Corporate Culture

I’d like to begin by acknowledging the Gadigal people of the Eora nation and pay my respects to Elders past and present.

I’ve framed my remarks on trust around three questions: where do we stand, why does it matter and what do we do next?

If you look at the 2018 Edelman Trust survey, trust in institutions of all kinds – business, media, government and not-for-profit – has reached record lows in Australia.

We’re one of just two nations to experience consecutive falls over a year. Australian institutions are now among the least trusted in the world – we’re just ahead of Russia by a few points.

And the Australian public does not trust business to do the right thing: at 45%, Australian trust in business is below the global average of 52%.

Today, only 14% of Australians agree that Australia’s government ‘works fine as it is’. We can see this flow through to voting patterns. I’m not going to go through all the reports that have come out even in the last six months, but let’s pick a few.

The Grattan Institute published ‘A crisis of trust: The rise of protest politics in Australia’ in March 2018, which found that in Australia the vote share of minor parties has been rising since 2007. At the 2016 election it reached the highest point since the Second World War. More than one-in-four Australians voted for a representative outside the major parties in the Senate, and more than one-in-eight in the House of Representatives. And if you look at the regions, the major parties are particularly challenged. The further you travel from a capital city, the higher the vote goes to minor parties.

Since the minor party vote began to rise in 2007, there has been a significant increase in the share of people who believe politicians look after themselves and government is run by a few big interests.

We’re not alone of course in facing a low trust environment.

When the Pew Research Centre began asking about trust in government in 1958, about 75% of Americans trusted the federal government to do the right thing almost always or most of the time. Since the GFC, the proportion of Americans answering in the affirmative has never exceeded 30%. And today, only 18% of Americans trust the government to do what is right always or most of the time.

The Australian Election Study series, which tracks trends in Australian political opinion and behaviour over an extended period of time, mirrors those Pew findings.

The Australian findings show a significant rise between 1987 and 2016 in the belief that big business has too much power. That’s gone from 51% to 74%, and an increase in those who are not satisfied with democracy from 22% to 40%.

40% of respondents are not satisfied with democracy, with our very basis of government.

On whether people in government can be trusted, results have fallen from a high of 51% in 1969 when the series started to 26% in 2018. When asked if people in government look after themselves, the results have risen from 49% to 74% over the same period. It’s not a pretty picture.

You can see that we’ve been in similar cycles before, so we should have some confidence we can get out, but we do need to start.

What’s behind this decline in trust? Well the Grattan study found that public suspicion of major parties is fuelled by the fact that parliamentarians aren’t seen to be held accountable for their poor behaviour.

Poor corporate governance, poor corporate behaviour. We’ve heard about the Hayne Royal Commission. We’ve seen some indefensible behaviours emerge during testimony. It still has a way to run, but the impact on the public is palpable.

We’ve seen large corporate fines levied. In my head in the past eight weeks I can count $25 million in corporate fines. These are remarkable events and they continue to undermine the integrity of the Australian public’s trust in business.

However, I have to emphasise that the decline in trust predates these events, and the banking sector cannot be responsible for the decline in trust across all the institutions.

So what are we dealing with? We’re dealing with perceptions.

People feel left behind. The 2018 CEDA Community Pulse found that 74% of people believe both large corporations and senior executives have gained a lot from 26 years of uninterrupted growth, whereas only 5% of people believe they, or people like them, have personally gained a lot. 79% of people believe the gap between the richest and poorest Australians is unacceptable.

People feel left behind. People are losing trust in the system because they feel the system does not work for them.

And media in all its forms is helping to reinforce perceptions.

How we use technology to engage and learn about the world has been driving significant changes in media business models. It’s now easier to call out bad behaviour, to identify where things are going wrong and publish it. But technology also has made it a lot easier for people to avoid information that challenges their opinions and world-views, and media business models are helping to reinforce that trend. Perceptions and emotions are being cultivated and manipulated to an alarming degree.

Uncertainty plays a role in the decline in trust.

The implications of new technologies for the future of work and society – the potential for a ‘revolution’ in our way of life – are a source of tremendous uncertainty.

A Bain report on demographics, automation and inequality released earlier this year said that the pace of workforce change we will undergo over the coming decade is unprecedented. While the transition from agriculture to industry in the industrial revolution spanned over four decades or more, the report’s authors expect a similar magnitude of workforce change to occur in the 2020s alone. So, while the transition back then from agriculture to industry affected basically the children of farmers rather than farmers, it’s the farmers that are going to be impacted this time.

And while many are optimistic about the opportunities for society, at the level of the individual the challenges for the unskilled and the re-skilled will be considerable, as will be the ethical challenges in many of these new technologies. That uncertainty looms over every generation in our society.

And finally, expectations have changed.

Millennials, who are rapidly becoming the largest generational cohort in the workplace, continue to show that they have different expectations of the social contract and responsibilities of business than their Gen X or Baby Boomer predecessors. For example, according to a 2018 YouGov poll, almost half of Australians believe businesses have a responsibility to assist in upskilling members of the community – and as the gig economy and automation continue apace, that sentiment could grow.

So the level and trend of trust in Australian society is deeply disturbing, and it has the potential to deteriorate further given perceptions of inequity, significant uncertainty about the future and rising expectations about the role of business and government.

Why does this matter?

The only thing you might take away today – Que País É Este? It’s Portuguese for what kind of country is this?

I began my career rescheduling sovereign debt in Latin America: Brazil, Argentina, and Ecuador. I have seen first-hand the consequences of living in a low-trust society. How countries with abundant resources and tremendous potential lose their place in the world, lose decades of economic growth, and lose the trust of their citizens.

We don’t want to live in a low-trust country. We don’t want to experience the damage to social capital and the economic inefficiencies, the cynicism that solutions will be found, and the political appeal to simple answers that miss the question. We would not want to live that way.

To quote from CEDA’s 2018 Community Pulse, “for government to have the political capital to implement the right policy settings, the community needs to have trust that the benefits will be shared broadly”. For example, lower business taxation, reduced business regulation and support for new business investment all ranked as ‘widely unimportant’ in the CEDA Report.

It is unrealistic to expect governments to take important steps – such as reducing overly prescriptive business regulations – in a low trust environment, without the political capital or support for such measures.

We can’t expect government to provide solutions to problems if we don’t play our part in finding and enabling those solutions. This is important work for organisations like the AICD, who seek to contribute to regulatory and reform settings.

Re-establishing trust is essential for us to tackle the challenges we already see in the global environment, in the global economy, in technology and in our society.

So what do we do next? From a business perspective, let’s start by learning, and in fact re-learning, from recent experience.

Two dominant themes have emerged through the Royal Commission and APRA Report into the CBA: the impact of corporate culture and the need to adapt to stakeholder interests.

Culture is critical.

A good culture can be a competitive advantage. Conversely, poor cultures damage employee and stakeholder perceptions, and when they result in visible failures – be they regulatory or ethical – they erode trust.

It is welcome news that when we last asked the director community about their thoughts on culture in the AICD’s Director Sentiment Index, we found that 92% were focused on culture in their organisation.

When we asked them what they were doing to tackle the issue they told us they were ensuring culture is a regular item on the board and audit committee agendas. They said they were capturing data on key indicators, they were communicating the ethical positions of their organisations to staff, and by having broader interaction across the organisation they were conveying that message.

Despite these efforts, rightly or wrongly, there is a view that the culture in many of Australia’s organisations leaves a lot to be desired. Perhaps this is because the culture of our workplaces has rarely been under greater scrutiny than it is today.

So the efforts of directors around their board tables, and leaders in their organisations, must be sustained and focused. This is a complex task and one that deserves our ongoing focus.

We need to hold ourselves accountable and be seen to hold ourselves accountable. We must be transparent in doing so, explaining clearly the reasons why decisions have or have not been taken, honestly and fully. We must encourage bad news to travel swiftly to start the remedy.”

If we’re not setting the tone for our staff, and the wider community, we cannot hope to repair the trust divide. Nor can we ask our employees to act as our most reliable and trustworthy spokespeople.

From the AICD’s perspective, we say that governance leaders can play a role in regaining trust if decisions are accountable and transparent, and leaders demonstrate ethical behaviour.

We need to hold ourselves accountable and be seen to hold ourselves accountable. We must be transparent in doing so, explaining clearly the reasons why decisions have or have not been taken, honestly and fully. We must encourage bad news to travel swiftly to start the remedy.

And there is one specific area we need to address to encourage disclosure.

The Australian Council of Superannuation Investors released findings earlier this year showing that only 55% of ASX 200 companies had policies allowing whistleblowers to remain anonymous, and 71 of our largest companies did not have statements making clear that retaliation against whistleblowers was unacceptable.

The AICD is focused on achieving good governance outcomes, and what better outcome is there than when an individual feels empowered enough to alert their own organisation of potential wrongdoing?

That’s why we’re backing stronger legal protections for whistleblowers, as a good governance measure.

Governance leaders can make an important contribution in promoting timeliness, transparency and accountability in decision-making through these actions and more. We need to model the ethics we want to take hold in our organisations, not just as individuals but as teams of leaders.

As organisations become larger and more complex, the challenge for leaders grows exponentially. They must reach and affect larger, more diverse audiences over longer periods of time to achieve their desired influence.

For directors and senior management, it is essential that frameworks, processes and behaviours support the desired culture throughout what are often complex, sprawling and diverse organisations.

The second theme that’s emerged through the Royal Commission and APRA Report into the CBA is around managing stakeholder interests. As governance leaders we need to embrace one of the clear call-outs of APRA’s Prudential Review of CBA – instilling into our organisational DNA the question of ‘should we’ not ‘can we’.

As the APRA Panel said in its report: “At its simplest, conduct risk management goes beyond what is strictly allowed under law and regulation (‘can we do it?’) to consider whether an action is appropriate or ethical (‘should we do it?’).”

Directors of listed companies owe fiduciary duties to their shareholders and their legal obligation is to act in the interests of the organisation as a whole. But boards are always balancing complex stakeholder interests in fulfilling their duties – engaged staff, happy customers, and positive relationships with communities – to support long-term value creation.

There’s a great test, long a feature in the public sector, which is emerging as a theme from the APRA report: would you want to see this published on the front page of The Daily Telegraph? Should we do this, not can we do it. The immediacy of public opinion and the implications from stakeholder mismanagement, including share price collapse and class actions, makes that ‘Daily Telegraph’ test an absolute priority.

And from our survey work, Australian business is deeply committed to that course.

A survey we did in cooperation with KPMG asked who are your most critical stakeholders? Something that really stood out is how important directors felt their relationships with customers, clients, employees and the community were relative to shareholders.

There are simple steps that we in business and other institutions can take to start the long path back to a trusting society. The critical factors for building trust focus on communicating and engaging with stakeholders and transparency.

A question you might want to ask when you get back to work: do you know how to respond? Do you have clear processes in place so that if you’re confronting a trust issue it is elevated quickly and you have an organisational sense of how to respond.

I’m a simple person so I try to distil things and if I reflect on the path back to good governance to address this deficit of trust, I would say it’s about transparency, it’s about accountability, and it’s about behaviour.

This is not meant to be an exhaustive list, but it is something to contemplate. From the perspective of transparency, with your stakeholder groups be clear about your priorities, be clear when they conflict, be clear how you’re going to resolve conflict. Understand your stakeholder voices and articulate how you’re going to address their issues. Half the battle is won if they know that you’re listening.

From the perspective of accountability, be clear and consistent in your accountability framework. One significant component of the public outcry is the perception that executives take the upside and ignore the downside. I don’t think that’s entirely true, but it’s clearly the perception and we need to be clearer with the public that it’s not the reality.

And the point I made just a moment ago: implement strong internal whistleblowing procedures and create a culture of disclosure. It is certainly the ethos of many institutions we work with that good news should travel fast but bad news should travel faster.

And, finally, have culture on your agenda. However you’re going to tackle it, however you’re going to manage it, keep coming back to it. It’s not an annual check-in process. Be clear about and model the ethical behaviour you want to see in your organisation from the board – right from the top.

So, in conclusion, trust is no longer something that institutions can preserve behind closed doors. Openness, transparency, and genuine engagement is needed to build trust and manage it. Rebuilding trust will be a slow process, not a switch we can flick overnight. It won’t be solved by tasking someone with building a ‘trusted brand’ strategy. It will require reflection and commitment to changing our processes, systems and institutional cultures to reflect the higher expectations of the 21st century.

We cannot wait for someone to take the lead. We all have a role to play in our institutions and in society, actively listening to the needs of the community and other stakeholders.

We need to model the behaviours that will lead to an increase in trust. Challenges from the global political environment and rapid changes in technology will test our ability as a society to mobilise and respond, and trust in our society will be critical to passing that test.

Thank you.