying the organisational culture they want – but not in executing appropriate oversight. Where Boards falter is in providing clear guidance to Management on specific and measurable parameters on which reporting is to be provided, such as an acceptable range of whistleblower reports or minimum level of knowledge that is acceptable for critical roles.

This shortcoming frequently means that Boards are provided with page after page of general data, from which they are expected to extract the information they require, as opposed to clear and targeted data that reflects the guidance provided.

So, in order to enable concise reporting from Management, the Board must be specific about the information it wants to see. In doing so, the Board must remember the difference between governance and management – the Board doesn’t ‘do’ the work, it provides guidance to Management on its expectations and Management then undertakes the implementation.

Key drivers of organisational culture

The key drivers of organisational culture are leader behaviour and organisational systems.

Leader behaviour occurs at all levels. Role modelling doesn’t stop at the level of the CEO because what the Board ‘demonstrates’ and what it ‘tolerates’ sends as strong – or stronger – message to the organisation as does the behaviour of any other leader.

The culture is not defined by the posters on the wall or the values on the website. Employees look to the behaviour of their leaders (and their leaders’ leaders) to see what is acceptable conduct, and the behaviour of the Board ultimately defines what is acceptable.

Employees are very good at quickly identifying the ‘real’ culture, because when they see a conflict between the stated organisational values and the behaviour demonstrated at the top of the organisation they will always believe what they see, rather than what they are told.

Many of an organisation’s systems are strongly influenced by both what a Board does and doesn’t say to Management. Boards often ‘assume’ that Management shares a common understanding of their objectives and expectations, such that it isn’t necessary to stipulate boundaries. For example, if the Board makes it clear to Management that a significant reduction in expenditure is expected, then frequently the system that is developed in response to this direction will primarily reflect financial drivers. Because the Board did not specify its expectations regarding any cultural implications, it is likely that the resultant system will deliver reduced expenses ‘at all costs’. Without the Board balancing its guidance to Management to incorporate cultural expectations, it is contributing to the organisational risk by creating ambiguity.

Boards can also often underestimate the informal influence they wield. A passing comment by the Chair about outdated office décor may result in a complete refurbishment of the premises prior to the next Board meeting.

As a result, no Board can avoid its accountability for the organisational culture or abdicate responsibility to the CEO.  The Board’s behaviour as an organisational role model and the guidance it provides, will always be key drivers of the culture, and as a result the behaviour of employees.

Click here for Article 3.