ACSI has collaborated with the Australian Institute of Company Directors (AICD) on our latest research report "Governing company culture: Insights from Australian directors". This report is a first-of-its-kind and collaboration between investors and directors to understand how culture is overseen, assessed and influenced in ASX listed companies, and understand what information is currently available to investors.
The research draws on interviews with experts and senior directors of ASX50 companies to provide perspectives on company culture from inside the boardroom supplemented by desktop analysis of public disclosures. It also provides directors with practical guidance about overseeing, assessing and influencing company culture.
Key findings:
Culture is a priority for directors
Our interviews revealed that there has been a significant shift in the focus on culture over recent years, with it now firmly in the spotlight for directors. Directors are alert to the risks and benefits of a positive or negative culture, and many demonstrated a sophisticated approach to defining, overseeing and measuring culture. Crucial to that process is articulating in writing the desired culture. There is a strong sense that boards and senior management set ‘the tone from the top’ and that directors play a critical role in governing culture. Perhaps most importantly, the board should challenge actions and decisions by asking whether they are consistent with the desired culture. Going forward, the board’s oversight of culture will be tested by the ongoing impact of COVID-19, particularly as workplaces look to permanently adapt to more flexible ways of working.
Directors now use a range of tools to influence company culture
We found that senior directors of large Australian companies believe that they are able to exert significant influence over company culture. It is encouraging to see the array of practical methods directors already use to influence company culture for the better. The key methods directors use to influence culture are:
• Selecting, monitoring and (where necessary) removing the CEO
• Executive remuneration: rewarding or penalising behaviour
• Setting the tone from the top: living the desired culture by modelling desired behaviours
• Sending signals via board priorities and decision-making
• Influencing the creation and enforcement of values statements and codes of conduct.
Directors need to be curious, persistent and prepared to synthesise information from diverse sources in order to truly gauge the actual corporate culture
Data and metrics relating to culture are widely available, but in order to interpret these effectively, individual directors must be curious, persistent and willing to synthesise the many formal and informal sources of information. Directors believe strongly that the raft of metrics relating to culture are only part of the picture; individual directors must be able and willing to interrogate these data. Fundamentally, the board must seek to address the inherent risk that management may present an overly optimistic picture of corporate culture or that directors become overly reliant on management’s perspective. Boards should be seeking to understand and bridge the gap between the actual and desired cultures.
Directors see a link between company culture and long-term company performance
Our findings build on existing research, and in particular support previous studies’ findings that positive company cultures are associated with better long-term company performance. Most directors interviewed see behaviours as the core of company culture, and many stressed that defining expected culture was a precursor to requiring employees to behave in line with the desired culture. All of the directors we interviewed felt that culture is extremely important to the long-term success of the company. Successful implementation of the agreed strategy relies ultimately on the prevailing culture.
Limited public disclosure on culture
Analysis shows a wide variance in public disclosure practices amongst ASX 50 companies. Investors would value greater disclosure to discern company’s cultural strengths and weaknesses. For almost half of ASX 50 companies cultural outcomes did not factor into remuneration plans. At the same time, there is a lack of market consensus regarding the most valuable and appropriate metrics to report against. This is an area where there should be further dialogue between directors and investors to seek to reach a common view.
