Identification and development of subcultures
Corporate culture, as a concept, is difficult to define. There is no “one size fits all” model for determining what is a “good” corporate culture — “culture, like beauty, can be in the eyes of the beholder”.  ASIC defines culture as the “mindset of an organisation” and the ‘“unwritten rules” for how things work’. Colloquially, corporate culture has been described as “the way we do things around here”.
Subcultures, on the other hand, are a distinct set of shared values and behaviours within an organisation which are noticeably different from those in other areas of the organisation. A recent study shows that culture may vary at the business-unit level or even within a business line.
It goes without saying that all organisations will have subcultures, and it is expected that in large organisations subcultures will naturally develop and should be welcomed if they are consistent with an organisation’s desired culture. ASIC ascribes the development of subcultures to the fact that employees’ behaviour is more likely to be influenced by the conduct of direct managers and /or top performers in their business unit than it is by directors or other senior leaders of the organisation. Of those we surveyed, 63% had identified subcultures within their organisation, with the existence of subcultures coming to our survey respondents’ attention largely through personal observation (66%), employee feedback (37%) and management reporting (within or outside the usual reporting channels (28%)).
The orthodox view is that Boards are ultimately responsible for defining and overseeing an organisation’s corporate culture, with management responsible for implementing and monitoring the desired culture, as set and defined by the Board. A subculture only becomes problematic if it does not align with the desired overall organisational culture.
Recent corporate culture failures have been blamed on the prevalence of inconsistent subcultures within organisations (as opposed to an identified failure of an organisation’s overall culture). That is, the failures have been blamed on a “few bad apples”.
How inconsistent subcultures arise will vary from organisation to organisation. It may be as a result of an organisation putting significant focus on getting the tone right at the top, but failing to realise that by the time it gets to the middle it has become “white noise”. A standing Board agenda item on managing corporate culture is of little value if there are ineffective processes in place within the organisation to ensure that the desired culture is being communicated and supported throughout the organisation. For example, management may not be effectively communicating the desired culture that has been set by the Board, or there may be a failure in human resources functions or misalignment in remuneration structures and incentives. These are key in shaping, reinforcing or changing an organisation’s corporate culture.
For those organisations who conduct internal and/or external audits to assess how culture is being managed, there may be a failure to “correct” cultural issues identified during these audits — 56% of our survey respondents noted that their organisations did not have any formal mechanisms in place to identify and address inconsistent subcultures.
Who should be accountable if an inconsistent subculture results in a poor outcome for investors and/or consumers? Should regulators step in and “punish” Boards and/or senior management, or should the blame primarily lie with the “rogue” individual(s) responsible for the conduct in question?
As the concept of corporate culture is an inherently slippery and subjective concept that cannot readily be objectively measured, Australian regulators have repeatedly stressed their unwillingness to impose “black letter law” on culture. However, regulators will not turn a blind eye, and if organisations do not respond (or are not seen to respond) appropriately to cultural issues, regulators may feel compelled to step in. An example is the current focus of Australian regulators on the financial services sector, evidenced by:
- the proposed Banking Executive Accountability Regime, set to commence on 1 July 2018 for large authorised deposit-taking institutions (ADIs), which among other things, will seek to strengthen the responsibility and accountability framework of ADIs by making senior executives expressly responsible for specific activities of the bank, and requiring bonuses to be deferred in certain circumstances. This regime will also give APRA new powers to investigate potential breaches, and to disqualify accountable persons for breach; and
- the Hayne Royal Commission, which is currently inquiring into misconduct in the banking, superannuation and financial services industry.
There are differing views as to whether regulatory intervention is a good thing or bad thing. While some studies conclude that regulation is, theoretically, one of the few means to prevent cultural failings in sectors such as the financial services sector, others suggest that stakeholders are more likely to respond positively to cultural improvements that are championed and implemented at an organisational level. This latter view is endorsed by the new ASIC Chairman, James Shipton, who in the context of the banking industry, has said that, while he will continue to keep pressure on banks to improve their conduct (as was done by his predecessor, Greg Medcraft), he “prefer[s] the industry to self-regulate and ‘not wait for regulatory catalysts’”.
The risk with regulation is that regulators may not always get it right, particularly where the regulators are acting on different mandates. In Australia there appears to be a perceived overlap between regulatory jurisdictions in some areas — for example, while APRA targets “risk culture”, which is focused on attitudes towards risk in the financial services sector and its implications for systemic stability, ASIC, on the other hand, is concerned with “conduct risk”, where culture motivates misconduct that is directly harmful to consumers and investors.
Nevertheless, recent regulatory focus on corporate culture, particularly in the financial services sector, puts all other sectors on notice, and may be a catalyst for organisations to take the lead on proactively improving corporate culture. As noted above, there is increasing support for the notion that each business needs to establish and maintain a “social licence” to operate, with organisations expected to maintain trust and the ongoing approval of key stakeholders, such as investors and customers. This expectation creates an opportunity for savvy businesses to compete on grounds of culture. Through cultural leadership, market participants can avert the need for regulatory intervention by demonstrating their ability to proactively address risk and promote healthy cultures within their organisations. Such a focus has the potential to provide private enterprises with the flexibility to operate, innovate and compete creatively, which in turn will have positive outcomes for consumers, employees and investors.
When it comes to personal accountability, our survey respondents had mixed views as to whether an organisation’s directors or senior management should be held personally accountable for an employee’s misconduct if the misconduct can be directly attributed to an organisation’s corporate culture. 24% of our survey respondents agreed, 10% disagreed, while 60% were of the view that directors or senior management should only be held personally responsible where there has been a demonstrated failure to put in place appropriate policies to manage misconduct. We asked a similar question in our survey for our 2016 Directions Report, and the sentiment appears to have changed since then, in that fewer survey respondents are now of the view that directors or senior management should be held personally responsible in these circumstances.
From a stakeholder perspective, media coverage of high profile cultural failings suggests that while the public expects the Board and management to take responsibility for wrongdoing within the organisation, the strict legal implications of that response are often of secondary importance from a reputational perspective. It is more likely that the community will respond favourably to the Board and executives “owning mistakes” through a proactive personal response from them.
Survey results also indicated that “training and education” is the most common method of addressing cultural inconsistencies within organisations. This reveals a strong preference for constructive and collaborative approaches. Other methods identified by our survey respondents included moving people around, and removing/disciplining the relevant division manager/team lead. Some survey respondents also suggested that staff should be invited to help shape cultural change through open discussion. In fact, one respondent objected to choosing any category narrower than having an “honest discussion”, with another suggesting that there needs to be “constant communication”. Other survey respondents also felt that identifying the root cause and considering the precise ways in which the cultural inconsistency was causing harm is a crucial first step. These responses suggest those on the ground are cognisant of the risk of inconsistent subcultures and understand that redress needs to be tailored to meet the specific circumstances. This may also explain the shift in survey responses, when compared to our survey for our 2016 Directions Report, in assessing whether an organisation’s directors or senior management should be personally accountable for an employee’s misconduct where it is linked to poor organisational culture.
Where to from here?
Corporate culture is more about people than it is about rules. Ensuring a healthy culture within an organisation should not mean mountains of red tape and/or armies of compliance staff. As the tone from the top will not automatically resonate throughout an organisation, the leaders at different levels will need to adapt and translate the tone as it is communicated throughout the organisation.
Boards and management also need to be cognisant of the subcultures that may exist within their organisations, and embed processes to address any behaviour that does not align with the overall organisational culture and values. At the same time, Boards and management need to balance this oversight with promoting appropriate autonomy and innovation.
This multi-faceted approach should allow positive subcultures, consistent with overall entity level culture, to emerge in order to accommodate and support individual employee strengths and immediate customer demands, and specific business unit/team objectives. This approach should in turn promote a greater trust and loyalty among stakeholders, translating to positive business outcomes and shareholder value.
 John Price, ‘Outline of ASIC’s Approach to Corporate Culture’ (Speech, AICD Directors’ Forum: Regulators’ Insights on Risk Culture, Sydney, 19 July 2017).
 Greg Medcraft, ‘The Importance of Corporate Culture’ (Speech, AHRI Senior HR Directors Forum Luncheon, 17 June 2017).
 John Price, ASIC Commissioner, ‘Outline of ASIC’s Approach to Corporate Culture’ (Speech, AICD Directors’ Forum: Regulators’ Insights on Risk Culture, Sydney, 19 July 2017).
 Governance Institute, Managing Culture: A Good Practice Guide (December, 2017) 16.
 Elizabeth Sheedy and Barbara Griffin, ‘Risk Governance, Structures, Culture, and Behaviour: A View from the Inside’ (2018) 26 Corporate Governance International Review 4.
 Greg Medcraft, ‘The Importance of Corporate Culture’ (Speech, AHRI Senior HR Directors Forum Luncheon, 17 June 2017).
 James Thomson, ‘ASIC’s Greg Medcraft Says Bank “Subcultures” Failing to Get the Message’, Australian Financial Review (Sydney, 2 January 2017).
 André van Hoorn, ‘Organizational Culture in the Financial Sector: Evidence from a Cross-Industry Analysis of Employee Personal Values and Career Success’ (2017) 146 Journal of Business Ethics 451.
 See Greg Medcraft, ‘Directors’ Duties and Culture’ (Speech, Law Council of Australia, Business Law Section, Corporations Workshop, Gold Coast, 19 June 2016); John Price, ‘Culture¸ Conduct and the Bottom Line’ (September 2015) <http://asic.gov.au/regulatory-resources/corporate-governance/corporate-governance-articles/culture-conduct-and-the-bottom-line/>; Greg Tanzer, ‘The Importance of Culture to Improving Conduct within the Financial Services Industry’ (Speech, Thomson Reuters’ Third Australian Regulatory Summit, Sydney, 27 May 2015), citing research by Harvard Business School and Forbes.
 Jonathan Shapiro and James Eyers, ‘New Corporate Cop Shipton Pledges to Close “Trust Gap”’, Australian Financial Review (Sydney, 19 March 2018).