Organisation culture as a form of accountability

Environment to speak freely and fearlessly a cornerstone of a successful company and good governance.

Frank Cooper AO FAICD believes the link between “corporate messaging” and organisation culture and accountability is underestimated in governance.

During a distinguished career in the accounting profession, Cooper saw too many instances of inappropriate communication and bad behaviour: a manager abusing a team member for that person’s work; reacting angrily to comments on his or her work; or criticising peers and the organisation. And leaders prepared to overlook or condone these actions.

“Many people learn and adapt their behaviour as a result of these experiences, to avoid exposing themselves to it happening again,” he says. “It can result in a culture of fear or a ‘good news’ organisation even though that result was never intended by the manager.”

Cooper, now a non-executive director of Woodside Petroleum, South32 and St John of God Australia, also saw examples of corporate “Chinese Whispers”: for example, balanced messaging from the CEO’s office about the link between financial results, safety and organisation sustainability watered down to only a financial message.

“Communication goes to the heart of organisation culture,” says Cooper. “Every employee must be able to speak freely, without fear of retribution, for a firm’s culture to thrive. An open, respectful culture, where every employee is able to speak up and be heard, without fear of losing his or her job, is the best form of accountability.”

Communication seems like a small piece in a challenging governance puzzle: boards being held accountable for cultural problems in increasingly large and complex organisations. But communication says much about organisation culture and ethics, and how that creates accountability through all levels of a firm, enhancing risk management.

Regulators believe boards need to do more to safeguard organisation culture. The Australian Prudential Regulation Authority’s (APRA) report on the Commonwealth Bank last year – considered a governance landmark – implied that boards must dig deeper in their organisation to strengthen accountability, governance and culture.

Many boards have tried to align organisation culture with executive pay to enhance organisation accountability, with mixed results. Culture is hard to define, measure and reward, and some fund managers have criticised boards for using “soft targets” in pay that are easier for management to game, compared to hard targets such as total shareholder returns.

As Division Council president of AICD WA, Cooper has followed governance debates around culture and accountability. He believes too much is expected of directors on organisation culture, but it is incumbent on boards to set the tone in their relationship with the CEO and senior management.

“I have long believed that the two most important safeguards in any organisation are culture and people,” says Cooper. “The best systems and processes in the world will not overcome bad organisation culture and people. If boards want to know that everyone in the organisation is accountable, it starts with having the right culture and right people for the strategy.”

Directors, says Cooper, should watch executive behaviour and communication. “It’s always a good sign when the CEO is open with the board, responsive to constructive feedback and being challenged, and not afraid to report bad news when it happens. Inevitably, the CEO’s communication style influences other executives and managers, and organisation tone.”

He says strong CEOs trust the board to use its resources and time effectively to test organisation culture and accountability, and provide insights that help the CEO rather than undermine him or her. “I look for management who understand that there is strong mutuality of interests between the executive team and board, and who welcome being challenged by the board in a constructive way.”

Cooper assesses corporate messaging further down the organisation through site visits and discussions with staff. “I want to know that managers and staff communicate appropriately and feel empowered to speak up when they see inappropriate behaviour. It’s rare that something bad happens in an organisation where nobody knew about the risk or that there was a problem. It’s usually because people were afraid to speak up, felt they would not be listened to, or would be reprimanded.”

Cooper says staff-engagement surveys are important in understanding employee perceptions and communication, but not enough on their own. “The best bits of corporate information I’ve gleaned over the years came from talking to staff, customers and suppliers, not in the boardroom. Directors must spend more time outside the boardroom and talk to more stakeholders, to understand if the organisation’s expressed culture and values are reflected in its actual behaviours.”

Stopping the ‘Red Sock’

When referring to integrity and accountability in organisational culture, former CEO of Medibank Private, George Savvides, FAICD, uses the analogy of a “red sock” unsighted in the wash. All it takes is one incidence of unchallenged bad behaviour (a red sock) to stain an otherwise squeaky-clean corporate culture.

The challenge for management and the board is to ensure organisation culture is sufficiently strong to identify and reject the red socks. “To passively condone or turn a blind eye is interpreted by the rest of the organisation as endorsed corrosive behaviour,” he says.

Like Cooper, Savvides, carefully considers executive behaviour and communication in his assessment of organisation culture and accountability. “Overconfidence or hubris among management is a warning sign for the board,” he says. “I’m always concerned if a degree of arrogance starts to kick in. For example, if management is well ahead of budget and boasting about their financial success. Integrity of values and behaviours can get side-lined.”

Savvides is the current Chair of Kings Transport and Next Science Group, Deputy Chair of SBS and an independent director of Ryman Healthcare NZ. As a director of Sodia, a consultancy that helps organisations align their brand, leadership and culture, he is an expert on human-capital issues.

Board-paper commentary provides another insight into organisation culture and accountability, says Savvides. “I’m always on the lookout for commentary where one division blames another. For example, a sales division that misses its targets blames the product-development team or procurement team. Such commentary suggests the presence of executive team disunity and alignment with organisational purpose, and that individual and team accountability is lacking. Disunity is a breeding ground for individualism, where personal ambition trumps organisational mission and purpose. Individual incentives sometime feed this distortion.”

Savvides says boards should encourage leaders to keep a check on self interest in executive culture. “There’s nothing wrong with individual ambition; the problem is when ambition becomes so self-absorbed that executives close themselves off from the organisation’s agenda and the needs of customers and staff. They get stuck on a treadmill of their own personal advancement and gain, and their actions quickly damage organisation culture and reputation as means are subordinated to personal ends.

He adds: “Leaders have to call out toxic individual behaviour that can become unaccountable. They must be willing to sacrifice financial returns and take extra risk (talent loss) in some cases to stamp out bad behaviour and set the tone for the rest of the organisation. It’s teamwork not individualism that creates a culture of collaboration and continuous improvement; people working in the same direction, with true accountability throughout the organisation.”

Ensuring the organisation has the right incentives for staff is paramount, says Savvides. “A true balanced scorecard is needed: it’s not just the revenue and profit the CEO delivers, but how he or she got there. It’s no good growing earnings quickly if safety has been compromised or the customer experience has been damaged. Boards should reserve the right to withhold financial rewards from executives if they do not deliver on the combination of agreed financial and non-financial goals.”

Savvides says the executive team must be appropriately incentivised to develop, strengthen and maintain a unified organisational culture that drives accountability. “The board effectively says to the CEO: we expect you and your team to deliver more than just shareholder return. You must also ensure the organisation delivers on its societal expectations and its mission and values.”

Savvides says boards and executive teams should set aside time in their annual planning cycle to revisit the organisation’s purpose - defined more broadly than in financial returns. “What is the organisation’s higher purpose? What sets it apart from competitors? What are we truly an exemplar in? What is the ‘lived’ customer experience we want our customers to applaud when dealing with our organisation? These questions are not asked enough, even though they go to the heart of organisation culture and accountability.”

Humility in leadership, says Savvides, is a trait that enables great organisation cultures and accountability. “It fosters a mindset where the organisation and its leaders never take success for granted. They never stop trying to improve and are always willing to put the organisation and its customers before themselves. Organisations with this type of culture have staff that are more accountable to each other, their customers, their firm and the community they work within.”