Culture and the Board
Changing behaviours of the leaders in many firms is not easy. Old habits may die hard but they have to change.
Shortly before he left the FCA, Martin Wheatley gave a speech in which he quoted a research report from Cass and New City Agenda. It stated that despite the emphasis on culture and behaviour in the financial services, since the crisis more than 50% of executives interviewed said that ‘ethical flexibility’ was important to career progression. This is pretty shocking and shows the scale of the challenge.
“Fish can’t see water”
If a culture is truly embedded in an organisation, it should be almost invisible. As has often been said, it’s like the water in which fish swim. They don’t see the water, it’s their natural environment. And it’s the same with organisations.
But how do we get there and why does culture matter? First, let’s make sure we understand what we mean by culture. Martin Bower, the ‘father of management consultancy’ at McKinsey came up with the idea that culture is ‘what we do round here’. However, to me culture is ‘what we decide to do round here’. This suggests that we have to think about what we’re doing and why.
Culture, behaviour and attitudes
In 2012, the Institute of Risk Management published a report on risk culture, in which they identified three characteristics; culture, behaviours and attitudes:‘The culture of a group arises from the repeated behaviour of its members. The behaviour of the group is shaped by their underlying attitudes. Both behaviour and attitudes are influenced by the prevailing culture of the group.’
Circular, yes, but it makes the point that culture is all about the groups and the individuals within the group. Common purpose is also crucial. Robert Salz wrote in his report on the failings at a leading bank:‘There was no sense of common purpose… Across the whole bank there were no clearly articulated and understood shared values…and what should guide everyday behaviours.’
Values drive value
So there seems to be a general agreement that identifying and embedding values and behaviours in a firm is a good thing. But why? For me good culture, understood by everybody, brings better results, improves decision making and gives a firm competitive advantage. The simple truth is that values drive value. Professor Roger Steare, visiting Professor of Organisational Ethics at Cass Business School and self-styled Corporate Philosopher, put it well: ‘Making money is an important measure of success, but a business won’t make money for long unless it understands how it wishes to make money.’
Those are the positive reasons why embedding a good culture makes sense. But of course there’s a flip-side. If you don’t get it right, if you don’t have a culture embedded across the firm, you end up, as the US Congressional Financial Crisis Inquiry Commission (2012) stated, with ‘dramatic failures of corporate governance and risk management…and a systemic breakdown of accountability and ethics’. You reach a point where your public don’t trust your business.
I read recently that many people would trust a bank if it were run by Google. Banking depends on trust and traditional banks, as the quote shows, our banks are struggling to regain it.
Mergers and change
Culture is fundamental to mergers and organisational change. Almost all mergers fail to achieve their stated objectives and fail investors in the long-run. It’s the same with organisational change. Management focuses on the financials and synergies and any thought for a new emerging culture gets forgotten. Change invariably involves, for staff, uncertainty, de-motivation and loss of identity which leads to defensive silos, as well as loss of productivity. People simply don’t know ‘the way we do things round here’. If management articulated the new common purpose, mergers would be far more successful.
And finally, reputation, reputation, reputation! Reputation damage is invariably one of the top three risks firms cite. But few make the fundamental connection between reputation and culture. Whether its banks, automobile manufacturers, horse burgers or big oil, if the culture’s wrong the results can be catastrophic.
So what can the board do?
What can the board do to get the culture right and ensure it is embedded across the organisation? The important element is the tone at the top – it’s a truism that we need to accept.
The whole project is doomed if all board members and senior management are not fully committed to ‘walking the talk’. I’m often amazed when I talk to firms and discover that the“Culture Project” is being implemented but being bypassed by the board completely.
Does the board embody the company’s cultural values? Are those values brought in to every major decision and at all levels of the organisation? Is there open debate, with challenge welcome so that if there are failures, they can be raised and lessons can be learnt? Does the board truly understand behaviour and why it matters? Do they welcome behavioural and cultural training? I’d be surprised if the answer to each of those questions is positive.
Alternatively, do staff trust the board? Do they observe infighting, dominant individuals or miscommunication? If that’s the situation, I suspect any discussion surrounding values and behaviours won’t be making much of an appearance.
It is the board’s responsibility to articulate and communicate the cultural values, which will inform the way the business is run. They will tie into and be part of the common purpose, the organisation’s strategy and objectives. As I go around, I’m struck by how often that common purpose isn’t articulated beyond the boardroom – or even in the boardroom itself. If at any level, it is not clear what you’re trying to do and why, the game is probably up and resources are wasted and lost.
And that phrase ‘at any level’ is important. It’s all very well listing the core values in the loo, the lifts or the corridors. But what do they mean for each member of staff? Do you know what they feel good looks like and what is unacceptable? Has that been defined – and agreed?
Values only work if they genuinely reflect the culture of the organisation, they are live and credible and reflect a dialogue with all stakeholders.
If we do everything above then the tone at the top will become ‘the tune in the middle and the beat of the feet at the bottom’, as Professor Mervyn King, author of the King Commission Codes of Governance in South Africa, so eloquently puts it. He goes on, ‘If you get your strategy right and you get buy-in, you get ordinary people to do extraordinary things.’
This seems to me to be well worth the price.
Non-executive Director, Institute of Operational Risk
John Thirlwell, has spent his career in financial services as an executive director of banks, a non-executive director in insurance and is currently non-executive chairman of a consumer finance company as well as an adviser to boards on risk management and cultural change. He is a non-executive Director of the Institute of Operational Risk and co-author of Mastering Operational Risk (Pearson, 2nd ed 2013).