Timely thinking on Royal Commissions: distinguish governance and culture

Anyone grappling with responding effectively to failures of corporate governance and culture such as those revealed by the Hayne Royal Commission, or wishing to avoid them, should read an article by former BHP executive John Fast, Stop the rot: fix your culture, published in The Australian. 

What Fast has to say is derived from experience, not asserted from hypothesis. Regardless whether you are a reputation manager, a CEO, line executive or non-executive director, it's worth absorbing what he has to say. It's not complex, just sensible, and could benefit many sectors, not just banking.

Fast argues we must "...understand the difference between governance and culture, ... terms... often used interchangeably...but...different in origin and meaning". He says understanding this is critical to restoring trust and effectiveness in large companies, citing as evidence the tale of former BHP CEO Paul Anderson developing the BHP Charter and how it was critical to transforming the company at the time Anderson led it. 

The Charter exists today. It is succinct and purposeful. Unlike many corporate statements, it sets measurable goals. It may not always have been followed as strongly as it was under Anderson since he left BHP, but the lessons John Fast draws from it are enduring. They are applicable to any large corporate:

" a large part of the governance ... is often externally derived or imposed. In contrast, culture is about an organisation’s values, shared ideals, behaviours and practices. It needs to evolve internally and organically — and to be effective requires strong leadership, consistency and reinforcement, to the point where it becomes second nature and a part of the DNA of that organisation.

"Anderson set about changing ... focus and practices...[H]e understood the need to change the culture ... from its roots right up to its board... , ... handwriting a document ... about how the company should conduct its business and how ...{to]... behave towards one another and customers, host governments, NGOs and ... other stakeholders. 

Anderson simultaneously created a moral compass and clarified BHP's objectives, then he lived and led to his guidance. His BHP Charter was not box-ticking. Ideally, what he did should be studied alongside the Final Report of APRA's Prudential Inquiry into the Commonwealth Bank of Australia. The Prudential Inquiry's report illustrates the degree of vigilence required to avoid the behavioural and systemic lapses of the type being examined by the Hayne Royal Commission.

APRA's Inquiry Panel summarised what they saw like this:

How can this happen...? There is no simple answer, no ‘silver bullet’ remedy. A complex interplay of organisational and cultural factors has been at work. CBA’s continued financial success dulled the senses of the institution.... senior leadership was slow to recognise, and address, emerging threats to CBA’s reputation. The consequences of this slowness were not grasped.

Following on, the Panel identified:

? "inadequate oversight and challenge by the Board and its gatekeeper committees of emerging non-financial risks;

? unclear accountabilities, starting with a lack of ownership of key risks at the Executive Committee level;

? weaknesses in how issues, incidents and risks were identified and escalated through the institution and a lack of urgency in their subsequent management and resolution;

? overly complex and bureaucratic decision- making processes that favoured collaboration over timely and effective outcomes and slowed the detection of risk failings;

? an operational risk management framework that worked better on paper than in practice, supported by an immature and under-resourced compliance function; and

? a remuneration framework that, at least until the AUSTRAC action, had little sting for senior managers and above when poor risk or customer outcomes materialised ".

This, with the possible exception of the nature of remuneration incentives, amounts to a fairly close match of what Anderson sought to tackle at BHP. A big lesson from his success in doing so is that a company can reform and resurrect itself by its own devices.

What is clear is that many of the failings we are currently seeing are exacerbated by the scale of large scale corporates. The reach of their systems and the complexity of them can increase the points of failures, the difficulty of detecting them and the magnitude of adverse effects.

Added to this is the frequent, though understandable, instinct of highly specialised senior managers to respond technocratically when more nuanced and culturally-grounded judgements might be called for, together with empathy.

In both cases stakeholder and corporate expectations can overtake reality. Assumptions about perfection and the integrity of systems -managerial and technical -are often optimistic. This is why the answer to the breaches of trust we are seeing is unlikely to be found in a predominately regulated or externally imposed response. As Fast says:

Litigation and regulation will follow as assuredly as night follows day. All this will add complexity and cost to an already heavily regulated environment. One can never entirely guard against bad behaviour by individuals, but a pattern of recurrent bad behaviour in an organisation speaks more of systemic failures — of poor attitudes, indifference, lack of common courtesies, lack of adequate supervision, inconsistent leadership or worse. 

You can find Fast's article, Stop the rot: fix your culture via this link: https://www.theaustralian.com.au/business/opinion/how-to-stop-the-rot-from-within-fix-your-culture/news-story/5a1e21d8de77d6ce3b6d89c342189c0c

You find a PDF of the Final Report of APRA's Prudential Inquiry into the Commonwealth Bank of Australia here: https://www.apra.gov.au/sites/default/files/CBA-Prudential-Inquiry_Final-Report_30042018.pdf