Royal Commission on Financial Institutions – Lessons on Corporate Culture

perspectives royal commission May 02, 2018

“Never leave your dog to guard your food”

~ child wisdom quotes

The findings from the Royal Commission continue to shock and surprise. While the obvious response could be to strengthen regulation, and tighten compliance, this may not be in the best interests of the industry, of shareholders or of customers. In this article, Adaptive Cultures explores the cultural implications of the Royal Commission findings.

The early findings of the Royal Commission highlight clear cultural issues that permeate all the way through the implicated institutions. The consequences of indiscretions by board members, distributors and external partners are both immediate and longlasting. They range from the reduced savings of everyday Australians, severe reputational damage to individuals and institutions, destruction of shareholder value, and the possibility of criminal charges.

With any crisis comes opportunity and a number of roads we can travel.  The cultural implications for how we work with these crises are many; this article explores some possible roads for organisations.

Organisational implications – culture

From the Royal Commission findings to date, there have been a number of shortcomings identified that are related to organisational culture:

  1. Practices and policies that incentivise self-interest ahead of the customer. These include incentive, reward, remuneration and promotion policies.
  2. Lack of genuine independence of financial advisers, institutions and stakeholders
  3. Too much reliance on process and insufficient accountability for individual responsibility and ethics
  4. A focus on short-term financial results ahead of supporting customers and ethical standards.

The organisations implicated and the financial industry as a whole will need to demonstrate to all stakeholders (regulators, shareholders, customers and the broader community) that they are taking legitimate and rapid steps to learn from and respond effectively to address these shortcomings.

From our experiences in working with organisations in transforming cultures, there are two possible directions that the implicated organisations can head:

1. Policy and process approach – revert to the known

If organisations rely solely on a process and policy approach, they are likely to revert to a much stronger compliance regime.  This might include significantly better-resourced risk and audit teams, stronger reporting to external stakeholders and greater responsibility from senior management to oversee that the right things are done.

It is clear, given the strong compliance processes of the organisations implicated, that processes alone can be thwarted and that while checks and balances are an important symbol and way of supporting people to adhere to ethical standards, they are not enough.

While the intention of a process and policy approach is clearly positive, the consequences on the organisation’s ability to grow and evolve can be compromised.  This approach can pull leaders away from leadership and into management, and rely solely on policy rather than combining process with personal responsibility.  As well as helping to mitigate risk, the development of personal responsibility and accountability enables greater organisational agility in meeting changing customer needs.

2. Principle-based policy and personal responsibility approach – learn & adapt

As with any crisis, It is possible for organisations to learn and grow through this experience. To learn and grow, rather than react and revert, it is critical to have a responsive and creative approach.

Part of this will be examining how, with all the processes, checks and balances in place, such breaches of trust still occurred. We may need to look deeply at the beliefs and assumptions underlying our approach to business and management, and many of the competing commitments we hold and demonstrate.

What if we viewed the Royal Commission as a call for organisations to build internal cultures of responsibility and integrity?

Through our work, we know that the above call to action is far more complex than rolling out new processes or tightening regulation.  To build cultures of responsibility and integrity requires people to:

  • Take personal responsibility for themselves, their choices and their actions rather than blame or hide behind systems or structures
  • Move beyond loyalty to managers, peers, team members or function. Move towards commitment to the ethical standards and customer promise of the organisation
  • Be willing to speak out and constructively challenge the status quo
  • Sacrifice immediate short-term rewards and delay personal gratification

For an organisation to enable people to take these actions requires that the organisation:

  • Rewards ethical customer-centric practice ahead of short-term financial results
  • Addresses the common excuses made for “high performers”
  • Educates shareholders to embrace long-term strategies which will produce better customer outcomes
  • Creates an environment which values people constructively challenging the status quo and authority, and questioning how things are done
  • Creates deep, trusting internal partnerships between risk and sales functions
  • Adopts radical transparency
  • Develops self-reflection and self-awareness capabilities throughout the organisation

In many of the organisations we work with, their compliance and risk systems would be called robust.  What they are struggling with is creating a culture of responsibility.

Whilst we strongly advocate for stronger penalties for individuals and organisations who act out of integrity, we also champion the evolving organisation which prioritises empowerment, trust, personal agency, transparency AND accountability.

It would be devastating if the Royal Commission findings resulted in simply tighter oversight, ignoring the larger opportunity it presents to help organisations to evolve their cultures.

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