04 Aug 2016

Take culture out of the risk pile and make it your competitive advantage

by Nicholas Mavrakis, Narelle Smythe

You should be proactive, not reactive, and nurture your culture into an asset that generates a competitive advantage.  

Culture matters. It matters to regulators, investors, boards, senior executives, staff, customers and competitors and directly relates to "conduct risk". Regulators are pushing for cultural change but cannot prescribe culture; a cultural shift needs to come from within an organisation. Thinking about culture holistically and as a weapon that can be used to enhance competitive advantage, rather than as a regulatory compliance burden and risk management issue, can aid in the transformation. There is no one-size-fits-all solution to culture, but market forces are likely to put pressure on companies to get it right.

Scrutiny of company culture around the world has gathered pace

Following the global financial crisis, company culture has been put under sustained scrutiny. Globally, regulators consider culture a key risk area, and identify poor culture as a root cause of major prudential or conduct failings in recent history.

In Australia, ASIC has indicated it will be focusing on poor culture as a way to detect early warning signs, which will help it to identify pervasive problems within a company as well as individual instances of misconduct. It has recently announced firm culture and conduct will be a key regulatory priority for 2016-2017.

APRA has also called for a focus on culture and is keen to see industries take the lead with the issue. This sentiment is echoed by regulators in other parts of the world; culture cannot be dictated by regulators, it is something that companies need to foster and advance themselves.

Poor culture can impact on your bottom line

The inherent connection between culture and conduct not only makes culture an appealing target for regulators, it also gives rise to extensive and damaging repercussions.

Poor conduct can result in poor outcomes and losses, which can erode the trust and confidence of investors and consumers. 

Poor culture can trigger internal issues, such as staff disengagement and poor retention. It can lead to inferior or negligent service which hits current customers and alienates potential customers. Contentious conduct arising from poor culture can also pave the way for substantial compensation claims and fines.

These factors can drag down morale, undermine quality service and shrink the profit pool which impacts on shareholders. Quantifying culture in this way exposes the substantial cost that poor culture can have. 

Culture matters ‒ but what is it?

The nebulous nature of culture makes it difficult to pin down, control, and regulate. Culture cannot be sprucely packaged in to a framework and definitively judged against compliance criteria, nor imposed on a group of people, or draped over an entity.

While a tight definition of "culture" has not been unanimously agreed, it is generally understood to grow organically as the fabric of an organisation, reflecting shared ideas, customs, and values.

Each member of the organisation contributes to its culture and management has an important role in moulding and embedding it. There may be one tightly woven cultural network or a number of sub-cultures co-existing under the cultural umbrella of a broader organisation. 

The amorphous and organic nature of culture renders it difficult to regulate, and the actual influence regulators can have is restricted by the fact that culture begins, lives and dies within firms. Regulators and investors instead look to indirect tools such as indicative factors of culture, which  uncovers how closely a company is aligned to what it says it is.

Tone from the top is lost without support from the middle

While it is well established that the top echelon of a company is critical in setting the right culture, we are seeing increased interest in the behaviour of those in the middle. This shift reflects the challenges faced when change is driven by one corner of a company, but others fail to jump on for the ride.

Middle management is a highly influential layer in an organisation. Managers play a vital role in linking the board and senior executives with the rest of the organisation, in modelling firm values and in mobilising their teams. Direct managers are often viewed as setting the standard for acceptable behaviour, which can make them a dangerous risk or a powerful asset. So even if the tone is right from the top, middle management needs to be on board otherwise the momentum is lost and cultural values will bottle neck rather than flow throughout the organisation.

The significance of middle management has not gone unnoticed by regulators. ASIC has indicated that it is important "that the 'tone from the top' is reflected in the 'mood in the middle' and not lost as white noise." 

Building a better culture will lay the groundwork to deliver better outcomes

The current climate is pushing companies to reflect on their culture and invest in improving it. Unfortunately, there is neither a quick fix nor an exhaustive set of actions which guarantee your culture is the right one. Nonetheless, there are some simple things you can do to assess, maintain, or (where necessary) improve your culture, and ultimately your bottom line.

Dealing with each other

  • What is the tone from the top, what cultural messages are cascading down through the business ‒ and are they reaching the frontline? 
  • Is the behaviour in the middle reflecting the tone from the top? Are middle managers empowered to drive cultural change? Do they have access to senior leadership and are they communicating the message to the masses? 
  • Do your managers understand, and visibly model, the company's values? Are they translating these values in to day to day activities and business practices? Are they teaching their team about these values and company expectations? 
  • What are your internal communication and escalation protocols? Open lines of communication, effective escalation and action, and support for people who raise questions can assist with a transparent culture and early detection of issues. 
  • Reflect on decisions and events that occur. Did they happen because of a direction from another employee, a hangover from previous practice, or a lack of rules or guidelines? 
  • What do your incentive schemes reward or penalise? Shifting the focus from financial contribution to prudent behaviour and good conduct helps nip problems in the bud.         
  • How are you recruiting people? Investing in getting to know people before bringing them on board can not only help to uncover their skill set, but can also help to understand their attitudes and behavioural tendencies. 
  • Do your training programs ensure staff know what is expected of them? Do your staff have clear guidelines so they know what to do when they come across an issue or inconsistency? Do they have the right support? 
  • Consider commissioning an independent assessment of culture or implementing monitoring that captures data on key indicators, such as employee engagement and customer complaints.

Dealing with your customers and the public at large

  • Do your internal decisions clash or align with your stated values and the image you present to the public?        
  • Consider the design of products and the attached terms and conditions.  Assessing the impact of the product on the whole spectrum of consumers from the outset can assist in matching the right product to each consumer. 
  • Are you merely ticking off legal compliance requirements, or are you working to exceed (or at least fulfil) consumer, investor and regulatory expectations? 

Pulling these points together to effect change will be a team effort and may require legal input or specialist advice. 

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Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this communication. Persons listed may not be admitted in all States and Territories.