Culture and remuneration

It hardly needs saying that organisational culture is critically important. The recent Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry highlighted its importance, and major fund managers such as State Street are making it a key investment criterion. There are few boards that will not have it on their agenda.

The Royal Commission was clear about the importance of culture, recommending that banks should “assess [their] culture and its governance, identify any problems with that culture and governance [and] deal with those problems” (Recommendation 5.6, p.392). And lest there be any doubt as to who specifically is accountable, Commissioner Hayne confirmed that primary responsibility sits with “those who manage and control them: their boards and management” (p. 47).

But just as culture is crucial, so is it widely misunderstood. “Culture” is an amorphous concept. There is no universally agreed definition, for example. The primacy of culture over other factors such as vision, direction or structure in shaping the success of an organisation is such that culture is famously said to eat strategy for breakfast, but that doesn’t make it easy to understand or, critically, measure. To add to the confusion there is a substantial industry dedicated to defining, building and changing culture.

What is clear is that organisational culture is a core responsibility of the board. From a board perspective, culture is often understood through a presentation by the Chief Human Resources Officer (CHRO) on the latest staff survey results. Financial services boards will hear regularly about their risk culture, and many industrial firms will focus heavily on safety culture.

Despite the ubiquity of the word, the board’s role in overseeing culture can be challenging. Given the intangible nature of the concept, there are few obviously right or wrong answers. However, arguably, it is not the job of the board to provide answers, but instead to ask the right questions of management.

There are six questions that boards can raise with their CHRO that will help them to better understand culture in their organisations.

1. What are we talking about when we talk about culture?

The word “culture” means different things to different people. Every consultant worth their fee will have a definition, and most papers and reports on the subject start by setting out theirs.

“Culture” is often used interchangeably with related concepts such as “values”, “behaviours”, “principles”, “traits”, “ways of working” and “purpose”. From a board perspective, how culture is defined is probably less critical than ensuring your organisation is clear and consistent when talking about it.

The CHRO and other key executives should be able to clearly define what they mean by “culture”. This is vital if they are going to explain it to employees, let alone effectively build and measure it. This in turn will ensure that everyone in the boardroom is on the same page when discussing culture.

A simple starting point can be to ask your CHRO how they tackle culture; they are often the default functional owner. Indeed, many HR functions have renamed themselves “People and Culture”, and their answer can hint at the depth of thinking within your organisation; are they responsible for all the elements that shape your culture, for example? Better still, talk to employees across the organisation and ask them how they feel about it.

2. How many cultures do we have?

Organisations invariably describe their culture in terms that suggest it is homogenous or firm-wide, but the reality is very different. Organisations will inevitably have different sub-cultures across teams, functions and geographies, and this is perfectly normal. Moving fast and breaking things is probably useful in the product development or innovation-centric teams for example, but it’s not what you want from your risk function.

Sensible companies (and CHROs) consciously recognise this and shape their activity accordingly. This might mean explicitly defining different cultures for different business units, even structuring them to create more autonomy and empowering them to reinforce their unique values as they see fit.

Or it could involve defining an overarching culture that is flexible enough to accommodate the breadth of activity and people across the company.

What is important is that there is careful activity to translate the stated culture into activities, policies and behaviours that are tangible for every person in the organisation; if you aspire to a culture of openness for example, then your leaders should be accessible and visible to more junior employees.

Bringing the culture to life in a meaningful way is definitely the responsibility of the board and executive, but it shouldn’t exclusively be a top-down activity. Staff should be encouraged – compelled – to think about what the firm’s culture means for them personally to bring it to life.

This is a critical activity, and your CHRO should be able to describe how it takes place.

3. Are we taking a holistic approach to building culture?

There are two things many firms get wrong when they put in place a plan to build culture; they focus too much on the outputs, and they tackle the drivers of culture in isolation.

Firstly, the outputs. It is critical that boards (and CHROs) realise that culture is an output, not an input. Understanding this helps shape how you change it.

“…hiring for collaborative skills and enshrining this in the culture is laudable, but if you then promote and reward based on individual performance, you are sending conflicting messages about what you value.”

To put it in simple terms, consider this: if you target job candidates with low integrity and incentivise them with a bonus scheme that only rewards the best performers while the lowest performers are terminated, then you will almost certainly create a culture of toxic rivalry. Measuring employee views on this is useful, but if you want to actually stop employees stabbing each other in the back then you need to change your recruitment and incentive structure: tackle the input, don’t just measure the output.

Not only should there be a focus on the inputs, but there should also be a recognition that this needs to be holistic; hiring for collaborative skills and enshrining this in the culture is laudable, but if you then promote and reward based on individual performance, you are sending conflicting messages about what you value.

There needs to be consistent reinforcement of the same culture and values from the start to the end of your employee’s career with you, and your CHRO should be able to demonstrate how they are driving this.

4. Does our culture differentiate us?

Your culture is unique – or at least it should be. How you define and build your organisational culture should be a differentiator and a source of competitive advantage. All too often however, it isn’t.

Definitions of culture are often mapped back to just four elements: integrity, collegiate behaviour, customer focus and speaking up. Does that sound familiar? Few directors could argue the importance of these traits, but their universal relevance also makes them very generic – and that’s not what you want your culture to be.

For example, our organisation recently helped a client define “direct honesty” as a cultural trait; close enough to “speaking up” but also capturing the candour, if not bluntness, that was evident in all our interactions with them. Directors should challenge their organisations to express their culture in a way that is authentic and recognisable, but also distinctive.

5. How do we involve our customers in building culture?

Many organisations enshrine customer-centricity in their core values, and even those that don’t would argue it is imperative. But what steps does your firm take to bring this value to life?

There are different levels of involvement that you can give your customers. And “customer” in this context also includes members, shareholders, regulators, community groups and other key stakeholders that have a strong interest in the outputs of your organisation.

At its most basic, employees should be regularly reminded of who their customers are and what they want. This means incorporating customer content into key touchpoints such as new hire onboarding and performance measures.

More committed organisations might actually bring their customers into the building. Listening to clients talk about their experience with you (and your competitors) can be powerful, and baking this into leadership development activity or town hall events sends a clear message about your culture.

For a genuinely customer-centric culture though, why not actually engage your customers in helping define what your culture should be? Talk to clients, investors, regulators and ask them what they want from you. That removes the guesswork, and it makes it very clear to employees exactly what a customer-focused culture looks like.

It also sends a clear message to those stakeholders you engage with just how committed you are to putting customers at the heart of your culture.

So ask your CHRO how they bring the customer into the room, physically or metaphorically, with your employees.

6. How are we measuring culture?

One of the easiest ways to start a fight between two organisational psychologists is to ask them if culture can be measured.

When you are dealing with a concept so hard to define, it follows that measuring it is equally problematic, and many will argue that it is not possible. Whether they’re right or wrong, that’s not a realistic option for boards.

Almost all organisations will use an employee survey, and that is what many regulators and shareholders look for first. Increasingly, technology offers more innovative ways of measuring attitudes, such as social media or discourse analysis that can gauge employee sentiment by analysing the tone and content of emails. Boards should check how far their CHRO is aware of these tools and their potential for their organisation.

More importantly, boards should also examine the inputs; if you want to track changes in culture then you need to measure the things that shape it. What candidates do you target and what is your employee proposition? What skills do you recruit for and how do you onboard new hires? How do you measure and reward performance? How is “talent” defined?

These are the key drivers of your culture. If your CHRO is serious about measuring culture then they should be talking to you about all the inputs.

Culture can be a complicated topic for boards to wrestle with, but it’s never been higher on the agenda. It is a topic that directors need to understand if they are to be genuinely effective. These questions provide a starting point for conversations about culture with the CHRO. This, in turn, should help boards tackle the issue in an informed and meaningful way.

Murray Priestman is the founder of Priestman Associates, a niche consultancy that works with clients to strengthen leadership, culture and performance. Murray was previously the Global Head of Talent for Macquarie Group Limited.