In the August 2016 edition of Company Director I wrote on corporate culture - what it is, why it matters, and why I think the board and management has a shared responsibility for forming and monitoring culture . Much has transpired since 2016, and there is now an overwhelming acknowledgement in Australian boardrooms that culture is a critical driver of an organisation’s conduct, performance, and reputation. Organisations across all sectors are engaging in understanding and monitoring culture. However, the role of the board in forming and monitoring culture remains contested, with surveys showing that many boards see the CEO as being primarily accountable for organisational culture . This is not how regulators and other stakeholders see it, nor does it reflect the need for an organisation’s governance framework to respond to a contemporary understanding of how organisations function.
Commissioner Hayne said, “… failings of organisational culture, governance arrangements and remuneration systems lie at the heart of much of the misconduct examined by the Commission … it is the entities, their boards and senior executives who bear primary responsibility for what has happened.”
Fundamentally, the board must have a role in the forming and monitoring of something that is so critical to organisational functioning and performance. The board sits at the apex of the organisational hierarchy holding ultimate authority and accountability, and should operate within a ‘fit for purpose’ governance framework. Today we have the benefit of extensive social science research illuminating organisations as complex social systems, and showing how the dynamics in those systems impact functioning and outcomes. Therefore, by necessity, the governance framework should require boards to understand, and by their actions monitor, influence, strengthen and change these systems. This includes the shared norms within the organisation about what things mean and how things get done – the culture. Although most board members are non-executive, they are not passive actors in the organisation’s social system, they are active members and their actions and decisions will impact all elements of the system.
“… the interface between board and management is a dynamic and at times contested space. Recognising the tension at this interface means the board and CEO can discuss how to proceed so that appropriate decisions can be made and activities undertaken with as clear a sense as possible as to who is doing what and why, but always with the understanding that the buck stops with the board.”
We have seen statements on the role of the board evolve over the last thirty years, becoming more expansive and explicit, acknowledging that “what constitutes good corporate governance will evolve with the changing circumstances of a company … (and) with developments both in Australia and overseas” . However, a fundamental premise set out in both the Cadbury Report (1992) and the Higgs Report (2003) on the role of the board continues as an important constant; namely, that boards are responsible for the system by which companies are directed and controlled. The system that boards are responsible for is more than the corporate structure, it includes the social system.
Cadbury stressed that boards must “retain full and effective control over the company and the executive management”. Full and effective control necessarily extends to the structures and conditions within an organisation for its functioning as a social system. Yet the board’s role in relation to the organisation as a social system has not yet emerged as part of the accepted discourse on corporate governance. The most recent edition of the ASX Corporate Governance Principles now speaks explicitly of a role for the board to approve the statement of values and code of conduct for the company, and to oversee management in instilling the entity’s values. It also speaks for the first time to corporate culture, saying that an entity has a responsibility to instil a culture of acting lawfully, ethically and responsibly. However, these statements could imply that the board has a passive or distant role in relation to corporate culture, rather than an active and direct role in this critical element in organisational functioning.
Boards will be held accountable for organisational culture, and so need to consider how they will work with executive management to discharge that accountability. There are no simple prescriptions for which tasks should be undertaken by the board and which should be undertaken by management. Context, including organisational maturity and complexity, will be factors to consider. Some tasks will be shared and some will be separate, and the allocation may change mid-stream, or over time, or in response to emerging external and internal factors. The important thing is to recognise that now, more than ever, the interface between board and management is a dynamic and at times contested space. Recognising the tension at this interface means the board and CEO can discuss how to proceed so that appropriate decisions can be made and activities undertaken with as clear a sense as possible as to who is doing what and why, but always with the understanding that the buck stops with the board.
The AICD has recently released two resources for directors, Governing Organisational Culture and Ethics in the Boardroom: A Decision-Making Guide for Directors, which will provide some guidance for directors. However, the role of the board in overseeing an organisation as a social system, including its culture, is complex and dynamic and many directors do not have a background that informs an understanding of their organisation through this lens. There is significant research happening in this area, and together with tools such as computational modelling and discourse analysis, boards and executives will, over time, be able to develop a more sophisticated understanding and the means by which to effectively monitor what is happening in their organisations.
We know that organisational culture is the set of shared norms in the organisation, a consensus about organisational meaning and how things get done. This consensus builds over time from shared experiences, and is a difficult to observe phenomenon . A board can articulate a set of cultural dimensions for the organisation to achieve its purpose and strategic goals, and approve processes in support, but achieving coherence throughout the organisation to this desired state is a significant challenge.
Every time there is a social interaction between individuals there is an opportunity to undermine the state of the overall system. This is because as individuals we bring to each social interaction our own beliefs, and during the interaction we respond by modifying or confirming our beliefs. We are often willing to temporarily forego our beliefs for the sake of social conformity (e.g. responding to peer pressure from our team members who have committed to the organisational values), but people with powerful social rank within an organisation can maintain their own beliefs and influence others to reject the organisational values. This is how potentially destructive micro cultures emerge, and undermine the development of a healthy organisation wide culture. Micro cultures can be particularly prevalent in organisations with distributed workforces and siloed operations. With tools, such as computational modelling, an organisation can identify areas where dysfunctional micro cultures are developing and take steps to change the group dynamics .
Understanding the forces in social interactions can also inform decisions about organisational structures. For example, research has shown that flatter organisational structures promote alignment of individual values with organisational values, achieving coherence between individual and organisational beliefs. This in turn increases the rate of information exchange and accelerates collective functions, such as organisational learning. Changing a hierarchal structure in an organisation can therefore be an effective form of intervention to change culture, as in the example above of dysfunctional micro cultures.
The stakes are high for boards of all organisations. As I wrote in 2016, culture is critical to an organisation’s success, and cultural change must be driven by, supported by and modelled by the leadership of the organisation, and therefore accommodated within the board’s governance role. Demonstrating board accountability for effective corporate governance, including for complex dynamic aspects such as organisational cultural, at a collective and individual level, is being demanded by stakeholders.
Recent reports from regulators and Royal Commissions have shown that being a non-executive director, distanced from the day to day management of an organisation, does not abrogate accountability. As directors we must strive to deepen our understanding of organisations as social systems, and our role as active participants in that system. We must also engage in a dynamic and iterative way with management so that processes for effective change management and ongoing oversight can be developed and implemented.
Dr Sally Pitkin FAICD is a company director with over twenty years experience of directorship in the private, public and community sectors. Sally is the Chair of AICD’s Corporate Governance Committee and holds a PhD in governance.