Organisational culture

An organisation’s culture refers to the collective behaviours of its people, driven by a set of norms and values that directly impact decision making.

It is central to an organisation’s performance against its goals and is essential to the quality of its corporate governance.

An organisation’s culture can be described in formal governance documents, but ultimately it is expressed in the actions and experiences of its employees, partners, suppliers and its customers. Culture is bound to considerations of what is right or wrong, and reframes compliance-oriented ‘can we?’ questions as ‘should we?’ questions – that is, questions regarding business ethics.

The importance of organisational culture

The management consultant and author Peter Trucker is credited with the well-known phrase, “Culture eats strategy for breakfast.”

Good culture is an invaluable asset to its organisation. Despite inherent complexity, culture is critical to shaping corporate governance frameworks and in driving sustainable performance. An organisation’s capacity to achieve its goals, brand and the reputation of the board and employees may all be severely damaged by public revelations of poor cultural practices.

Organisations with an appropriate and positive culture may be at lower risk of events leading from misconduct, but may also have higher customer satisfaction, improved morale and wellbeing among employees, better productivity and stronger performance against long-term strategic goals.

In the wake of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, Australian regulators such as the Australian Securities and Investments Commission (ASIC) and the Australian Prudential Regulation Authority (APRA) have spoken to the significance of good culture.

Types of organisational culture

No two organisations are exactly alike, and so culture comes in different styles. In The Leader’s Guide to Corporate Culture by Boris Groysberg, Jeremiah Lee, Jesse Price and J Yo-Jud Cheng (Harvard Business Review), a study of US companies, there are eight organisational culture types identified:

• Caring;

• Purpose;

• Learning;

• Enjoyment;

• Results;

• Authority;

• Safety; and

• Order.

Despite examining only US companies, the study findings demonstrated an issue also apparent in Australian organisations. Employees across all sectors ranked the cultural characteristics of ‘results’ and ‘caring’ almost equally important.

Beyond these two elements, cultural values were ranked differently between sectors. Organisations will require different cultures to effectively achieve their goals.

The board’s role in corporate culture

The board plays an important part in shaping and exemplifying an organisation’s culture. As the Chinese proverb goes, the fish rots from the head. Directors and leadership must demonstrate the organisation’s values and set the tone for the rest of the organisation.

Director behaviour, such as the quality and character of their conversation, and the decisions they make in the boardroom (regarding strategic direction, risk appetite and remuneration, for example), affect how senior management and the CEO will carry out their roles.

In their roles as stewards of an organisation, a board’s directors must take steps to regularly assess and understand the corporate culture, and to work with senior management to create change where needed and make the most of relevant opportunities. Directors must seek to ensure that an organisation’s true culture is in alignment with the culture that is approved by the board.

To effectively oversee culture, a board should consider its own functions in three areas:

• Is the board setting a clear direction for its culture and expectations around behaviour and decision making? Both formal and informal behaviours must be examined, as together they show the true picture of an organisation’s culture.

• Are these expectations reinforced in the organisation’s policies, systems and procedures, and are they aligned with its strategic goals?

• How is the board ensuring that those expectations are met? What tests are in place? Are both reported metrics (formal measurements) and observed behaviour (informal measurements) telling the same story? Inconsistencies between these two might reveal contention between the cultural attributes desired by the board and informal rules of the workplace.

Holding the CEO accountable is a vital part of the board’s role in governing organisational culture. Ensuring the values of the organisation are shared by the candidates is important during recruitment and succession planning processes.

Assessing organisational culture

There are many different formal and informal means of assessing culture that are at a board’s disposal – staff surveys, net promotor scores, recruitment and retention measures, among others.

An holistic approach to assessing culture helps create a sharper image of a culture, its suitability to the business, its alignment with current strategy, and to surface red flags. Directors cannot rely solely on formal data measurements to form cultural insights, nor delegate all responsibility to management. The board and management must together discuss the framework that will best allow for an appropriate oversight of culture and for constructive challenging of management.

The board’s trust in the CEO and other management roles should also be tested by first-hand experience among employees and consumers. Taking time to ‘walk the floor’ allows directors to understand, evaluate, compare and influence their organisation’s formal and informal systems of culture.

The tools used by the board to make decisions in the boardroom and how they interact with the organisation are key to its ability to assess and craft formal culture systems and policies. In contrast, the board’s influence and understanding of its informal culture systems are reliant on directors’ behaviour outside as well as inside the boardroom.