Corporate culture – why does it matter?
In December 2017, a practical guide titled "Managing Culture - A Good Practice Guide" (Guide) was jointly produced by the Institute of Internal Auditors Australia, The Ethics Centre, the Chartered Accountants Australia & New Zealand and the Governance Institute of Australia.1 In light of the heightened regulatory focus on corporate culture and conduct, this timely publication provides helpful and practical insights for all organisations on building and maintaining a sound corporate culture.
Recent years have seen a noticeable decline in public confidence in financial institutions and an intensified regulatory focus on conduct issues. Most recently, a Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry was established, whereby the conduct, practices and behaviour of financial institutions will be scrutinised.
The Banking Executive Accountability Regime, proposed to commence on 1 July 2018, further demonstrates the federal government's efforts in addressing community concerns around corporate culture in the financial services sector.
The Australian Securities and Investments Commission (ASIC) has identified, as key risks in 2017-2018, culture and conduct in financial services resulting in poor outcomes for investors and consumers.2 ASIC considers that poor culture can drive poor conduct. In its regulation of "risk culture", the Australian Prudential Regulation Authority (APRA) places certain requirements on the boards of APRA-regulated institutions which include authorised deposit-taking institutions and general insurers.3 For instance, boards are effectively required to formulate the entity's risk appetite, form a view of its risk culture, identify any desirable changes to the risk culture and ensure those changes are addressed. Boards are also directed to ensure that senior management "monitor and manage all material risks consistent with the strategic objectives, risk appetite statement and policies approved by the board".
With the increased regulatory focus on culture and governance practices, it is important not only for financial institutions but all entities to establish and maintain a sound corporate culture.
Culture – what is good and what is bad?
Culture generally encompasses an organisation's shared values, principles and behaviours. It can be discerned from its main instruments such as policies, work processes, risk frameworks and organisational structure, its espoused values and principles and its day-to-day practices.
It is important to recognise that all roles and individuals within an organisation contribute to corporate culture. Culture is not merely shaped by the board and/or senior management, but is influenced by the character of the individuals who make up the organization.
Impact of corporate culture on business performance
Any business should be concerned with culture because it translates into tangible financial benefits through customer brand loyalty, increases shareholder value and can mitigate against conduct risks. Culture is also critical to an organisation's overall ability to achieve its objectives. Preliminary results of a current study being undertaken of ASX200 companies over the last 5 years suggest a "clear correlation between conduct and share price".6
As corporate culture inevitably shapes the day-to-day conduct of companies, directors' duties under the Corporations Act 2001 (Cth) may require the engagement of directors on issues of corporate culture.7
Steps to build a sound corporate culture
The Guide recommends an ethical framework that serves as a point of reference in decision-making, rather than prescriptive rules (e.g. in the form of a code of conduct) that will not cover every possible scenario. The framework, reflecting the entity's purpose, values and principles, will then give shape to its organisational culture.
The Guide offers useful insights on building a sound corporate culture:
- Identify the organisation's desired culture and formulate an ethical framework to guide decision-making at all levels. This framework should align with the defined purpose of the organisation and be core to the governance framework. It should also be practical, authentic, stable and comprehensible to those required to actually apply the framework.
- Assess all aspects of the organisation to ensure alignment with the framework by way of surveys, dashboards, interviews, focus groups and/or an in-depth review of policies and procedures. Any misalignment requires sound justification and approval.
- Embed the ethical framework throughout the organisation so that it is reflected in its business strategy and model, policies, procedures and practices. The diagram below shows how each of the following roles can assist in translating the desired culture set at the top into actual practices of the business:
1 Full text of the publication is available at http://iia.org.au/sf_docs/default-source/default-document-library/424_managing-culture-a-good-practice-guide_v8.pdf?sfvrsn=2.
2 Australian Securities and Investments Commission, 'ASIC's Corporate Plan 2017-18 to 2020-21', August 2017. < HTTP://DOWNLOAD.ASIC.GOV.AU/MEDIA/4439405/CORPORATE-PLAN-2017-PUBLISHED-31-AUGUST-2017-1.PDF >
3 Australian Prudential Regulation Authority, 'Prudential Standard CPS 220 Risk Management', July 2017.
4 'Why culture matters', a speech by Greg Medcraft, Chairman, ASIC at BNP Paribas Conduct Month (Sydney, Australia), 24 May 2016
5 Australian Prudential Regulation Authority, 'Information Paper – Risk Culture', October 2016.
6 Durkin, Patrick, 'ASIC's culture crackdown puts boards on high alert', Australian Financial Review, 11 January 2018.
7 For example, see ss 180, 181, 182 and 183 of the Corporations Act 2001 (Cth).
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.