Recommendations to boards post Hayne Royal Commission with permission Wendy Harris QC.

Recommendations to boards post Hayne Royal Commission with permission Wendy Harris QC.

When a QC talks, I listen – avoid litigation.

I had the pleasure of reading the paper delivered by Wendy Harris QC, current President, Victorian Bar at the recent Australian Insurance Law Association (AILA) in Tasmania. (A huge congratulations to the conference organisers as it was a suburb event, with great speakers and in a sensational location).

Wendy’s topic was about the Management of non-financial risk in a post-Royal Commission world. Of course, Wendy was referring to the Royal Commission into the Banking, Superannuation and Financial Services Industry a mere 9months after the report was published.

Disappointingly, Wendy did reference an event whereby only a minority of attendees had noticed their organisations making changes post the Royal Commission. However, a recent article in the Legal Review “A brave new world” (Nov 2019) indicates that there has been a spike of workload for law firms in what is recognised as a change in attitude from ASIC from collaborator to aggressive intervention and action (welcomed by the community at large and well overdue).

If you can get a copy of Wendy’s paper, please do as it was a great read, with full disclosure with a glance at the issues experienced in our health sectors.

However, I wanted to highlight some key points that Wendy addressed in her speech to the #AILA attendees, specifically the call for all boards (across all sectors) to focus on non-financial metrics.

 

Recommendations

1. Recommendations apply across sectors:

Whilst the commission had a focus on the banking, superannuation and financial industries the issues around the management of non-financial risk encompasses all sectors and is not confined to the financial services sector.

2. Non financial risk metrics that need focus are customer and culture.

What is the better measure of culture or is psychological safety actually the better metric for the health of an organisation? What are your cultural surveys telling you? What interventions are you engaging in? Are they working? Are they changing behaviour? Have you changed practices as a result of cultural surveys such as recruitment, training, upskilling? What about the customer – what measures are you using? Are you able to identify the sources of the information? Are you tracking complaints? Are you looking at your customer numbers as a key asset – how many are you losing? How many are you retaining? Why? Have you got curious about the way customer and cultural metrics are being reported and surveyed. Most organisations are extremely shallow in their methodologies for both customer and culture and boards are not getting a clear view nor a number that actually links to performance and profitability.

“Barriers to good culture (and therefore psychological safety) are often leaders who prioritise their own success over the interests of customers, and a preparedness to take compliance shortcuts.”

3. Central to managing non-financial risk is organisational culture.

These are the values that you don’t just articulate at your AGM or in your annual reports – these are the values that is guiding north for all decision making and there is a commitment to those values. These values are the values that every person in the organisation should be accountable for and it should be visible in the decision making process across the organisation. You cannot be a customer centric culture if you are finding ways to sell products to customers without knowing who they are and what their needs are. If you are creating more friction and anxiety with your IT systems (driven by costs reduction) you are not customer centric. You are not invested in your people by having a Wellness program. You are invested in your people if you have identified what matters to them and how you can help them achieve “what matters”. “While the core responsibility for setting and driving culture rests with the board and the most senior levels of management, the maintenance of good culture is an organisation-wide concern.”

4. Boards do not always understand their central role and responsibility for managing risk (‘that’s for the clinicians and management to worry about’).

This was really interesting to me and again it comes back to shallow management and perhaps under estimating the reach of our legal framework. There is almost a clinical assessment of risk with no real endeavours to investigate the impacts on the people we rely on – our customers and our employees. There seems to be a lot of time and effort on a framework around risk and the measurement of risk but we also seem to have removed the word “people” from our boardrooms when we look at compliance and governance. The silos in our organisations are reflected in our board structures and the skill sets that we have around the table. Our diversity issues across boards go further than gender but in skillsets and cognitive thinking.

“The under-appreciation and shallow management of risk is endemic in boards and management across Australia.”

5. An organisation’s purpose and values should be reflected in the way everyone goes about their job, and makes the decisions and choices which their roles entail, from the mail clerk to the CEO, from the delivery driver to the Board Chair.

Too often we have conflicting values and we lack purpose. The majority of issues within organisations today is the “self interest of management” superseding decisions and recommendations from customers and employees. Whilst our boards may be struggling to identify issues, frontline employees know exactly what the issues are — so why are the real issues not being addressed? Organisations have an inability to have difficult conversations. They lack the curiosity to ask questions and delve deeper into reports. They are not following up with outcomes and linking this to financial other non financial metrics. We are using lagging indicators. We are condoning poor behaviours and normalising “people” issues instead of using our values to create boundaries and consequences of behaviour. And these are critical issues in across our industry sectors. Organisations are determining values based on “what they should do” not on what they are prepared to do. “Barriers to good culture (and therefore psychological safety) are often leaders who prioritise their own success over the interests of customers, and a preparedness to take compliance shortcuts.”

6. The experience gap:

This is where there is a clear disconnect between what leaders think they are delivering and what “people – employees and customers” are actually experiencing. This is true from a cultural perspective where there is a clear disconnect between what the organisational leaders think they are cultivating and what is actually playing out at the coal face. Behaviours within the workplace, the lack of boundaries, the lack of accountability and the lack of consequences are creating a culture of apathy, distrust, self interest and blinded bias. So, how do boards get visibility of these issues? Cultural surveys are clearly not cutting it? Or is it disclosure, transparency and curiosity letting us down? We have a customer experience gap that is prevalent with customers. How many of these commissions have commenced with customer complaints? Complaints that are rarely reported, investigated or treated with any curiosity from the board or management (unless it makes it to social media). How many of our boards ask – how will this change affect our customers? What are the alternatives? Where are the biggest areas of anxiety or friction and how can we prioritise these issues? If we looked at our compliance issues they are all to protect our employees, our customers and society. So why have we taken “people” out of the committee structures, out of the decision making process. If we looked at some of the largest issues around the commission and bad behaviours and asked the question – how does this help the customer? We seem to forget that without customers our shareholders have no value.

7. The Board, and the senior management – is critical in leading and driving cultural change.

I would add here that cultural change will never occur unless psychological safety is measured and monitored in a team environment. Culture change is an organisational wide issue. But there is so much distrust because of the “shallow” management of cultural issues in the past. Leaders and managers within organisations influence up to 70% of team performance. So this is why such a strong focus is on the management and leadership teams. However, a checklist of internal workshops will not change an organisations culture. You have behavioural norms “ we always do it that way”, “why bother, they never do anything”, “why worry, they never sack you unless it’s something really really bad”. To really make change, to get people to learn a new skill, to upskill to share knowledge – you need an environment of psychological safety, without it – transformation projects, cultural change initiatives will deliver no long term improvement.

8. There are financial impacts to non-financial issues

Bad culture in a company isn’t just an ‘ethical problem’; it is likely to lead to poor financial outcomes because of the likelihood that the company will run headlong into costly conduct and compliance risk. Poor psychological safety has been proven to cost organisations in terms of employee churn rates, poor productivity, high absenteeism and a disengaged workforce – this affects your costs. When these impacts start occurring in our workplace, customers suffer – they start to become dissatisfied, disloyal and start to look for alternatives – this then affects your revenue. Now you have a non-financial metric affecting every part of your business from finance, legal, people and culture, human resources, marketing, workplace, health and safety and risk management.

9. Take action – critical self-examination and diagnosis is key. Seek external views.

Organisations – large and small, customer facing or not – should be giving themselves a culture and governance health check. Or due to the large biases and the difficulty in asking the tough questions and not being defensive but factual– get an external provider to do some investigative work around non-finanical compliance with you.

NEXT STEPS – TAKE ACTION

From our perspective, there are a number of actions we recommend boards and executives taking to focus on non-financial metrics.

1. Accept that “people are your greatest risk and your greatest potential” .

Once you accept this you need to identify those key values that are going to drive your organisation and be the “guiding light” on all decisions making. Can you accept and agree as a board and organisation that people before profits will driver greater performance and greater profits – then you need to put some focus on your “non-financial metrics”.

2. Understand your now. Boards need to review the non-financial metrics that are being reported.

They also need to ensure that they are actually measuring metrics that are lead indicators to the outcomes they wish to achieve. How can we stop being reactive to situations and be proactive? What metrics are we using that are telling us the story too late? We need to be able to predict and then intervene. Start putting people front and centre of your decision making and the consequences of your decision making – your customers, your employees, your community and your shareholder.

3. Ensure you are measuring the right “People” metrics that highlight your biggest risks and opportunities. People audits are required – for employees we recommend measuring Psychological Safety.

For customers we prefer Net Promoter Score (NPS) and an Emotional Engagement Score ®. How are you driving change and performance improvement in your compliance and audit breaches? How much of what you are seeing are you categorising as “business as usual”. Start removing the diabolical language around compliance and governance and start thinking in terms of what if this was your grandmother? What if this happened to your daughter? When did we start removing the language of “people” when we started talking about the impacts of decision making. We cannot all be reduced to a scale or a number. This is the key change we need to make across the organisations from the top to the bottom.

4. Board diversity – board diversity is more than about gender.

It is about backgrounds and skills sets, it’s about appreciating and being inclusive of the different ways of thinking. Start getting some “people experience” around the board that are there to be advocates of customer and employees. They should not be put in a siloed marketing committee, they should be across every committee as each of your committees impacts on “people” and rely on “people”. A diversity of thinking, and the ability to facilitate and leverage that diversity instead of pigeon holing and creating biases around peoples skillset.

5. Board curiosity – a recurring theme is the “shallow” view of non-financial metrics.

Certainly finding training outside of governance, risk management and processes is difficult to access. But understanding non-financial outcomes, inputs, metrics are critical for high performing boards. Start to be more curious about the reports your organisation has been conducting – the net promoter score, the cultural survey. Don’t look at what it is telling you, ask about the delivery, ask how it links to your performance indicators, what are these reports highlighting, what are the outcomes and where will you see an improvement – real evidence of improvement. How many of your non-financial metrics are actually linked to your financial metrics? With all the data we have at our fingertips we should be able to link each non financial metric to a financial metric. What we need to do is ensure that the metric is viewed as a lead indicator not a lagging one – such as the financial metric.

6. External view – self -assessment in culture’s where “self -interest” seems to be the theme of the day over purpose and values.

I would suggest (with full disclosure of a conflict here) that the time for external parties to help identify “what you don’t know” is critical. Poor organisational culture, “toxic boards” are all too frequent across all industries. Get an independent third party to assist you navigate the non-financial governance, the culture of commitment and your people – customers and employees. When was the last time you did a psychological safety assessment of your board? Of you executive team? Self assessment risks us using the same biases to critically asses ourselves as we have to so far, justify our actions.

7. Culture + behaviour review

We clearly have across industries with our cultures. Unclear values, lack of clarity and transparency, poor examples of behaviour and a lack of accountability are issues that many organisations are facing. Values are not a one day workshop and articulating in our strategy document – it’s sets the behaviour and guide for decision making, interactions.

“The most visible manifestation of culture is behaviour”– Leading by Example.

8. Leadership – boards and senior executives.

We need to look at our boardroom and leadership dynamics on decision making, culture and behaviour. There is a lack of awareness of behaviour and the group dynamics that influence decision making. Our boardrooms and meeting rooms are constructed of dominance and docility and I would argue are psychologically unsafe. Informal and often biased decision making and an unsatisfactory adherence to strategic objectives (other than the pursuit of profit at all costs), compliance and ethics are evidenced across industries.

9. Act don’t defend – too often the response to hearing something that you did not know or “bad news” is to defend the information.

Just listen and think about what you are hearing. Don’t defend it. Think through how you might be able to leverage the opportunity provided by a different view, or new information. Take action and make a commitment by being consistent and demonstrating new behaviours. Your biggest fear should be what you think you know but don’t know. Or what you are not hearing as a result of your previous behaviours.

The Victorian Bar Association in conjunction with the Association of Corporate Counsel (ACC) is hosting a panel discussion “Should we, even if we can” – Ethical Corporate Decision Making in a post Hayne world. Thursday 28th November, 5pm in the Neil McPhee Room, Level 1 Owen Dixon Chambers East, 205 Willian Street.