How to end corporate Australia’s culture crisis
Disclaimer: This article was originally published in the Australian Financial Review (AFR) on 30th October, 2020 by Sunil Vohra. Sunil is the co-founder and CEO of culture tech analytics and management company The Workability Index (TWI).
Another day, another ASX chief on the chopping block for poor behaviour. Engaging in or mismanaging poor behaviour has caused the downfall of Rio Tinto CEO Jean Sebastien Jacques, QBE boss Pat Regan and AMP chairman David Murray in just the past few months.
These culture crises are more than just a public relations headache. They are costing shareholders hundreds of millions of dollars, as the damage to share prices cements the impact of poor culture oversight into the company’s valuation.
Broader society is also tiring of companies acting badly. Customers, shareholders, staff and the public are increasingly uniting in calls for heads to roll.
The broad message is that community expectations have changed, but board governance has not.
So how can boards reset their governance models to meet these new expectations and prevent – not constantly react to – these crises?
Here are four guiding principles.
Elevate culture alongside the numbers via a quantified framework
Companies are required to report financials using a widely accepted accounting standard, which shareholders and analysts understand. In contrast, reporting of non-financial measures such as culture is random, subjective and based on highly variable metrics. Boards must reject this ad hoc approach to culture reporting and the notion that it sits secondary to financial reporting.
Behaving more ethically will boost Australia’s economic recovery
A culture reporting framework that is standardised, quantifiable, consistent, and readily understandable would be a first step to eliminating this issue.
As an example, real estate company Laing+Simmons said recently it had applied an independent standardised index to measure itself on 10 specific dimensions of culture: trust, wellbeing, engagement, inclusion, advocacy, risk, organisational, leadership, future workforce and community.
The metrics in the index are quantifiable and consistent, allowing for comparisons year on year and against other companies. Results highlighted areas of strength and weakness that Laing+Simmons could address, while their objective score is visible to all.
Reassign responsibility for culture reporting
The remit of culture reporting has traditionally fallen to the people and culture function. This seems a natural fit, given its role in recruitment, staff wellbeing and performance management.
However, the people function is mostly internally focused and is conflicted by the need to project culture success up reporting lines. It is heavily incentivised to minimise, not expose, culture issues – like asking a student to mark and report their own exam result.
Consequently, investigations of poor behaviour tend to be limited to mid-level individuals or managers. Systemic or organisational issues are rarely captured, especially if they stem from the C-suite or board itself.
Instead, the reporting of culture metrics should sit with the chief financial officer, alongside their formalised responsibilities for financial standards and reporting.
The CFO role now extends to oversight of environmental, social and governance issues, and is the logical home for crucial non-financial metrics, such as culture. This would halt the reporting of subjective and self-serving culture performance metrics.
Appoint a chairman of culture to the board
Governance structures and subcommittees have long been formulated around areas considered to influence the financials, such as audit, remuneration and risk.
But culture is now of such significance to financial performance and risk that it requires a dedicated board committee itself.
Boards should dissolve traditional remuneration committees and reconstitute them as a culture performance committees with a nominated chair.
Terms of reference should cover areas such as culture as an enabler of strategy; incentives and remuneration structures; people risk management; culture transparency for ESG reporting; culture performance and key performance indicators for the CEO; professional development; and succession.
AustralianSuper is one of the leading examples in this area, having a board subcommittee with a specific remit for culture, including formalised terms of reference and chaired by trustee Innes Willox.
Recruit all board members based on culture track record
All potential board members should be assessed for past cultural performance, with equivalent weighting to financial performance, using a balanced scorecard.
The scorecard assessment process should involve asking candidates to provide evidence of culture assessments and metrics used in previous roles, and running them through a case study to assess culture competency.
It should include assessment for bias and stereotyping, and should evaluate what candidates bring to the board’s composition, giving stronger weighting for fresh perspectives in culture oversight. There should be a minimum mark under which candidates become unacceptable.