Organisational Culture – How to Manage a Moving Target

The findings from Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry (Hayne’s Royal Commission) have sent a ripple across corporate Australia, thrusting organisational culture to the top of board agendas across all industries.

But how do you measure culture, and more importantly, how can you effect change to drive the desired behaviours?

Drawing on their own experience and learnings, panel members at the Aon Insights Series in Melbourne discussed how they assess and manage risk culture in their own organisations, sharing practical tips to help achieve the right outcomes in a post-Royal Commission world.

The risk of regulatory change has fallen to the number 10 risk globally in Aon’s Global Risk Management Survey 2019. The slide in ranking is likely to be driven by the recent deregulation efforts of pro-business governments in many parts of the world, including Australia.

Culture is key to business strategy

Companies may not be seeing organisational culture and regulation as a top risk, but this does not mean that they are ignoring it altogether. In fact, it’s become an important part of their competitive strategy. Organisations are now viewing regulation as an opportunity to create a competitive advantage over their peers. Therefore, regardless of how the regulatory landscape evolves, companies should recognise that organisational culture is no longer a secondary concern, but a primary consideration in their business strategies.

Strong leaders are key to the success of culture

Professor Elizabeth Sheedy, Professor of Applied Finance, Macquarie Business School, shared newly-developed research from Macquarie Business School highlighting that, “risk culture is not just about what is in the policy documents or on the website. It’s not so much the formal statements of the senior leaders, it’s about the day-to-day business environment.” Professor Sheedy highlighted that there is a clear divide between senior leadership and staff. Staff are strongly influenced by their leadership meaning strong leaders are crucial to the success of culture.

Professor Sheedy states that,

Risk culture is really about staff perceptions, importantly, risk culture should address all the risks that are relevant to the organisation.

Simon Kennedy, Head of Rewards Solutions, Pacific at Aon discussed a broad review of what regulators are focussing on when it comes to the changing remuneration environment within organisational culture in light of the recommendations that came from the Hayne Royal Commission and other government-mandated inquiries. Mr Kennedy highlighted three aspects of APRA’s draft Prudential Standard CPS 511 Remuneration which seeks to ensure that the remuneration arrangements promote effective management of both financial and non-financial risks, sustainable performance and long-term soundness of the entity.

Among key reforms, APRA is proposing:

1. Deferrals for long-term incentives
2. Capping financial performance measures and KPIs (50% non-financial performance measures)
3. Making the board entirely responsible for remuneration frameworks

Risk and HR must come together

APRA’s proposed reforms also states that boards must establish a formal process for the remuneration committee to consult with the board risk committee and the chief risk officer to approve remuneration frameworks and policies. Aon’s view more broadly is that human resources and risk business units should come together to better align remuneration frameworks with the long-term interests of entities and their stakeholders, including customers and shareholders.

The views and opinions expressed in this blog are those of the author(s) and do not necessarily reflect that of Aon.  We make no representations (express or implied) as to accuracy, completeness, correctness or validity of any information in this blog and accept no responsibility or liability for any errors, omissions or misstatements of whatever nature and however caused.