Culture comes from the top

Thursday 10th December 2020 Justin Cleveland

Research from the Australian Council of Superannuation Investors (ACSI) and the Australian Institute of Company Directors (AICD) has found that better long-term company performance comes from a top-down focus on culture.

The report – “Governing company culture: Insights from Australian directors” interviewed experts and senior directors of ASX 50 companies to understand how culture is overseen, assessed, and influenced in listed organisations.

“Investors have long understood the link between company culture and long-term value creation,” says ACSI CEO Louise Davidson. “In recent years investors have noticed greater focus on culture by boards, partly due to directors having seen the damage poor culture can cause.

“We hope that this research will be a useful tool for directors in examining company culture and will strengthen the understanding that boards have of their role in overseeing, assessing, and influencing culture.”

Responsibility goes all the way to the top

The report’s primary conclusion – that culture is the responsibility of directors – may be a bit surprising for organisations that put culture at the feet of senior management. “The ACSI/AICD research shows that directors overwhelmingly see that culture isn’t just a job for management,” says Davidson.

“The role of the board is crucial. That wasn’t a common view five years ago.”

While day-tod-day management must deliver board expectations, directors can use a range of practical methods to exert influence over the company’s operations.

While there are short term implications in culture, like staff retention, an organisation’s long-term performance can also be influenced. “Investors are keen to work with directors to promote positive company culture, which will benefit not only long-term company performance but also employees and other stakeholders.”

Culture isn’t set-and-forget

While there is increased focus today on the of culture in an organisation, the general consensus from the report is that there needs to be active management and oversight of culture from engaged directors to make meaningful, longitudinal changes.

All the data in the world won’t matter if there’s nobody reviewing it. Individual directors must remain curious and willing to make changes based on new information.

Similarly, a rosy picture painted by senior management shouldn’t be taken at face value. “It is the responsibility of the board to set a clear tone from the top on their cultural expectations of management and of themselves,” says AICD managing director and CEO Angus Armour. “But they must do more by interrogating a wide range of data points to constructively challenge management’s perspective.”

The role of culture for investors

As more investors incorporate ESG measures in their decisions, the report shows that public disclosures on culture could be another valuable tool. The value would come from helping investors understand the company’s cultural strengths and weaknesses.

And yet, there are few organisations that have any sort of mention of culture in public disclosures and there is no market consensus about how to measure or report.

The report encourages further dialogue between directors and investors about the ways we talk about culture, including around risk and processes.

“Now, it is just as important as ever that boards make clear statements about what they are doing to understand the culture and practices of their organisation, a swell as taking the necessary steps to ensure effective oversight,” concludes Armour. “It is hoped this research will serve as a useful guide for all directors as they examine their own company culture and seek to build successful, sustainable organisations.”

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