A matter of attitude

Are legislative changes to counterbalance perceived cultural failings in Australian organisations warranted? John Brogden suggests the answer to reform may lie elsewhere.

Much has been said and written about organisational culture in recent weeks, following comments by Australian Securities and Investments Commission (ASIC) chairman Greg Medcraft, which suggested that changes to the Corporations Act to counter perceived cultural issues within the financial services industry could be imminent.

All directors would agree that culture is crucial to an organisation’s success. Indeed, creating and cultivating a good corporate and organisational culture – setting the “tone from the top” – is a priority for boards and directors. Poor culture has been identified as the underlying cause of corporate misconduct in a small number of cases in Australia. Consumers and shareholders have suffered financial losses through dealings with companies that have tolerated, permitted or even encouraged unnecessarily risky, unethical or immoral behaviour.

This behaviour is unacceptable in every case. And in some instances directors have been at fault. However, the number of cases of cultural failure against the totality of business in Australia demonstrates that we do not have a significant problem that requires a legislative response of the kind recommended by ASIC.

Medcraft argues that existing provisions within the Criminal Code Act that relate to corporate responsibility for culture should be extended to the financial services and product provisions of the Corporations Act.

He also calls for civil penalties to apply where existing laws under the Corporations Act are breached by an employee and it is shown that the company’s culture “encouraged or tolerated” the breach. It is unclear if the proposed reforms would be extended beyond financial services to the corporate sector more generally.

ASIC clearly believes there should be scope for authorities to bring action when it finds organisations – including their directors and managers – have allowed a toxic culture to prevail which has in some way encouraged or permitted delinquent behaviours amongst its employees. Such a proposal suggests that a good corporate culture can be obtained by a “tick-the-box” compliance process when, in fact, it is a function of a variety of factors that are unique to each organisation and evolves over a significant period.

Indeed, ASIC commissioner Greg Tanzer himself recognised this in a speech delivered earlier this year when he said that “culture is a very broad topic, and often considered a somewhat intangible concept.”

Intangibles are, by definition, difficult to capture in black-letter law and even more difficult to prove in a court of law.

If we are to properly address this issue, then greater consideration is required around how continuing improvements in corporate culture can be achieved. Ongoing education for directors and executives, for example, is likely to be a far more effective tool than the introduction of reactive regulation that attempts to produce a pro-forma version of good corporate culture.

The key, therefore, to cultural reform is more likely to lie in the attitude of those who govern and run a business. Directors and executives may be required to consider corporate culture from a different perspective or be open to new ideas about how to influence and drive ethical cultures while also meeting their shareholders’ high expectations.

The Australian Institute of Company Directors calls on all directors and executives to critically reflect on the existing culture of their organisation and to understand how their actions and decisions may influence this culture and employee behaviour.

The whole issue of corporate culture clearly illustrates the growing gap between societal expectations of corporations, including their boards, and the practicalities of their roles.

Corporate Australia needs to address this public perception to rebuild trust in the fact that the majority of organisations and their boards are focused on doing the right thing by all their stakeholders, including consumers. But the means by which this is achieved should be far more nuanced than a hard-line law which fails to recognise the true nature of organisational culture and instead attempts to boil it down to a series of legalistic principles.

ASIC’s views on corporate culture have kickstarted a debate that could continue for some time and it’s important that directors play a central role in it.