Looking at culture through governance lenses

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By Jo Iwasaki – Head of Corporate Governance at ACCA

 

 

 

Culture in the professional context has become a commonplace conversation today. A report published last year by the UK’s Financial Reporting Council appears to confirm that ‘boards and executive management can steer corporate behaviour to create a culture that will deliver sustainable good performance’.[1]

Sharing the views of senior business leaders, the report also says that a clear purpose – why the company exists and what it is there to do – is the starting point for a successful company and is closely tied to culture. There are many who agree that culture is fundamental to a successful business from risk management to effective decision-making in the boardroom.

Exploring the link between culture and behaviour

ACCA began looking into the interaction between culture and the conduct of individuals as early as 2012. Prompted initially by the global financial crash of 2008, we wanted to explore why rules and regulations could not pre-empt the problems associated with dysfunctional behaviours at work. Already then, many commentators pointed to poor corporate culture as the root cause of many wrongdoings leading up to the crisis.

Subsequently, ACCA conducted a desktop study of organisational science literature, followed by a series of roundtables in London, Brussels, New York, Dubai and Bangalore, capturing views of more than 150 senior business leaders. Finally, we gathered insights on corporate culture from nearly 2,000 members globally.[2]

The project uncovered that corporate leadership has a critical role to play in setting organisational values. Channelling functional behaviours also involves considering incentives and performance measurement systems, as well as internal communication and investment in human resources. We also received valuable insights on instances when and how participants in the research perceived the impact of corporate culture in their own context.

What have we learnt?

Projects like these can help us virtually simulate many people’s experiences and actions. I am a great fan of good practice examples: sometimes, after events and talks, I go home remembering episodes and anecdotes but not always technical explanations. We are pleased that there are many experiences and stories that we can share in relation to the culture debate that can be so vague at times.

Similarly, it is also important to understand the mechanism of how culture interacts with aspects, such as organisational value and strategy or governance. Without a holistic picture it is difficult, particularly for organisation leaders, to plan and start a change regarding corporate culture,

The key issues regarding corporate culture include:

  • Corporate culture is decisive in determining whether an organisation will do the right thing. It is important to recognise that an organisation – or it might be a department or office – has its own culture and way of acting. An organisation is not a random assembly of people who are acting completely independently. People gathered in a professional context will understand how they are expected to act – this is an important element of corporate culture.
  • Culture is often driven from the top – the leadership, both the board and senior management, has the responsibility for ensuring that organisation’s values are lived and breathed throughout the organisation. But culture is not one-directional. The findings also highlighted the importance of interaction within the organisation. Everyone, including the leadership, is bound by peer pressure, formal and informal norms and collective identity-building. We all mirror the behaviour of one another.
  • Culture is made up of both tangible and intangible elements. The former may be appraisal, hierarchy, pay structure, access to decision-making processes, recruitment policy and training, while the latter may include peer pressure, accountability and the existence of organisational identity. Most processes and procedures are tangible but people often form ideas about what would be considered desirable and acceptable behaviour based on their experience of them; these ideas then form the intangible elements. Inconsistency between the two can create dysfunctional behaviour.
  • It is also fundamental to recognise that organisations can trigger a culture change. This is particularly relevant for those who are responsible for governance of the organisation. Both the roundtables and the survey pointed this out again and again. A participant at a London roundtable recounted the example of a chief executive who extensively consulted his staff for months before defining the strategic outcomes that the organisation should aim at; the CEO also asked what each department could contribute in order to enable these outcomes. By directly engaging staff in designing the strategy as well as setting operational level objectives, people felt supported and involved and the company has progressed from FTSE 500 to FTSE 100.

The responses from our member survey back up this story. Sixty-one per cent of 1,800 members said tone at the top, ahead of incentives (not just financial, 20 per cent) and rules and procedures (10 per cent), was what most influences corporate behaviour.

The board and senior leadership have governance responsibilities in driving corporate culture through setting organisational direction, making key internal and external decisions and set behavioural examples. Collectively, they set the overall tone of the organisation, which impacts a broad framework for the processes and procedures of the organisation.

Presenting the idea visually

In the diagram below, we have placed corporate leadership at the core to show that it is a primary source of impact on corporate culture: to set the right tone at the top, to develop a mission that incorporates the organisational values and to set the broad framework for performance management and communication.

Leadership comes from both the board and senior management, so we have decided not to differentiate the two – at least in the context of corporate culture, they need to work together. They are often equally important in corporate culture debate. Furthermore, this also enables the application of the tool to organisations that do not fit into a traditional board structure.

The layer in the middle shows a set of governance ‘lenses’. These lenses can help in analysing corporate culture in a systematic order and then introducing changes. These lenses are closely aligned with well-established principles of corporate governance, apart from ‘interconnections’.

People often ask what we mean by this term. So let me explain. In developing the diagram, we analysed the findings of roundtables and surveys to identify signs and triggers that indicate in our minds what culture an organisation embodies. We extracted them and realised that we could bundle them into five groups because they are similar or related and gave a name to each of them.

Interestingly, for four groups we could use terms that are well established in existing corporate governance frameworks. This left, however, one that relates to how people are connected to their organisation, each other and even external stakeholders. We thought that this is important as we often hear that better integrated organisations perform better. For this the top needs to reach out to the whole of the organisation, while it requires the buy-in from the rest of the organisation, too.

Admittedly, in a traditional corporate governance framework, inter-connectivity does not seem to exist. However, the diagram was developed to summarise what we learnt, thus we decided to include this. Things that fell into this category include organisational structure, employee involvement in decision-making and the diversity of the organisation.

Finally, the outside layer shows organisational processes and procedures. Many of these are something that we see and experience in our everyday life, but there are many others that escape exact definition or allow manipulation, for example, norms and peer pressure. These collectively represent an organisational ‘culture’.

An interactive PDF on our website allows you to click on any of the governance lenses, that will then take you to the list of relevant ‘processes and procedures’, which also includes ‘intangible’ aspects, too.[3]

Let’s imagine that you clicked on ‘organisational values’. It will open up two sets of processes and procedures. One of the lists is linked to both ‘organisational values’ and ‘interconnections’:

  • Decision-making and handling of challenge/diversity
  • Collective sense-making and identity-building
  • Formal and informal norms/sub-cultures
  • Alignment with individual values
  • Peer pressure

The other set is related to ‘organisational values’ and ‘risk-taking and transparency’,  consisting of:

  • Performance measurement and time frame
  • People management and talent retention
  • Training/recruiting/sub-contracting
  • Rewards and remuneration
  • Incentives and sanctions
  • Risk appetite

This should help you start measuring the culture of your organisation by referring to these processes and procedures in relation to aspects related to organisational values.

Your organisations might have other processes and procedures: fine, you can add them because every organisation is different. The diagram is a starting point. In addition to reviewing processes and procedures, information available from staff survey results can help understand the ‘intangible’ side of culture. Once you have done so, check the consistency from inside to out, from the messages coming out from corporate leadership to what everyone experiences, as well as the horizontal consistency. Corporate culture is, after all, not made up of one element, but the consistent messaging that we experience professionally, day to day. Once inconsistencies are identified, you can start planning what needs to change first.

What can we do with this?

In the interactive PDF, we suggest specific examples when you might want to use the tool:

  • When organisations are going through rapid change and need to manage culture, such as

– growing fast

– change to ownership structure,

for example a merger

– when planning succession

  • When developing structured narratives on culture, to communicate internally or to disclose in the annual report
  • When speaking with interested stakeholders. Some investors take an active interest in corporate culture and the tool can help you prepare

While the tool is made as practical as possible, it is not a set of tick boxes. You need to allow time and resources to work out what you need to do. One might question if it is worth the effort. We can only say that it is hard to measure the benefit of culture change, but so many ideas in the area of corporate governance are like that – many of us believe in their long-term value and follow the best practice. Now, do you?

 

About the Author:

Jo Iwasaki is head of corporate governance within the Professional Insights team of ACCA. She has published on a wide range of corporate governance topics, including governance principles, board responsibilities, and diversity. She has presented and lectured to varied audiences, including directors, academics, and students. She is a qualified accountant and trained in tax and audit. In addition to corporate governance, she also has extensive experience in auditing and assurance on both financial and non-financial information.

Footnotes:

1.Corporate culture and the role of boards, FRC, 2016

2.www.accaglobal.com/culture

3.www.accaglobal.com/culturegovernance