A Financial Services Spotlight

By Dylan Flavell and Chris Morfesse

The Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry is complete. Across 76 recommendations, the verdict is in: a profit over people approach had established deep roots in the culture of many organisations. With APRA and the broader community seeking effective reform, a question has emerged related to culture: can it be regulated?

WHAT IMPACT WOULD REGULATION HAVE?

We have seen regulation work well when considering culture as it relates to employee safety outcomes, where aspects of safety culture can be measured relative to industry benchmarks and reinforced by the watchful eyes of safety bodies. It’s also clear that employee safety is, by and large, a shared priority for staff, leaders and regulators.

When we turn our gaze to financial services however, there are some key differences. The cost of risky behaviours can be difficult to ascertain, culture benchmarks are less defined, and there is a risk that regulation becomes another system for players to ‘game’.

Further, as Commissioner Hayne described, “much more often than not, the conduct now condemned was contrary to law. Passing some new law to say, again, ‘Do not do that’, would add an extra layer of legal complexity to an already complex regulatory regime. What would that gain?”

Hayne’s view is supported by numerous studies in behavioural psychology showing the more rules we have, the less personal accountability we tend to demonstrate. In short, we tend to rely on the rules rather than personal and conscious accountability. When novel situations or events arise regulation can become ineffective or even counterproductive

ROADMAP FOR CHANGE

If regulation is not the answer, then where and how should financial institutions invest effort to generate a healthy performance culture? Our work across industry sectors in helping to build high performing and sustainable cultures, along with a vast body of research, demonstrate that cultural change is achievable when given appropriate attention and thought.

MEASURE THE RIGHT STUFF

Rather than point out individual players (the bad apples), we must recognise the troubled orchard. It’s the system that enabled misconduct, and the effectiveness of a system is best measured through a systemic and evidence based culture assessment.

A survey of our clients and the literature suggest that more than 75% of organisations do not measure culture. Instead, employee engagement is often measured and used as a proxy for a ‘healthy and sustainable’ workplace.

Measuring engagement in an organisation and industry where employees are paid well, organisations are profitable, and employee empowerment is strong can result in engagement data that is misleading in its implications for organisational health. The deployment of evidence based and commercial assessments of culture would have illuminated the risk of a profit over customer focus, shining a light on the behaviours and work practices that enabled it.

Companies who proactively manage culture demonstrate 516% higher revenue growth than those who do not over a 10 year period.

INCENTIVISE ‘BALANCE’

A key finding from the Commission was the prioritisation of ‘profit over people [customers]’. Incentive structures came under fire and calls for the removal of all sales incentives and commissions followed. Whilst understandable, evidence suggests we should instead be seeking to build cultures (and performance frameworks) where balance, rather than polarity, is central. Profit AND Customer, Quality AND Efficiency, Short Term AND Long Term should be the explicit goal. It is unrealistic and unsustainable to ignore the competing priorities that characterise organisational health and performance.

Research shows that organisations who focus on developing cultural balance (across the domains of customer, employees, efficiency and strategy) significantly outperform competitors on key commercial metrics such as Sales Growth and EBITDA Growth. The paradox is that encouraging a focus on cultural balance, rather than profit alone, is a commercial advantage.

INVOLVE RATHER THAN CONTROL

When it comes to setting and shaping culture, understanding the different roles of leaders and teams is critical. Contrary to popular opinion, the role of the executive team in shaping culture, whilst important, is not the whole game.

Senior leaders do play a critical role in setting cultural intent, but meaningful change requires real involvement at all levels. Front line leaders and teams who have not bought into or helped shape the way they will express cultural priorities, will ignore or block top down directives.

Our experience and the research into ‘what works’ in driving cultural change shows that organisations that can set a strategically aligned cultural intent at the executive level, and then invite front line leaders and teams to shape the expression of that through practical initiatives, are much more likely to yield returns on cultural change efforts. Counter-intuitively, increasing commitment and accountability is achieved by yielding, rather than increasing, control.

OWN YOUR CULTURAL INTENT

Rather than a new set of rules and regulation, thoughtful management of culture can generate the cultural changes the Royal Commission indicated as necessary to restore trust.

Measuring the right behaviours and work practices, balancing incentivisation, and seeking genuine involvement of the frontline are critical enablers of behavioural change and represent clear opportunities to reestablish trust in financial services. 


References cited above:

  • Denison., D (2017). Should Corporate Culture Be Regulated? Denison Consulting
  • Kahneman., D and Tversky., A (2011) Thinking Fast and Slow.
  • Kotter, J. and Heskett, J. (2011).  Study on Corporate Culture and Performance.
  • Kania, Hamilton, Senge; Stanford Social Innovation Review, 2015

For more articles and resources, visit our Culture pages

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