What’s the Issue?
The banking royal commission’s final recommendations have application for all entities regardless of sector, in the areas of culture and governance.[1]
The June 2018 issue of Company Director featured an article “Should directors brave a school Board?” The matter of culture comes up once or twice.
This very matter was the inspiration for my thesis 13 years earlier (http://epubs.scu.edu.au/theses/15). Although the fruit issues were different, the root issues were the same.
This paper will not discuss the validity of your school’s values: that is a matter entirely for the Board.
However, what the paper will provide is, once having established those values, what processes the Board should put in place and what questions should be asked, to ensure that the organization is going to be run in a manner consistent with those values. This is consistent with Recommendation 5.6 from the Banking Royal Commission; that entities should take steps to assess the culture, identify any problems and determine what needs to change; and then review if those changes have been effective.
What is the purpose of corporate governance?
The compliance paradigm would tell you that staying out of jail is a good idea. Tick a few boxes on a checklist, and it will be alright.
The profit paradigm would tell you that creating value for your shareholders is a good idea; one school of thought (pardon the pun) is this is paramount, to the detriment of other stakeholders.
The management paradigm would tell you that having good systems and procedures in place to ensure that you accomplish your strategic goals would be a good idea.
All of these are right, BUT…. they don’t tell the full story.
- The compliance paradigm is right – if there is a major data breach, and parents don’t believe that their personal information is safe, it is likely that they will withdraw their children.
- The profit paradigm is right – although schools are not-for-profit, that just means you don’t have shareholders. You still have to ensure that you have more money coming in than going out in order to be able to continue running the school.
- The management paradigm is right – you need to have systems in place to ensure that the students actually learn.
Ultimately, the future sustainability of your school hinges on your reputation. If you have a poor reputation, parents will not trust you with their children. It is the Board’s responsibility to define the behaviours needed from themselves, staff, students and parents to preserve and protect the school’s reputation in the community and with regulators.[2]
Simon Sinek says you should always start with the why. It is the “why” that captures the heart. If the organisational “why” resonates with the personal values of the staff you will find your employee productivity will improve. Values congruence leads to happiness. And we all know that happy staff leads to happy students, which leads to happy parents. Happy parents tend to pay their fee accounts!
Culture ought to be a business imperative, as it has a significant impact on profit.
Notwithstanding management speak that the Board has one employee (the Principal), ultimately the Board is responsible for the performance of the school. However, it is NOT OK to achieve performance by compromising your values. Such behaviour will lead to reputational damage which will lead to sustainability challenges should society choose to revoke your licence to operate, as demonstrated by parents withdrawing their children and staff leaving. Society will only continue to give us a licence to operate if they trust us to provide goods and services that they want, in a manner consistent with how they believe things ought to be done.
This paper does not attempt to tell you what your values ought to be. Instead it provides you with processes to put in place, and questions that should be asked to ensure that the organization is going to be run in a manner consistent with those values.
Why is this important?
The Korn Ferry Institute issued a report “The tone from the top – taking responsibility for corporate culture”. This was a series of conversations with businesses and advisors about corporate culture.
David Crawford (a former KPMG partner) in his conversation with the Korn Ferry Institute said:
“I believe culture is fundamentally important to the success or lack of success of corporations. Unless an organisation has a set of fundamental principles by which it operates, then all the people in the organisation will not know how they should behave and what is necessarily in the interest of the organisation, and the community in which they operate.”[3]
He goes on to say that culture should be part of your organisational DNA.
If culture is in your organisation’s DNA, this paper argues that the values are the nucleotides that make up the DNA: that is the organisational values will shape the facets of the diamond that is your culture and helps customers set you apart from your competitors.
Almost all definitions of culture include people and behaviours[4].
(A former chairman of ASIC has said that “Culture is a set of shared values, or assumptions.” It is the unwritten rules that govern how things actually work.[5] Other definitions include “culture as the values attitudes and norms that set the stage for action, belief and policy”.)[6]
Values are the foundation of a culture as they shape attitudes and practices.[7]
What counts is the actual behaviour of people – that is performance!
The Board has a central element of establishing the culture of the organisation, maintaining the ethics and values against which the organisation should operate. The purpose (the why) and values equip the organisation to be focused and consistent[8].
Clearly, values should inform behaviours. However, values statements only provide the espoused values; the expected behavioural norms.
The question then is how do we align the core values through the Board and the management committee to facilitate a healthy corporate culture?
Align core values at the very top of the organisation, embed desired behaviours across the Board and apply a values lens to Board decision processes. Focus on trust as an enabler of positive and productive cultures[9].
Value congruence is a significant indicator of person-organisation fit. Recruitment is the initial gate where we can catch value incongruence and mitigate the toxic effect on productivity and staff morale in the rest of the team where there is no value congruence?
- Ask questions about the applicant’s personal values.
- Assess how their values align with corporate values.
- Make sure you include values and attitudes in roles descriptions, as well as aptitude and ability.
- During the induction process, provide training in depth about the types of expected behaviours that would characterise those values.
- During feedback sessions during the probation periods, ask staff for specific examples of how they have “lived out” the organisational values.
Once staff are made permanent, then:
- Specific values-related questions should be included in the annual appraisal process
- Rewards mechanisms (eg employee of the week) should be targeted to behaviours which exemplify the desired values.
You can’t write a set of rules that cover absolutely every situation that employees will come across. However, if there is greater value alignment, then you can be reasonably assured that they employee’s response to the particular situation they are facing will be broadly consistent with the culture and the policies.
A lot of independent schools are companies limited by guarantee, so we would probably talk about ASIC. No doubt ACNC will take a similar view.
ASIC has ramped up its interest in corporate culture. In a speech on 24 May 2016, Mr Medcraft (then ASIC chairman) was heard to say (yes, you’ve guessed it) “we are at an exciting time in history”. He also noted that “good culture is critical for organisations that want to be around for the long term”. And indeed, ASIC have spoken at this conference.
ASIC believes there are seven key drivers of good culture:
- Tone at the top – the Board and senior management should set the values and principles of an organisation’s culture and ensure they are reflected in the organisation’s strategy, business model, risk appetite etc.
- Cascading values to the rest of the organisation
- Translating the values into business practices
- Accountability that those values are happening
- Effective communication – an open culture where if the values are not being adhered to, then it can be reported
- Recruitment training and reward – you hire for culture and character, you can always train competence
- Governance and controls
Good culture is good for business:
- It improves customer loyalty, brand and reputation
- Helps attract and retain staff.
Corporate integrity (reputation) requires the alignment of values with actions[10]. The culture is effectively the personality of the organisation that your customer/clients and employees experience. Although the company is a separate legal entity to the owners and the managers, it has no soul /character in and of itself – the espoused values mean nothing, without people to put them into practice. It is the people who govern the organisation and manage it and work there who give life to those espoused values – well at least that’s what it would be like at Utopia College
At the launch of the inaugural Governance Institute Ethics Index, the ASIC Chairman said that it is a matter for the Board and the CEO to ensure there is a values-led culture that can be implemented by frontline staff. He said in an earlier speech, that “it is not enough to talk the talk. You’ve got to walk the walk too.”[11]
It is important to take the values statement off the wall. In the book, The Corporate Culture Handbook[12], the author analyses the espoused values of Enron, Arthur Andersen and few others and the reasons for their demise. It would seem that although the espoused values were exemplary, their values in practice were perhaps somewhat less than exemplary. Let’s not make the same mistake.
Now ASIC is not trying to dictate what kind of culture a company should have, neither am does this paper tell you what values are suitable for your organisation. What it does do is suggest a framework that, once you have selected the values, you could implement to ensure that those values are practised throughout the organisation.
Planning for Performance
Are values used as a primary filter in strategic planning? If a proposed strategy conflicts with a value, does that mean you no longer consider that strategy (or amend it so it does align with the value)?
Sir Winfried Bischoff, Chairman of the UK Financial Reporting Council suggests that strategy should reflect the values and culture of the company and should not be developed in isolation.[13]
How do you ensure that values are explicitly considered at the Board level?
Cabinet submissions for the Queensland Government had to include an Environmental Impact Statement and a Regulatory Impact Statement. Why not have a Values Impact Statement in your Board papers?
Boards should assess how effective is the fit between purpose, values, culture and strategic goals. What are the barriers, enablers, risks and opportunities?
Closer to home, in their book Driven by purpose, Stephen Judd, Anne Robinson and Felicity Errington asserted that the Board is responsible for the who and the why of the organisation.[14] They are also responsible for the how.
The purpose is one thing, how we achieve that purpose, the boundaries that we will not cross, are also of significance. Indeed, they are of value to the employees. They are watching the Board and the senior executive. It is the behaviour of the Board and the senior executive that gives life, or suffocates, the espoused values on the wall and on the website.
Accountability for Performance
Can Board members and leadership team raise constructive challenges about behaviours that are inconsistent with the organisation’s values?
Can the CEO’s direct reports raise an issue with the Board where they have a contrary view?
Reporting on Performance
The periodic reports from the CEO should include Cultural Health Indicators – this is the tricky bit – what KPIs should you put in place to evaluate the values in practice.
The Board is entitled to receive information it considers it needs to effectively govern the organisation. One mechanism to mitigate the CEO filter is to have other members of the senior leadership team attend Board meetings from time to time.
Talk about your values in your annual report. If they are important to you, brag about them. In this way, you demonstrate to society that they are right to provide you with a licence to operate. Of course, you may not want to be quite so forthcoming if your actual behaviour does not align with your espoused values.
Recruitment
The rights skills get you to the table, but the right fit gets you into the organisations[15].
At all levels of the organisation, the best person for the job has a combination of capability and skill, along with personality and fit.
Clearly articulated values can be used in both staff and Board recruitment: to assess for value congruence
Some organisations have a cultural custodian on the interview panel whose express brief is to asking the probing questions to assess cultural fit.
It is my contention that if an organisation focuses on recruiting people whose values are aligned with the organisation, then there is a reduced chance of behaviour that is contrary to the goals of the organisation. This if course must be done in a manner that is compliant with relevant laws.
The most powerful way in which a Board influences culture, other than through its own behaviour, is through its selection and management of the chief executive.
One of the interviewees in the FRC report suggests that internal promotions are less risky because the individual is well known and would have already demonstrated adherence to the organisation’s values.
Of course, the relationship between chair and CEO is critical. If trust is missing then they are competitors rather than the chair being available as a sounding Board for the CEO.
Board Evaluation
David Crawford, in his conversation with the Korn Ferry Institute: When you appoint Board members, you look for people who have similar values and similar view about those fundamental things.
Values can be used to provide a structure for the Board evaluation process.
Summary and Conclusions
Key strategies from the FRC
- Embed and integrate your organisation’s values so that everybody is clear about the expected behaviours: employees, contractors, clients
- Don’t let your performance management and reward system skewer your values
- Assess, measure and engage – values ought to be important, so brag about them. Demonstrate that society is right to give you a licence to operate.
Key recommendations from CIPD
- Value alignment
- Board champion
- Develop Leadership and people capacity – embed values
- Make it safe to speak up – Board committees and employees should be able to challenge behaviour that is not consistent
Why we should care:
- ASIC’s interested in culture, so let’s make sure our house is in order
- It’s good for business – reputation management – happy customers
- Value congruence with staff is good for productivity
Some of the things you can do about it:
- Take your values off the walls
- Talk about them in staff meetings/toolbox meetings (safety first etc)
- Board members get out of the Board room and get to know your senior leadership.
- Check for value alignment at recruitment stage.
[1] https://www.governanceinstitute.com.au/resources/governance-directions/volume-71-issue-2/ Accessed 29 March 2019
[2] ASX Corporate Governance Council, 2019, Corporate Governance Principles and Recommendations, 4th edn.
[3] Conversation with David Crawford in The Korn Ferry Institute, The Tone from the top – Taking Responsibility for Corporate Culture, 2016
[4]CIPD A duty to care? Evidence of the importance of organisational culture to effective governance and leadership, July 2016
[5] Medcraft, G “Why Culture Matters” speech to BNP Paribas Conduct Month, 24 May 2016
[6] Fredrick, W.C. (1995), Values, Nature and Culture in the American Corporation
[7] Medcraft, G ibid
[8] City Values Forum, 2016 Governance Culture – Risk & Opportunity – a Guide to Board Leadership in Purpose, Values and Culture
[9] CIPD A duty to care? Evidence of the importance of organisational culture to effective governance and leadership, July 2016 p35.
[10] Scott, S. 2004 Fierce Conversations, Berkley Books, New York
[11] Medcraft, G Why culture matters Speech given on 24 May 2016 to BNP Paribas Conduct Month , Sydney
[12] O’Donovan, G, 2006 The Corporate Culture Handbook, The Liffey Press, Dublin
[13] Bischoff, W., 2016 Corporate Culture and the role of Boards, Financial Reporting Council UK p.3
[14] Judd, S. Robinson, A. Errington, F 2012, Driven by Purpose, Hammond Press, Sydney
[15] Conversation with Vivek Bhatia in The Korn Ferry Institute report “The tone from the top, taking responsibility for corporate culture”