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Organisational Culture Trumps Regulations

Do the ever increasing regulatory requirements imposed on the governance environment actually improve the performance of organisations? Or, do they fit the description, by the President of the Union Pacific Railway, in 1887, when writing to Congressman, J D Long regarding a forthcoming piece of legislation: “What is desired" he said, "is something having a good sound, but quite harmless, which will impress the popular mind with the idea that a great deal is being done, when in reality, very little is intended to be done.” Or, in the present day sense, “very little is expected to change”. There are two recent pieces of proposed regulatory change that I believe fit this criteria.

The first is the Australian Federal Governments proposed new corporate governance rules which amongst other things, may require one third of board directors of industry superannuation funds to be independent. The proposed implementation of these new regulations may lead to approximately 40 chairmen from Australia’s biggest industry super funds needing to be replaced. This will mostly impact, non-profit funds e.g. union-backed industry funds and corporate funds such as, Rio Tinto, Australia Post, and other public sector funds.

Unsurprisingly, it would appear that little consideration has been given the question, where the replacements for the displaced chairman and directors will come from?

More importantly, what are the drivers for this regulatory change? Performance does not seem to be the issue, as most of these funds either outperform or perform equally as well as other fund operators.

The second, is a new requirement of the SEC (America) that companies publish the gap between their CEOs pay and the median salary of employees. This is due to come into force in 2018. Pundits and specialists are already discussing how firms might “plot out your internal communications strategy, get people educated about how your company sets pay”

I agree that action is needed to address what is in some cases, an obscene disparity between CEO and employee pay levels. However, do regulators really believe that their approach will reduce this disparity? If that is their aim. When in reality, the drivers for this disparity, result from the culture of entitlement embedded in the culture of the board and executive.

If they really wanted to fix the disparity, then simply make one of the key determinates for remuneration of the board and executive, specific decreases in the disparity multiplier. Will this happen, no, why, principally because of the culture of entitlement existing within the board and executive.

Have we learnt from the failings of previous attempts to regulate behaviours? As a sector, banking is possibly one of the most regulated business sectors there is. Yet, this has not stopped banking being at the forefront of sectors who have caused financial havoc on the international stage through their collective and individual behaviours.

It would be difficult to name an international bank that has not been implicated, in some form of corrupt behaviour within the last decade. A desktop review of these organisations adherence to their regulatory and compliance requirements shows the majority adhere to their statutory and regulatory requirements. Yet, the organisations continue to be implicated in illegal behaviour.

If we look at one regulatory component, the need to have a prescribed number of independent directors. All those implicated in scandals, adhere to the required regulation, having the minimum number of independent directors.

Therefore, you could surmise, that the push to get independent directors on these boards, has in fact, increased the occurrence of fraudulent/corrupt behaviour! While that assertion is certainly a flippant one. There is still doubt as to how much the banks boards and executives really knew. As highlighted by the recent case of UBS city trader Tom Hayes. When in defence of his actions, Hayes said: 'Everything I did was with complete transparency. Everything I did my managers knew about... sometimes going up all the way to the CEO.' Add to that the recent fraudulent reporting cases of Olympia and Toshiba, where the culture of deceit was lead from the top.

You then have a near perfect storm, where regulation is subservient to the culture of the organisation.

What is needed, is not more regulation, but a recognition that organisational culture is the real determinant of organisational behaviour and adherence to societal expectations. This view is shared by the ASIC Chairman Greg Medcraft. In his statement to the State Estimates Committee Mr. Medcraft told the committee:

“ASIC is concerned about culture because it is a big driver of conduct in the financial industry. It is a sad fact that bad culture leads to bad conduct and this inevitably leads to poor outcomes for consumers. Given there is a strong connection between poor culture and poor conduct, ASIC thinks culture is a major risk to:

  • investor and consumer trust and confidence; and

  • the fair, orderly and transparent operation of our markets.

“ASIC is planning to incorporate culture into our role as a conduct regulator.”

Here is the question, how will they regulate culture?

The birth of organisational culture does not start with a rule, regulation or some hyped up mission statement. It is nurtured and developed through the thoughts and deeds of everyone in the organisation. Starting with the board, who hire the CEO.

If the board and CEO cannot, do not, will not, live and breathe the culture they desire and which is often written into mission and purpose statements. Then they, and the organisation are doomed to failure.

Understanding organisational culture starts with understanding the culture that exists within and between the board and CEO. Achieving this understanding, is confronting for a board and CEO, as it identifies the issues that restrict the development of synergy, trust and confidence, within and between them. Synergy, trust and confidence are the corner stones on which organisational culture is developed.

What is required, is not more regulation, it is the realisation that organisational culture (good or bad) is initially developed and nurtured by the board and CEO, long before it infects the rest of the organisation. Therefore, unless the board and CEO are confronted with, and understand what their culture is, and how it is viewed by others. They will not be able to understand or lead cultural change. As Tolstoy said, "everyone thinks of changing the world, but rarely do people think of changing themselves."

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