Over 1,700 directors were surveyed for the AICD’s Director Sentiment Index in September. The results reveal that oversight of culture remains a key focus - with 86% of directors trying to affect some culture change in their organisation. However, an October member survey shows directors are continuing to grapple with how best to discharge their cultural oversight role.
In responding to the AICD’s Leaders’ Pulse survey in October, 80.3% of the approximately 250 respondents indicated they view the board’s role in overseeing culture as setting the ‘tone from the top’, with the next most popular responses being hiring and performance management of the CEO (8.4%), approving remuneration structures and outcomes (4.8%) and approving cultural framework documents such as values and codes of conduct (4.8%).
Notably, 59.8% of directors consider company culture should be dealt with as a whole of board issue, rather than a function for specific committee deliberation. A slight majority indicated that their board discusses culture periodically (54.6%) while a significant minority (28.1%) stated that it was on every board agenda. Interestingly, 10% of respondents said that culture was an annual agenda item, while it never featured for 7.2% of members.
Importantly, directors surveyed cited challenges with understanding the organisation’s culture when they are distant from day-to-day operations and too often receiving filtered reporting and data from management on cultural indicators and performance as key challenges to overcome.
Similarly, directors are continuing to observe a reluctance from management to be the “bearer of bad news”. The results reveal that directors see a stronger role for the board in holding management to account on the visibility of not only the metrics, but also the intangible elements more often observed in attitudes and behaviours. To this end, directors caution against the assumption that culture is agreed at the top and permeates throughout an organisation.
Survey results indicate trust in employee engagement, HR statistics (turnover, absenteeism, tenure) and customer complaints as the most effective cultural metrics (nominated respectively by 77.8%, 70% and 42.3% of respondents), with whistleblowing reports (17.3%), NPSs (14.5%) and diversity statistics (12.9%) far less relied upon.
Ongoing focus for boards, investors and regulators
Recent experience shows that poor company culture has been at the heart of corporate collapses, Royal Commissions and high-profile governance failures. It is now widely recognised that weaknesses in governance, culture and accountability translate directly into financial risk.
Regulator focus on culture took a backseat in 2020 in light of the COVID-19 pandemic and the need to refocus on more urgent financial stability and consumer protection issues.
However, as business slowly returns to normal, there is a critical need to refocus on the issue of company culture, and to consider the new cultural challenges posed by remote working environments. We expect regulators such as ASIC and APRA to focus on these new risks as part of their ongoing oversight and supervisory responsibilities.
Equally, investors have flexed their muscles this year by taking a decisive stand where corporate conduct has suggested cultural problems are at play. This is unlikely to go away in 2021 as investors seek to satisfy themselves that a healthy culture lies at the heart of sustainable value creation.
Forthcoming publication: Governing company culture – insights from listed company directors
Against this backdrop, the AICD and institutional investor body the Australian Council of Superannuation Investors (ACSI) have partnered on new research to examine how directors oversee, measure and influence company culture.
In a report to be released on 9 December 2020, we speak with some of Australia’s most senior listed company directors, gathering real-world insights and examples.
This report is intended to be a constructive contribution to the discussion on culture, focussing on the board’s role and examining the particular challenges from a director perspective.
The report will explore:
- how Australian directors and boards oversee, assess and influence company culture, based on in-depth interviews with experienced directors and subject matter experts; and
- provide practical guidance on some of the issues and questions boards should seek to explore as part of their cultural stewardship role.
While our findings suggest the task before boards is formidable, it is not impossible, and progress is being made. Our research reveals that directors are acutely aware of the importance of culture in driving company performance and good outcomes for employees, customers and stakeholders. There is a strong sense that boards and senior management set ‘the tone from the top’ and that directors play a critical role in governing culture.
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