In our heads, the alarm bells were ringing. As we sat around the table with the behavioural assessment results of the top 40 people at a big financial institution, we could see telltale danger signs which, if left unaddressed, could be explosive for the company.
A change of strategy from a new CEO had tilted the culture away from a previously healthy balance of results and customer service. The weight had now shifted dramatically to hitting financial targets — at the expense of doing the right thing. It was a disaster waiting to happen.
We needed to feed these results back to the leadership and board, and work with the executives to highlight the implications of their results. The head of human resources said there wasn’t a budget. The CFO said “people stuff” was HR’s business. The chair changed the subject. The board director told us they would get on to culture when everything else had been sorted.
Turn the clock forward two years and the same institution has been giving evidence at the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry — and just as damagingly, in the court of public opinion.
Boards have not been immune to the pain. Many in the banking and financial services industry have found themselves in the firing line for the poor governance and for accepting cultures that have seen the public lose their faith and trust in them. So what next? What concrete steps should boards be taking to learn from the sins of the past?
Critical to the success of any change process is an understanding of the psychology of change.
The Swiss-American psychiatrist Elisabeth Kübler-Ross describes the process of change as the stages of a “curve”. It starts with denial, resistance and exploration, ending with commitment. Some people will journey through these stages rapidly, while others — such as the key stakeholders at the financial institution we were describing earlier — find it difficult to move through the initial stages of denial and resistance. The upshot is that any attempt to change a culture and rebuild organisational trust must follow the arc of the change curve. Historical precedent shows how it can be done.
- Address denial by engendering transparency
Denial is hard to address if you can’t see it. Boards therefore need to engender transparency at all levels. Entertainment company Netflix, for example, encourages transparency between the CEO, executives and the board in two ways. First, board members periodically sit in on monthly and quarterly senior management meetings, in a listening capacity only.
Secondly, it dictates board communications should be structured as 30-page online memos that include links to supporting analysis and also allow access to all data and information that sit on the company’s internal shared systems. They can also ask questions of the authors.
Netflix founder and CEO Reed Hastings says these practices help the board provide “an extreme duty of care” to the corporation. “The board isn’t going to have the confidence to make hard decisions unless they really understand the market and the company,” he says.
Australian software company Atlassian enshrines transparency in its unambiguous corporate value of “Open company, no bullshit”. In fact, the company credits its transparency for much of its achievement. Atlassian is an Australian success story in terms of revenue and growth, and is consistently in the top five of the best places to work in Australia — all of which Atlassian says are a downstream effect of a high-performance culture.
- Move through resistance and exploration by promoting candour
It can be difficult to get people to tell you what you don’t want to hear. For teams to feel the psychological safety required, a standard for honest and open conversations needs to be set at the top, by the board.
Alan Mulally, former CEO of Ford, used the common traffic light system in management meetings — a green light meant all was well, orange meant something needed attention and red meant something was critical.
At his first four meetings, he was “awash” with green. He confronted his team, “We are going to lose $18 billion this year, so is there anything that’s not going well?” The following meeting, when one of his executives flagged a problem, Mulally congratulated him and asked what the group could do to help out.
Boards can also welcome the bearers of bad news and encourage speaking out, providing protection for whistleblowing and making sure the organisation sees that action is taken as a result of candour. They can also build a trusting and open relationship with the executive team, encouraging discussion, rather than reporting.
An example of how a change in tone from the board can elicit a shift in culture comes from an Australian logistics company we worked with several years ago. When it saw the number of lost-time injuries increase, the board instructed the CEO to reverse the trend. Through cascading the instruction, he accomplished the desired decline in reported injuries. However, it soon became clear that it was only the reporting of lost-time injuries that declined.
Things only changed when the board shifted from an inquisitorial tone to an exploratory one, asking questions like ‘what can we learn from near misses?’
By creating a draconian environment where management was hauled over the coals for reported lost-time injuries, the CEO had unwittingly introduced measures encouraging management to game the system. Lost-time injuries were concealed, but crucially, so were near misses and accidents not resulting in lost time, both vital safety metrics.
Things only changed when the board shifted from an inquisitorial tone to an exploratory one, asking questions such as, “What can we learn from near misses?”
When people (including the CEO) felt safe to report accidents and near misses without the fear of retribution, reports initially spiked, but over a period of time, incidents sharply declined.
Businessman and board member David Gonski AC FAICDLife calls this disarming ability to explore, connect and build trust “becoming human”. He advocates running board meetings with the CEO reporting extempore on the issues of the day. He also recommends bringing in the next layer of management to test assumptions and perceptions.
- Develop commitment with leaders who look in the mirror. Set metrics that motivate
Just because an organisation has buy-in to new values-led behaviours, doesn’t necessarily mean these behaviours are going to stick. Kübler-Ross highlights the fact that, unchecked, individuals can regress along the behavioural change curve.
A board can take the lead with this by raising its visibility within an organisation and promote “a clear tone at the top in both messaging and action,” as recently recommended by the Australian Prudential Regulation Authority (APRA). Nonetheless, boards must still rely on the executive to authentically close the gap between the “talk” and the “walk”.
APRA’s recommendations in this regard include that senior leaders reinforce key behaviours such as, “self-reflection, giving and receiving constructive feedback… and cascading the desired tone at the top in a personal and authentic manner.”
The tone at the top needs to echo back from the whole organisation and that means that leaders need to consistently and unfailingly demonstrate the behaviours that define the culture norms. Without that congruence, it becomes impossible to build and sustain trust in the entirety of the organisation.
To make this work, boards need to elevate the importance of competencies such as emotional intelligence by recruiting for them and measuring, tracking and developing them.
Of course, that’s not all that needs to be measured. To sustain authentic, self-reflective behaviours, boards also need to take a critical look at incentive structures, watching for unintended consequences that encourage undesirable or unethical behaviours.
The first step in this process is defining ethical leadership — a concept that seems to be under assault by a global counterculture. It’s hard to be selfless, defy groupthink and be ferociously customer-focused if you’re under the blowtorch of short-term profits.
In fact, APRA chair Wayne Byres has gone so far as to recommended rebalancing CEO bonuses away from the generation of short-term profits to rewarding them for good risk management and customer outcomes.
There are no silver bullets here. No magic injections. As with any relationship built on trust, organisational trust is built incrementally, through a relentless and sustained approach and, crucially, with executive sponsorship and direct involvement from the very top.