Culture and Corporate Governance

It would be remiss of us to not mention the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, which has consumed much of media and news reports recently. Culture was the predominant theme of the Commission, and indeed its finding. Corporate culture, however, is probably the theme of the decade. An issue we believe will continue to dominate the corporate governance landscape for a while to come until it is normalised as a metric of company performance.

But what is culture…?

The Australian Securities & Investments Commission (ASIC) defines culture as  “a set of shared values or assumptions … the underlying mindset of the organisation … culture shapes and influences people’s attitudes and behaviours towards, for example, customers and compliance.”

ASIC’s explanation is clear that “Directors play an important role in shaping the culture of their organisations. In turn, a company’s culture shapes its corporate governance frameworks and practices.”

Although it has made several attempts, other than this statement and a few speeches, ASIC has not been successful in regulating or pushing culture as a regulated aspect of corporate governance.  The lack of success is because of the reality that culture is not easily defined, and cannot easily be translated into blackletter law.

The Australian Institute of Company Directors (AICD), however, is leading the way in culture and the role directors can play in setting the culture of an organisation. Last year they released a governance standard on culture. AICD Governance Standard 10 reads as follows: The Board sets the tone for ethical and responsible decision making throughout the organisation.

The standard is based on the widely held view that the culture of the Board influences the culture of the rest of the organisation. The AICD talks of positive board behaviours from directors turning up on time, reading their Board papers and declaring and properly managing conflicts of interests. It also suggests that organisations review how they reward behaviours, including the type of behaviours they reward, and challenging undesirable behaviour. It is these practical examples of positive Board behaviours that will help shape reform in this area.

Practical solutions to the issue of culture

Boards can contribute to the culture of their organisation by strengthening their corporate governance practices, including:

  • developing a set of company values
  • implementing a Board code of conduct
  • implementing a Board conflict of interest policy
  • implementing organisation wide values and codes of conduct
  • implementing a whistle-blower policy
  • ensuring the organisation’s constitution allows the Board to deal with directors that do not comply the Board code of conduct
  • ensuring the organisation’s employment contracts allow it to deal with employees who do not comply with the code of conduct
  • implementing procedures for dealing with complaints, disputes and issues – and providing those procedures both inside and outside your organisation as a way to deal with concerns
  • regularly discussing all of the above, and providing training to the Board and staff on all of these policies and procedures.

Perhaps the most important aspect of maintaining a positive corporate culture, is to then use the tools you put in place to call out bad practices and behaviour. The Banking Royal Commission was clear that the failure of Board and management to ask more questions and to call out poor practices contributes to the appalling culture in the banking and finance sector. There is no point focusing on culture unless you are prepared to call out examples of poor behaviours and standards.

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