Co-sponsored: Culture, conduct and remuneration: A failure of leadership?

A key observation in the Royal Commission’s final report into misconduct in Banking, Superannuation and Financial Services, is the connection between culture, conduct and reward writes Michael Williams Partner, Deloitte Financial Services Human Capital and Culture practice leader.

Commissioner Hayne clearly places the blame for misconduct in the financial services industry at the feet of boards and senior management. The report focuses on the profit driven culture and inadequate systems of risk management and governance, which ultimately reflect a failure of leadership. It outlines several specific recommendations on culture and remuneration, including that:

• APRA plays a stronger role in supervising culture and remuneration systems, principles and practices.

• Culture and remuneration systems focus on both financial and nonfinancial risk, including conduct.

• All entities regularly assess the effectiveness of remuneration systems in relation to non-financial risks.

• The Sedgwick Review be fully implemented.

• All entities establish a system to assess culture, understand problems and their root causes.

• That all entities demonstrate the outcomes achieved through any changes or interventions.

• Executive accountability, and so executive culture be informed by professional expectations and an expansion of the Banking Executive Accountability Regime (BEAR).

Hayne exposed the very worst of the industry over this past year.

This awful exposure has called on the very best people in the industry to set higher goals for themselves and their organisations.

The recommendations clearly direct boards and executive teams to take a very real focus on building robust cultures - with a strong emphasis on remuneration.

This means, they will need to consider how their structure, systems, governance and culture reflect their purpose and values. Hayne reserves particular challenge for the systems of reward in the industry, wielding regulatory and governance oversight of remuneration like a scalpel to carve real change in executive and staff behaviour.

He reinforces that the board and executive team are responsible for determining the organisation’s desired culture, and then ensure that it is being lived through measurement and management.

The reality is that a strong and ethical culture not only prevents misconduct - it enables the organisation to thrive. Such a culture requires a clear and consistent tone from the top. It builds capability in good decision- making, and provides the whole organisation with the courage and responsibility to safely challenge.

It requires every person in the organisation to understand, in the words of Lieutenant General David Morrison: The standard you walk past is the standard you accept.

To date, the focus on measuring culture has been limited to measuring risk culture, that is ‘the way we do risk around here’, as directed by APRA RG 220. Commissioner Hayne however, is asking entities to understand the risks arising from all aspects of culture - that is ‘the risk of the way we do things around here’, to ensure they

can fully understand and repair the root causes of misconduct.

The Board

Boards will need to lead this discussion on culture. In this ‘new era’where organisations must ask ‘should we?’ rather than ‘could we?’,boards will need to consider how their actions and decisions will be experienced by all stakeholders. And how they will be assessed both in the moment and in the future. This does present a complex challenge.

To lead the conversation effectively, boards will need to develop both the skills and mechanisms to measure and monitor culture.

This may require a rethink of the structure of board committees to understand non-financial risk in a more holistic, integrated way, rather than through a disconnected committee that focuses on just the narrow dimensions of culture and conduct.

Boards will also need to look at themselves and consider the skills around the table. This can mean recruiting more, diverse talent with different skill sets and perspectives to those that currently reside on Australian financial institutions’ boards.

The reality is that Hayne exposed that existing systems and processes in financial services institutions failed to respond to their culture issues. Our experience is that truly understanding and managing culture can be overwhelming to most executives.

Most boards and senior management accept they need to take action in respect of culture, yet they struggle to execute and often send inadvertent messages, unaware they are doing so. The truth is that every approach can have unintended consequences. This is why it will be so important to establish mechanisms to monitor culture and conduct.


Deloitte believes it is likely that more boards will establish a dedicated ‘culture and conduct’ committee to elevate the discussion on remuneration, and so also address culture.

By openly questioning assumptions about what drives behaviour at all levels, and experimenting with different models, it will be possible to find a way to design remuneration approaches that motivate staff to do the right

thing, balanced with consequences that stop people doing the wrong things.

Finding that balance will not be easy. The whole organisation with direction from the Board will need to form a view on whether the right balance is in place at any given time.

Enforcement - a new era

Because the Hayne recommendations have given new authority to regulators to oversee whether changes to culture and remuneration are actually delivering the right outcomes, the Board and senior executives will be held to account.

Actions: Each entity will have to ask:

• ‘What is our purpose, values or desired behaviours?

• ‘How do our customers, people and shareholders experience these values or desired behaviours?’

Purpose: The board and the organisation’s executives set the purpose. They are responsible for clarifying and driving it into the very fabric of their organisations. When an organisation is truly purpose-led, every employee understands his or her contribution towards achieving that purpose.

Values: An organisation’s values frame ‘how we do things around here’. They need to be continually reinforced through accountability at every level by effective consequence management.

Remuneration: An important component of managing culture is the serious consideration of how remuneration for senior and middle management shapes decisions and behaviours.

Short term, profit based incentives need to be replaced with longer term, broad-based measures for upper levels of management. They need to drive purpose-aligned decision-making for the benefit of a wider group of stakeholders, including customers, employees and shareholders. The true test of performance will be the outcomes, that often only materialise years after the decisions are made.

Hayne’s requirement that the Sedgwick Review recommendations be fully implemented, challenge the industry and businesses everywhere to consider new models of measurement and reward for good behaviour. Indeed, they are likely to revolutionise remuneration systems.

The short-term impacts of these changes could mean that executives default to meeting the ‘minimum standards’, but the very public scrutiny of the Hayne Royal Commission does mean that our complex financial services will be under the eagle eye of the community, whistle-blowers and regulators to demonstrate that they are pursuing fundamental and profound change. In the long term, truly purpose-led organisations will be the winners.

Michael Williams the Deloitte Financial Services Human Capital and Culture practice. Victoria Whitaker Deloitte Partner, is an experienced risk advisor focusing on ethics and sustainability.