Governance: Achieving a Healthy Organisational Culture

In last week's article, Governance: The Foundation for Strategy and Planning, I made the case for governance entailing the distribution of responsibilities and rights among various stakeholders and for it to define the procedures and rules for making decisions on organisational affairs. I also cautioned that when governance is marginalised in an organisation, usually by confining it to the responsibility of only a small cadre of officers, authority will often be exercised in an unchecked manner;. those in control are unlikely to be held to account; and the management of resources will remain arbitrary and subjective.

However, simply pulling on the governance lever is no guarantee of improving processes — much less enhancing performance. This is because it moves an organisation from asking what is governance to asking how does an organisation implement a broader definition of corporate governance? A question that, by way of answer, requires a plan for the distribution of responsibilities and rights among various stakeholders, and the definition of procedures and rules for making decisions on organisational affairs.

To formulate such a plan, it is first necessary to understand the organisation as a social system and how cultural norms develop.

The Organisation as a Social System

Answering the how of corporate governance requires we stop seeing an organisation as an entity separate from stakeholders and start seeing an organisation as a complex social system comprised of stakeholders. Each team, department, or division develops its own culture — usually organically and often established from the bottom up. This contrasts, and at times conflicts, with the broader 'organisational culture' — usually imposed from the top down by the CEO and Board. Team level sub-cultures, and the way in which they interact with the overarching organisational culture, defines how teams see and as a result respond to challenges and opportunities.

Taking a leaf from Niklas Luhmann's book, literally titled The Society of Society [Die Gesellschaft der Gesellschaft], is to appreciate that for an organisation to emerge there need to be three systems in place:

1. Educational: to supply adequately skilled human resources.
2. Economic: to establish a system of paid labour.
3. Legal: to create and enforce binding contracts.

The key element about each of these systems is that they are perpetual and self-recreating (a process technically called autopoiesis). Which, again picking up on the work of Luhmann, requires a specific modus operandi — in an organisational context this mode is communication.

Of course, as has often been observed, the great myth about communication is that it has taken place. Fewer places does this seem truer than in an organisation where the myriad emails, chat messages, company updates, staff briefings, and team meetings — let alone the inevitable water cooler conversations — create a lot of noise, but often little by way of communication.

If an Executive Leadership Team or Board ignores the process of governance and simply focusses on the documents of governance — for example tightening rules, policies, and procedures — they risk disregarding the value of trust and minimise the importance of autonomous critical thinking. Both of which are vital as an organisation progresses through the Five Stages of Autonomy.

The outcome of such an organisational landscape driven by documentation over process is that there will be ever more 'red tape', but ever declining accountability and culture. Along with little to no chance the organisation will be successful in achieving its efficiency aspirations.

However, once an organisation is correctly seen as the social system it is, the role of governance can be correctly situated — to act as the glue that binds teams to broader organisational goals and cultural values.. Once this happens, we have a conceptualisation and framework from which we can create an effective organisational culture.

Governing for an Effective Organisational Culture

The traditional understanding of governance and culture is that tone is set from the top by the Board and the CEO. This is certainly true, as it is the Board's role to ensure that appropriate standards and expectations are set, and that management is held to account. However, in organisations there is frequently a disconnect between what are often little more than aspirational standards and what behaviours are actually measured at a team level. This surfaces three essential dimensions for using governance to establish and maintain a corporate culture:

• Expected behaviours: must be clearly defined and defended by regularly referencing what is acceptable. This needs to happen not just in company updates or HR training sessions, but in teams meetings and 1:1s.
• Tone from the top: is not only driven by the Executive Leadership Team (ELT) and Board through their decision making and discussions about culture, but by measuring tone at a team level.
• Zero tolerance: standards of behaviour must be enforced. This happens by holding staff to account, particularly officers, and taking disciplinary action (e.g., formal warnings and performance improvement plans) when there are breaches of conduct.

The centrality of ensuring good governance of culture at all levels of the organisation cannot be overstated. Much like an orchestra, tone from the top cannot be something only the conductor does. It requires section leads ensure that individuals are in tune and have the capability to play their instrument. If leaders beneath the officers of a company cannot or do not engage in enforcement, and an environment of permissiveness becomes preponderant, it becomes exponentially harder to achieve wide adoption of agreed cultural norms.

To counteract the frequent trend of permissiveness, Commissioner Hayne in the Final Report of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry noted six 'norms' which are 'well‑established, widely accepted, and easily understood'. These form the basis for good governance of organisational culture:

1. obey the law;
2. do not mislead or deceive;
3. act fairly;
4. provide services that are fit for purpose;
5. deliver services with reasonable care and skill; and
6. when acting for another, act in the best interests of that other.Hayne, 2019.

Unless the responsibility for governance of culture is extended beyond the Board and ELT to middle and lower management who can collectively and individually model desired characteristics, a positive and effective culture is unlikely to manifest. A situation which in turn either enhances or undermines the process of risk and compliance. A topic I will turn to next week.

Good night, and good luck.