Corporate culture: boards must take responsibility

NAB chair Ken Henry’s call on boards to take responsibility for corporate culture is refreshing and welcome.

ACSI chief executive Louise Davidson.

A full and frank discussion about corporate culture in Australia has been a long time coming, but it’s ­finally arrived with a vengeance.

But amid all the new and welcome talk, we mustn’t lose sight of one issue — the role of the board in the culture of the company.

It was extremely heartening for investors to hear National Bank of Australia chairman Ken Henry admit last week: “Corporate leaders have responsibility for the culture of organisations and they all kind of know it, but they’re struggling with how to do it and how to be effective.”

How refreshing. It’s too easy for companies to try to dismiss bad behaviour within their organisations as coming from “rogue elements”. To the wider community their excuses must sound almost insulting.

Whether it is offshore bribery and corruption allegations, customers consigned to penury by denied insurance claims, financial planners’ commissions prioritised over customers or business meetings in strip clubs — they’ve all captured headlines in recent weeks.

Aside from tarnishing corporate reputations, these outbreaks beg the question: just how many “rogue elements” does it take before a company, or an industry, realises that the high principles they endorse don’t match their actions? Will boards take responsibility, and control, over the culture?

The “few bad apples” defence becomes significantly less ­convincing the second, third and fourth time around. Leading resource companies long ago realised the vital role directors have to play in the setting and oversight of corporate culture, putting in place employee health and safety regimes that ensure every serious incident on site requires a board-level review. This sends a message through the entire organisation of what practices are, and are not, tolerated.

Companies control who they employ, the values and culture they instil, and the ways they incentivise their staff. Boards set the parameters and appoint a chief executive to oversee and execute them. Skilled boards avoid complacency and do not assume that the existing culture is either the right one, or worthy of retention in perpetuity.

Former Wesfarmers chair Bob Every succinctly described the key role of a chair as a “custodian of the culture”. Dr Henry also put it well when he said this week, “When something goes wrong, the finger is going to be pointed at the board. My view is that given that we can’t escape the responsibility, we should embrace the responsibility.”

The hackneyed argument that boards overseeing large and complex corporations can’t be aware of everything misses the point. Directors are obliged to ensure they have structures in place to acquaint them with all aspects of the companies they preside over, and which set the tone of how that business is conducted. They must also recognise they will be held accountable for the outcomes.

Australian Council of Superannuation Investors members are superannuation funds, long- term investors, owning on average 10 per cent of every company in the S&P/ASX 200. We know there is a high risk of value destruction at companies with poor corporate culture — and those losses flow into the retirement savings of millions of Australians.

That’s why, when ACSI meets with boards of over 100 ASX-listed companies every year, corporate culture is always on the agenda.

One indicator of corporate culture is diversity. Diversity of thought, skills and experience — including gender, age and ethnicity — is also one of the best protections against inculcating the wrong corporate cultures.

ACSI has worked hard over the years to impress upon companies that by drawing their board members from broader gene pools, rather than “the usual suspects”, they actually deepen the combined skill base and capacity to deal with growth and adversity.

Corporate culture might be intangible and hard to define, but it’s not an abstract concept — it’s a critical component of how a company flourishes. Conversely, ­experience has shown us that poor corporate culture can corrode investor and public confidence — as well as have detrimental effects on staff and productivity generally.

We are well aware that culture can’t be regulated with black letter law, but effective and engaged boards should be monitoring, challenging and effectively communicating their aspirations all the way down to the lowest level of employee or contractor.

Australian companies have an opportunity to learn from the current failures of corporate culture. Rather than history repeating, if boards take greater responsibility for this issue, the result will be better outcomes for both the corporate sector and for long-term investments. Some may find it won’t be easy to shine a light in all corners of their operations — but they’ll also find it’s far easier than restoring a lost reputation.

Louise Davidson is the CEO of the Australian Council of Superannuation Investors.