May 2019

A lesson on culture from the Hayne Royal Commission

The recent Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, aka the Hayne Royal Commission, asked whether the conduct of financial services entities amounted to misconduct and whether any conduct, practices, behaviour or business activities by those entities fell below community standards and expectations.

Volume 1 of the Commission’s four volume report stated that primary responsibility for the misconduct it identified lay with the entities concerned and those who manage and control them; that is, the board and senior management. Therefore, it said “close attention must be given to the culture, the governance and their remuneration practices.”

This article examines those aspects of the Report that deal with culture, focusing on Recommendation 5.6. The Report’s discussion of the pivotal role of culture in driving or discouraging misconduct is relevant to both government and private organisations.

What is culture?

The culture of an entity, the Report says, is the “shared values and norms that shape behaviours and mindsets”. It is “what people do when no one is watching” and the essentially internalised or instinctive application of shared norms and values.

The Report makes three general points about culture.

  • The culture of each entity is unique, and may vary widely within different parts of the entity.

  • Basic Norms of Behaviour: There is no single “best practice” for creating or maintaining a desirable culture but one necessary element is adherence to these basic norms of behaviour:

    • obey the law

    • do not mislead or deceive

    • act fairly

    • provide services that are fit for purpose

    • deliver services with reasonable care and skill

    • when acting for one another, act in the best interests of that other.

      As culture is about behaviours and outcomes, these norms must be applied consistently, within the organisation and in its dealings with others. This will embed the norms of behaviour into the organisation’s DNA.

  • Culture cannot be prescribed or legislated or imposed by rules. It is about behaviours, and behaviours are mostly not amenable to legislation and regulation.

How does an organisation assess its culture?

The Report notes that assessing culture is more difficult in organisations with problematic cultures. The reason: problematic cultures tend to arise from the organisation turning a blind eye to its own faults.

When assessing its own culture, every organisation must therefore ask itself how it knows what it knows, and whether it has a sound basis for that view.

Another problem in assessing culture, says the Report, “…is that what constitutes truth differs. It is invariably framed by ideological predisposition. Reasonable people can differ. One must, however, be able to distinguish between opinion and fact.”

So what approach could be reliable enough to reasonably identify an organisation’s culture?

Perhaps the answer is recognising that while cultural norms and beliefs can’t be empirically measured, behaviours and outcomes can. The Report suggests that regulators could adopt a “hold up a mirror” approach that reflects back to the entity and its people, its behaviours and outcomes, thereby making them aware of them.

The Report adopts such an approach in Volume 2 with case studies which reflect the behaviours, outcomes and misconduct that arose from organisations that did not have the right culture.

It would be difficult for any reasonable and honest organisation to deny behaviours and outcomes reflected back in this manner. It is also easy to acknowledge the impact of those behaviours on others when reflection is judgement free.

How can culture be changed?

One of the recommendations made by the Report was that:

All … entities should, as often as reasonably possible, take proper steps to:

  • assess the entity’s culture and its governance

  • identify any problems with the culture and governance

  • deal with those problems; and

  • determine whether the changes it has made have been effective.

This is no mere box ticking exercise. It requires intellectual drive, honesty and rigour. It demands thought, work and action informed by what has happened in the past, why it happened and what steps are now proposed to prevent its recurrence.

Managing culture, says the Report, is an ongoing process that must be integrated into day-to-day business operations. It highlights the importance of leadership and management at all levels, and requires all to be appropriately trained, promoted and supported. The goal should be to develop a sustainable culture that embeds at least the basic norms of behaviour above into the organisation’s DNA.

Finally, there is a close connection between culture, governance and remuneration. As the Report notes, “Positive steps in one area will reinforce positive steps taken in the others. Failings in one area will undermine progress in the others.”

Author: Norman Donato