Pitifully weak Culture – is this how we all really are?

If so, there are big governance implications for us all.

We have all read the revelations of PwC undertaking consulting work for the ATO to strengthen the ability to collect tax from multinationals and then turning around and packaging up ways to avoid this and sell it to multinationals. There are so many ramifications to this that a book could (and probably will) be written about it… but I would like to focus on one aspect as it relates to governance in all our organisations, and that is the role of culture.?

In the recent handbook on Directors Legal Responsibilities published by the AICD (an excellent guide written by Professor Pamala Hanrahan) the importance of culture in corporate governance is highlighted. Culture is described as the thing that ensures that the right things are done when no one is looking. We describe culture is described in terms of stated values but culture is actually defined by behaviours. It is what people do that matters.?

Most organisations publish their values with “accountability”, “integrity” and “transparency” featuring frequently. ?

It is easy for organisations to run an offsite, publish their values, and believe they have ticked the box on culture. They have talked the talk, but they have not yet walked the walk. PwC makes global claims about its culture including a purpose statement that reads. "Our purpose is to build trust in society and solve important problems”. (Interestingly the page on values and culture seems to have been taken down from the PwC Australia website.) Notwithstanding this inspiring purpose from PwC, a small cohort of (senior) people decided to operate outside these values.??

PwC has made the headlines, but there have been many other high-profile examples of culture breaches that have also made headlines. Former Prime Minister Scott Morrison had five secret ministerial portfolios - this would not pass muster with any transparency test. Steve Smith (and his two teammates) certainly would fail any integrity test over sandpaper-gate. The Hayne Royal Commission found companies billing for services when their clients were dead – that would fail any number of corporate values. The Catholic Church shuffling troubled priests around its vast organisation to hide a serious problem fails the very code Catholicism was built on.?There are many examples of culture breaches that, once discovered, end up as train wrecks.

As a declaration of interest, I once worked in an overseas post for Coopers & Lybrand, a precedent firm of PwC, and I have appointed PwC as auditors of a public company I chaired. I found them to be of the highest integrity. I was also a partner at both Deloitte and KPMG, and have worked extensively with EY who are currently auditors of one of my boards. I entrusted my three sons to a catholic boarding school education. I am not critical of the organisations I used in these examples of breach of conduct.?Noncompliance to organisational values by some does not mean the whole organisation is toxic, but unfortunately it does taint the whole organisation.

Published values are easy, behaviours are where the rubber hits the road! Governance requires an unwavering attention to behaviours.

There are several important comments I have about culture given its critical role in governance.?Firstly, values are easy to say but walking the walk takes significant effort.? It must be owned by the organisation and lived by the leadership. This is a big job and a key part of all leaders and manager's role is to demonstrate culture by their behaviours.

Secondly, the enforcement of culture is substantially self regulated. Each organisation deals with cultural breaches internally and this means there is much temptation to cover up indiscretions because nobody wants to air its dirty laundry.

Minor transgressions are often accepted or someone gets a slap on the wrist. More serious transgressions are painted over, and people leave with a good cover story and often, regrettably with an unblemished reference. The penalty for a breach of culture is light and casts doubts if self-regulation reinforces the importance of culture as implied in our governance models.?

When a cultural breach becomes public a different run sheet plays out.?Major transgressions are inevitably very badly handled by the organisation. These become trainwrecks and organisations dig themselves into hole.? At the start of the crisis the organisation typically demonstrates a culture of self preservation by trying to minimise the damage. Non cooperation, cover up, partial disclosure and re-assigning people are some of the behaviours.

So much for putting customers first, or integrity, or accountability, or transparency or even straight-out honesty which is rarely listed as a value because it is assumed to exist in every organisation. As the situation blows out of control and the bushfire rages, the final layer of “governance”– the media’s determination of public interest takes over and you meet your destiny.??The last place you want to be in the press is Rear Window (back page of AFR).

So how do we deal with indiscretion in value systems and poor cultural behaviour?

If we need to rely on culture as part of the governance model and directors have a responsibility for setting the right culture, then we need a framework to help do this.?

Do organisations have a formal system for dealing with cultural (behavioural) breaches? Is it left to the manager directly responsible for the offender to resolve??Does that manager have an obligation to report incidents, or can they deal with it and brush it under the carpet? What about a whistleblower regime? Can people who see or suspect wrong behaviours raise a concern in a way that doesn't invite recrimination? If as directors we are relying on culture to see the right thing is done when no one is looking then surely there must be a structured and meaningful approach to deal with cultural breaches.??

Cultural breaches involving an individual losing their way should be dealt with by management in the normal course of business. The development of a guide for managers to use in reprimanding and imposing penalties on individual breaches should be available to leaders who deal with these matters. A file note record of the breach is important and this should be generated by a good feedback system. There would obviously be an escalation clause when the indiscretion was more serious.?This would need to go to a high-level person or body that oversees all these matters. I know this sounds like setting up the culture police but if organisations self regulate culture, and it is a major plank of corporate governance, then there needs to be some institutionalised system with enough teeth to be effective.?

Where there is a cohort who collectively work against the culture of the organisation, there is a major problem. Often this cohort is a team who have made a unilateral declaration of independence and do things their own way. This is often tolerated if this group provides a material importance to the organisation either through profit contribution, major account ownership, tenure or political power.??

Breaking up these groups always runs the risk of a hard landing.? Imposing a change in leadership or splitting the team up may avoid the stepping on eggs shells and should be the first approach. If there is resistance there may need to be the removal of one or more people from the organisation. Dealing with a group is tough but the damage to the rest of the organisation is significant and the problem must be dealt with, broken eggshells or not.??

PwC has been extremely slow in dealing with its problem and has never got out in front of it. In my view, they should have excised any part of the organisation that had been involved and made a statement to the market that PwC is a highly trusted brand and if they have breached their own standards then they stand by their clients who buy the brand and not their partners and staff who have betrayed the organisation's values. After all this is what their statement suggest – building trust in society. (By the way separating the consulting and audit parts of the business into two organisations does not deal with this issue - the tax guys did all this by themselves.)?

What if the cohort whose culture is out of alignment is the board?? What if the board is out of step with the organisation values? Addressing this major problem depends on your relationship with the board. What you can do depends on if you are a director, an MD, a CEO, a CoSec, or as someone who works closely with the board.??

Having been through a torturous path of being a board member and removing the other directors I will save that journey for a future edition of Reflections. However I will say that the first thing needed is an objective and robust assessment of the skills and performance of the board. To facilitate change, the board will need to see that it has problems that need to be addressed. This must be the starting point for a discussion. The chair is critical to this process, and if the Chair is part of the problem then the CEO and CoSec might have to step up and be the change agents.?Let’s leave this tough nut for a future read.

Jim McKerlie?

Executive Chair at Kendo??

P.S. If you would like to know more about how Kendo can help your board with governance, culture and business success please message me or go to www.thekendoway.com