Striking the right balance between culture, incentives and processes is becoming critical for all financial services providers in Australia as regulators increase their scrutiny in these areas. But beyond compliance, having a good culture is also just good for business. Tas Bindi explores further.
Establishing a strong organisational culture is about identifying values, embedding them into action, and reassessing and revising them to ensure adaptability and resilience at a time of change. Over time, an ethical, customer-focused culture can shield a business against financial, legal and reputational risks, while enhancing the overall performance and longevity of a business.
Under Australia’s Commonwealth Criminal Code Act 1995, culture is defined as the “attitude, policy, rule, course of conduct or practice existing within the body corporate generally or in the part of the body corporate in which the relevant activities take place”.
Former chair of the Australian Securities and Investments Commission (ASIC), Greg Medcraft, referred to culture as the “mindset” of a business, while the Australian Prudential Regulation Authority (APRA) describes culture as a system of shared values and norms that shape behaviour and mindsets within an institution, and once
established, these are difficult to shift.
Meanwhile, accountancy and consultancy giant Deloitte describes corporate culture as “[permeating] all aspects of its business, including attitudes towards risk-taking, customer treatment, competence, compliance with rules, innovation, plain-speaking, diversity and inclusion, empowerment of staff to make decisions, and the time horizon over which costs and benefits are considered”.
Fundamentally, culture signals the behaviours that are encouraged, discouraged, tolerated, rewarded and punished – often more so than what is simply written into an internal code of ethics or espoused on paper.
The final report for the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry identified culture as a “root cause” of misconduct.
It also showed that the consequences of getting culture wrong can be substantial to businesses. These consequences could be significant criminal and civil penalties, financial loss and reputational damage, especially with regulators being more proactive in assessing and investigating culture and having more means to pursue enforcement under the new penalties regime.
Speaking at the Governance Institute of Australia’s Governance and Risk Management Forum in Sydney in June, Dr John Laker AO, chair of the Banking and Finance Oath, noted that the financial services royal commission came to the same conclusion that was reached during the global financial crisis a decade earlier – that the culture of financial organisations was promoting behaviours and outcomes that are inconsistent with customer interests and sound risk management practices.
“Failures of culture, the excessive and reckless risk-taking, the gross misconduct, the glittering rewards for short-term success, the loss of sidelines to customers were at the heart of the global financial crisis and the subsequent loss of community trust,” Dr Laker said at the forum.
“There was, simply put, an absence of ethical responsibility.”
Sam Boer, the chief executive of Smartline, says anyone can read through APRA’s report on governance, culture and accountability within the CBA Group – which Treasurer-turned-Prime Minister Scott Morrison said was “required reading” for all board members – to understand how important having the “right” culture is.
The final report, which presented 35 recommendations, highlighted broad and interlinked cultural traits that impacted the major bank. These included “a widespread sense of complacency”, a lack of “intellectual curiosity and critical thinking about the ‘bigger picture’ and the full depth of risk issues”, and “lessened constructive criticism”, which reportedly led to “slower decision-making, lengthier and more complex processes, and a slippage of focus on outcomes”.
Mr Boer says: “We are only as good as our reputation, and it only takes one or two bad things to destroy a brand. It’s vitally important that we remain focused on our core values and always do what’s right for our clients, people and our business partners.”
In the same way that a poor corporate culture invites added risk, the benefits of a healthy culture are manifold. These include stronger reputation, greater recruitment and retention of staff, improved customer attraction and retention, alignment with community standards and expectations, and increased productivity and profit, just to name a few.
As Steve Saunders, head of broker distribution at Heritage Bank, says: “A positive corporate culture helps build confidence in your organisation, whether that’s from borrowers, business partners, staff or the community in general.
“Often, it can be intangible things like a positive culture that earn you a reputation, which builds business. People are attracted to organisations they know have strong cultures, as they know they can trust them to act with integrity.”
He notes that creating a culture that promotes staff to act with honesty and integrity is particularly important in the finance sector.
“Customers often entrust our organisations with decisions that affect their life savings and their future well-being, so they expect even higher standards of propriety,” Mr Saunders says.
Daniel Oh, group legal counsel at Connective, adds that culture should be the foundation of any broking business.
“When uncertain, or in times of stress, strong businesses can fall back onto their culture to guide their decision-making process,” Mr Oh adds.
“Especially in this environment of heightened regulatory scrutiny, if your business is not built on the right foundation, you open yourself up to risk and placing yourself in a situation which could ultimately result in you being forced out of the industry.”
While business culture was identified as a root cause of financial sector misconduct by the royal commission, it was also highlighted as part of the solution. In fact, commissioner Kenneth Hayne made a comment in his final report that culture, governance and remuneration “march together”, meaning that “improvements in one area will reinforce improvements in others”, while “inaction in one area will undermine progress in others”.
Building, transforming and maintaining a positive culture, however, is not a short-term exercise; it is never-ending and requires time, leadership, diligence and courage.
According to Megan Motto, CEO of the Governance Institute, one way that broking businesses can start to build a healthy culture is by reading the recommendations presented by commissioner Hayne and APRA in their respective reports.
The final royal commission report contains 76 recommendations, which commissioner Hayne said can be whittled down to six simple principles for business leaders to apply. These are:
Ms Motto also stresses the importance of establishing good governance frameworks, calling it the “single biggest determiner of long-term business success”.
“I say ‘frameworks’ because we know that what gets measured gets done. So, we have to have some frameworks, either a questions framework or some key financial and non-financial metrics that you’re asking your organisation to bring forth,” she says.
The Governance Institute’s response to the royal commission’s interim report noted that “conduct is the manifestation of culture” and suggested that an “ethical framework should sit at the heart of a company’s governance structure to serve as a common and authoritative point of reference for all decision-makers and give shape to culture”.
The institute suggested that company boards have a role to play in “setting the ‘tone from the top’ and modelling that tone as well as monitoring culture”.
“Boards must consider how to avoid setting policies, building systems or establishing practices that might drive conduct that is at odds with the declared ethical framework, particularly in the area of remuneration and incentives,” the institution’s response stated.
Once an ethical framework is established and adopted by the company’s board of directors, all aspects of the company should be assessed to ensure that they are aligned with the components of the framework, according to the Governance Institute.
According to Heritage Bank’s Mr Saunders, some initial steps brokers can take to build a good business culture are:
The Heritage head of broker distribution also advises brokers to revisit and reassess culture over time, noting that maintaining a good culture is not something “that just happens”.
“A great way of assessing your culture is through feedback; it’s how others view your culture that is the true litmus test of whether you are living by your values or they are just a poster on the wall,” Mr Saunders says.
“Develop a survey for your customers that incorporates feedback on your values as well as overall outcomes for your customers. Use this feedback to improve how you bring your values to life. For brokers that have a team, have open discussions with your team, or even develop a survey to get feedback anonymously.
“But the most important aspect of feedback loops is action; use the information to change the way you do things if you want to get a different outcome.”
Mr Saunders says Heritage Bank’s efforts to maintain a strong and positive culture start from the induction for new employees, who each receive a “culture book” that sets out in simple language what the community-owned bank is all about and the way it expects people to behave.
The bank also has a code of conduct that everyone becomes a signatory of, and twice a year, Heritage hosts roadshows, where senior executives travel out to the regions to talk to staff about business and culture.
“We also have staff awards program called Heritage Heroes, which specifically acknowledges people who live by our values and demonstrate our culture in action,” Mr Saunders adds.
Connective’s Mr Oh adds that one step that brokers can take to set a cultural tone that promotes ethical conduct and facilitate good customer outcomes is to map out a “detailed and robust end-to-end process” and follow it “religiously”.
“This process needs to have absolute clarity as to how and when you communicate with clients, the level of enquires and verification you conduct, and promote transparency at all stages of the process with customers and lenders,” he says.
“Look at this process in totality – does it drive good customer outcomes in a compliant manner? Exceptions need to be appropriately escalated and documented.”
Connective’s group legal counsel additionally recommends fostering staff accountability.
“Understand that any task you delegate, you are ultimately accountable for, and it’s your ability to continue operating in the industry that is at risk. Have control and oversight
of your team. Build these control mechanisms into your process,” Mr Oh says.
The Connective group legal counsel also warns that it’s when processes are inefficient or when a business is under stress that culture is most at risk. He suggests that brokers should therefore keep on top of the technology products and services available in the market that could help improve processes and efficiencies.
Mr Oh says the brokers with the best culture are those that are customer-centric in their decision-making.
“Never forget it’s about your customer,” he stresses.
“Remain interested in each customer’s situation. Have regular reminders to check in with them. Can they get a better rate? Has their situation changed?”
While this may not directly result in additional revenue, Mr Oh says “ultimately, promoting good customer outcomes is what you should be in business for and a key component of your culture”.
“A customer that you provide exceptional service for is more likely to refer you to their family and friends,” he adds.
“The brokers we see with the best culture are those that have their customers’ best interests at heart and are there for them as they go through the different stages of their financial journey.”
Tas Bindi is the features editor for The Adviser magazine. She writes about the mortgage industry, macroeconomics, fintech, financial regulation, and market trends.
Prior to joining Momentum Media, Tas wrote for business and technology titles such as ZDNet, TechRepublic, Startup Daily, and Dynamic Business.
The major bank has said that it is taking ASIC’s legal action ...
The broking franchise group has released its full-year results, r...
Major aggregator AFG has announced the addition of a new small-bu...