Boards must act as culture guardians

A positive company culture can lead to better long-term performance. Here's what boards must do to manage it, starting from the top down.

When it comes to corporate culture, the failures make the headlines. However, leading directors say it’s time to embrace culture for its positive contribution to performance, wellbeing and attracting and keeping top talent.

“I would see culture as a force for good as opposed to a force for minimising the chance of bad things happening,” says Michael Ullmer AO FAICD, chair of Lendlease Group and a director of Woolworths, in the AICD/ACSI research.

Coca-Cola Amatil chair and ANZ board member Ilana Atlas AO MAICD notes, “Companies tend to focus on the negative side of culture — on everything they shouldn’t be doing. Whereas the reality is, you need to have really positive cultural norms to be successful as an organisation.”

Three years ago, the banking Royal Commission devoted an entire chapter to governance, culture and remuneration — elements that Commissioner Kenneth Hayne AC said “march together”. The commission report provided a high-level description of “what” should be done about corporate culture, but almost no detail on “how”.

“Assess the entity’s culture and its governance, identify any problems with that culture and governance, deal with those problems, and determine whether the changes it has made have been effective,” advised Hayne.

“It is the board’s role to make sure culture is on the agenda and gets enough meaningful airtime at board meetings,” says Ullmer. “This demonstrates to management and the organisation that it has to be taken... as seriously as you’d take strategy.”

What is culture, why does it matter?

Positive company culture is important to long-term performance, according to every director interviewed for the research.

Graeme Hunt MAICD is the chair of AGL and BIS Industries, the National Resources Science Precinct and the Western Australian Energy Research Alliance. In a recent AICD webinar on governance research findings, Hunt stressed that while in the past it had been acceptable that companies achieved good financial returns, shareholders now expected more — including “how companies create value”.

Culture is “the most important enabler of a successful strategy implementation,” said Atlas. “The most important aspect is how leaders behave and oversight of the CEO is the most important aspect of culture for boards.”

What leaders do and say sets the tone for the rest of their organisation, says Judith MacCormick FAICD, author of the AICD director tool, Governing Organisational Culture.

Elements of culture include how directors behave, the quality and character of their discourse, the decisions they make in the boardroom including their risk appetites and remuneration frameworks. MacCormick maintains that organisations with a stronger, positive culture may not only face lower risk — for example from misconduct — but also better employee morale and wellbeing, and enhanced productivity and performance.

MacCormick advises boards to consider their function over three dimensions:

• By setting clear cultural direction/expectations around behaviours and decision-making
• By aligning the levers at their disposal to reinforce these expectations
• By regularly testing whether these expectations are being met.

Many directors argue that companies that define the company culture in simple terms — for example, by keeping key requirements short and drafting communications in plain English — can help get the message through.

A search of ASX 50 annual reports and websites for the AICD/ACSI research found 75 per cent of letters from the chair or CEO in annual reports included the word “culture”. The research encompassed both statements and actions taken by companies; and the data collected covered four themes — values and conduct, employees, diversity, and executive pay.

With regard to “values”, the search revealed that all the ASX 50 companies operated a code of conduct or its equivalent. Almost all the organisations reported the number of breaches of the code, and about 80 per cent of them reported the consequences of those breaches.

The most common corporate value nominated by ASX 50 companies was “integrity” (40 per cent). This was followed by “respect” (32 per cent) and “excellence” (26 per cent). However, only 10 per cent of companies actually provided information on the number of whistleblowing events.

Most companies reported undertaking an employee engagement survey annually or biennially, but fewer companies (42 per cent) publicly reported participation levels or overall engagement scores. Just over half of the ASX 50 explicitly included a culture-related metric in their executive remuneration plan.

How do boards get a line of sight?

“You need to be omnipresent,” Hunt said in the Governing Company Culture webinar, adding directors should use “all senses to connect to the organisation”. “If you are only talking to the senior management of the company it’s hard to be confident that you know what’s going on in the business,” he noted. “You can’t live in a vacuum and just be fed information that might be coloured in a way that is not good for the company and ultimately for shareholders.”

Site tours, engaging with staff in the absence of managers and setting up “an ongoing forum” led by a board’s chair to keep discussion open, are ways to do this, he said, adding that passing information back to management is vital. “You don’t want a debate about whether the information is accurate or not, you just want to say this is what we have been told,” he said.

Putting culture on the formal board agenda to signal its importance is key, as is giving the board time to question management about company culture. David Gonski AC FAICDLife, former chair of ANZ, a director of Sydney Airport Corporation, UNSW chancellor and president of the Art Gallery of NSW Trust, said an essential part of culture is “questioning the ethics of what you’re doing”.

“I believe large companies should have a board ethics committee and that management should have an ethics committee as well,” said Gonski.

MacCormick said appointing a CEO and “holding them accountable” are significant influences the board has on culture.

An alignment with values should be given appropriate weight during the CEO recruitment process and succession planning,” she advises in AICD director tool Governing Organisational Culture.

When appointing a new CEO, a strong focus on soft skills — “who they are as people” — is key, said John M Green FAICD, deputy chair of QBE Insurance, and a director of the Cyber Security Cooperative Research Centre and Challenger. “If someone is a good executive, but turns out to have significant negative character traits, you might want to counsel them and give them an opportunity to change. But if they can’t or won’t, getting them off your bus might be a very wise option.”

Managing safety is also an important factor, and a 2020 ACSI report — Safety in Numbers: Safety reporting by ASX 200 companies — found that while reporting on the most material safety issues is improving, significant gaps remain. Seventy companies did not report any safety data in 2019, including 23 in sectors where safety is likely to be material. ACSI also identified 10 companies which linked safety performance to remuneration without disclosing any safety data or targets.

The joint AICD/ACSI research found senior directors believe they are able to exert significant influence over company culture by:

• Selecting, monitoring and (where necessary) removing the CEO
• Executive remuneration — rewarding or penalising behaviour
• Setting the tone from the top — modelling desired behaviours
• Sending signals via board priorities
• Influencing the creation and enforcement of values statements and codes of conduct.

How can boards assess and measure culture?

Corporate culture can have a profound impact on a company’s performance, governance and reputation, but as Penny Bingham-Hall FAICD — a director of BlueScope, Dexus Funds Management and Fortescue Metals Group — said in the AICD/ACSI research: “One of the real challenges as a director is how do you know what you don’t know? The challenge for directors is to think ahead — how could that happen to us? In hindsight, you think, how did we let that happen?”

Measuring and monitoring culture can be complex. The AICD/ACSI report found boards need to work collaboratively with management — using internal and external metrics — to determine whether the right things are being measured and appropriately reported to the board.

Internal metrics Common survey-based metrics included:

• Employee engagement surveys
• Specific culture surveys
• 360-degree feedback on people in leadership positions
• A detailed culture review, which may be led by an independent third-party
• Employee Net Promoter Scores (eNPS)
• Values questions in employee performance assessments — “Have you complied with the organisation’s values?”

Other internal metrics include absenteeism, staff turnover/unexplained departures, employee grievances, whistleblower calls, statistics relating to diversity, discrimination, harassment and bullying complaints, compliance training, and interactions with regulators and breach reporting.

External metrics Common survey-based metrics included:

• Customer Net Promoter Scores
• Investor or stakeholder surveys
• Customer complaints and response times
• Market data — Corporate Confidence Index
• Glassdoor or employer review sites
• Supplier feedback.
• New approaches.

How boards can set the tone

Many directors consider effective oversight of culture starts with the mindset of directors as individuals and the dynamics of the board as a group.

“You need directors with curious minds,” said Tim Poole, chair of Aurizon Holdings. “The role doesn’t start and stop in the boardroom. Board meetings are one very small component of what we do. There are a range of things you can do if you’re active, interested and curious — including constantly talking to people and looking at things. Some people have that mindset and some don’t.”

Directors described having their “antennae out and looking for soft signals around what’s going on in the organisation”. The board’s first sign of a cultural problem may be “ripples” or “noises”.

When it comes to managing complaints, directors need to be prepared to probe more deeply into issues at times. In some cases, this might be a regular part of reporting: for example, the board asking to be taken through data and trends on customer complaints once a quarter. Boards may ask to see how management has dealt with an individual complaint, incident or issue. The board can then send strong signals to the organisation about its expectations for handling future incidents.

Role modelling the culture of organisations is important, said Atlas. “Boards don’t spend enough time thinking about their own role. The formal processes do supply significant insight — what goes on an agenda or in a paper is really important, the people who come to the board to talk are important signals to the organisation. It is an ongoing and intensive process. There is no silver bullet. It’s about being consciously aware of the signals you are receiving and the signals you are giving.”

About the report

New AICD research in partnership with the Australian Council of Superannuation Investors (ACSI) — Governing Company Culture: Insights from Australian directors — offers key lessons on how boards can oversee, assess and manage company culture.

The research, based on a series of interviews with senior directors of ASX 50 companies, reveals directors are acutely aware of the importance of culture in driving performance and good outcomes for employees, customers and stakeholders. 

AICD CEO Angus Armour FAICD and Louise Davidson AM GAICD, CEO of ACSI, write in the foreword that poor company culture is at the heart of “many, if not all” high-profile governance failures over the past decade. “The insights from the experienced directors and subject matter experts interviewed suggests that while the task before boards is formidable, it is not impossible,” the report found. “A key finding of this research is that directors believe they can and should influence culture, and are able to articulate methods for doing so. Ultimately, assessing company culture is an exercise in judgement.”

Key findings:

• Culture is the responsibility of directors, not just senior management. Directors can use a range of practical methods to exert significant influence over company culture.
• Company culture is an increasingly high priority. There has been a significant shift over recent years, with culture now firmly in the spotlight for directors.
• Directors see the link between culture and long-term performance. Directors feel that culture is extremely important to the long-term performance of a company.
• Effective oversight of culture requires active and curious directors. Directors need to be curious, persistent and willing to synthesise the many formal and informal sources of data relating to culture. Directors must be alert to an overly optimistic picture of culture from management.
• There is limited public disclosure on culture. Investors would value greater disclosure to discern companies’ cultural strengths and weaknesses. Yet practices among ASX 50 companies show wide variance in public disclosure and there is a lack of market consensus as to the most valuable metrics to report against.