Harbridge Insights – Culture versus Strategy

Harbridge Insights – Culture

Part 2 – Culture versus Strategy

10 min read

Introduction

Does culture really eat strategy for breakfast? This article examines and compares culture to strategy, asking: Is one more important than the other? Can you have one without the other? Our first article in our series of four articles on workplace culture examined “What is Culture? and provided some ways to assess organisational culture. This article compares and contrasts culture and strategy.

“Culture eats strategy for breakfast” is a comment made by Peter Drucker and later popularised by Mark Fields when he was president of the Ford Motor Company. Whilst not my favourite Peter Drucker quote (see our website homepage for that one), it is often repeated in the context of culture being more important than strategy. We don’t agree with this premise and will explain why in this article.

We also consider some of the findings of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry in Australia and question whether some of the findings attributed to breakdowns in culture were instead due to a lack of strategy. Finally, we consider the findings, implications and expectations on both financial and non-financial services directors and entities.

Definitions of culture, strategy and purpose

Culture – In our first article in this series, we defined culture as “the way things get done (or don’t get done) when no one else is looking”, noting it is as unique to every organisation as fingerprints are to each person.

Strategy – A strategy is the plan of action required to achieve one or more specific goals. The primary purpose of a strategy is to take proactive steps towards achieving the longer-term organisational vision. The vision is the long-term future you want to build and achieve for the organisation. It’s your purpose for being, the “why” of why you are in business. By contrast, your mission is what you must do to get you there. The strategy supports the organisation to fulfil its mission, on the longer path to achieving the vision.

Strategy is the deliberate plan of action that the organisation intends to take to achieve its mission. It generally requires three key things from the board:

• a commitment to the long-term direction and planning of the organisation (although the definition of long-term differs from firm to firm and industry to industry)
• it must be viewed within the context of a competitive environment and not in isolation
• it requires a commitment of resources (people, processes, systems, strategic business partners and money amongst other things) to assist with the implementation

Strategy can occur at the organisational or corporate level, as well as the business level.

Purpose – Purpose is the reason you are in business. It is the Why to strategy’s What and culture’s How. In today’s increasingly complex economic environment, defining a purpose that focuses solely on maximising value for shareholders, customers and employees is unlikely to resonate with these three key stakeholder groups. Further, research into organisations that are incorporating a broader and more socially engaged purpose indicates that they are outperforming their competitors. They are also more fully engaging their employees. An organisation doesn’t have values, but its employees do. Organisations are now expected to go beyond returning only profits to ensure that they are creating value for the societies they operate in (we discuss this further in articles 3 and 4).

Research by Gallup indicates that only 27% of employees strongly agree that they believe in the company’s values, whilst only 23% of employees strongly agree they can apply these values to their daily work. A values-driven culture can both drive organisational growth and attract top talent to your organisation, as high performing employees want to work for an organisation with a thriving culture (we also discuss these issues further in the third and fourth articles in this series). Having an organisation full of staff aligned with the organisational purpose can help to drive a path through disruption, while keeping focused on how their individual contributions independently and collectively help the organisation achieve its purpose.

Determining your culture, strategy and purpose

The Royal Commission suggested setting the tone from the top. But this does not mean that the board is solely responsible for defining the purpose and culture or determining the strategy, nor should they solely be the ones to determine these critical success factors.

Assessing the values of the staff within the organisation can assist in determining what the purpose is or should be. This should be done across the organisation to ensure you obtain the collective values of all employees, as alignment with the purpose, values and strategy affect the culture and attract people who align with and want to work for this type of culture. Taking this a step further to involve other key stakeholders in determining your purpose is a challenge, but one that brings total alignment and engagement across your total value chain.

Many organisations do not include their employees in their culture and purpose defining processes, nor their strategy development processes, despite then expecting them to be fully engaged with their implementation (and beyond). However, one of the most effective ways to get buy-in on strategy implementation (or any change program) is to involve employees and other key stakeholders in these development processes. When people feel that they are part of the process, they are more aligned with and attached to the outcomes determined, positively impacting the culture.

So, whilst the board should actively monitor and manage the organisational purpose, culture and strategy, a greater level of stakeholder input makes it more likely they will be achieved as determined.

Royal Commission findings

The Haynes Royal Commission into Misconduct in the Banking, Superannuation and Financial Services findings centred on the relationship between culture, remuneration and governance and we discuss and question these findings across all three areas.

Culture

One of the key findings from the Royal Commission was that culture was the root cause of many of the failings uncovered. Whilst we do not disagree that culture had a huge impact on many of the actions that drove misconduct, we believe that a lack of strategy and/or an inability to implement strategy post-takeover implementation was the root cause.

Over the last two decades, many single service/function organisations, such as banks, insurance firms and superannuation funds decided that they wanted to be one-stop financial services shops. This is a perfectly reasonable strategy, as it is aimed at both increasing the size of the pie and increasing their slice of it. The implementation of this strategy started slowly and simply, with larger banks taking over smaller retail and commercial banks, friendly and building societies. Insurers took over other insurers offering complimentary insurance products. Superannuation funds targeted organisations within their industry who were trying to grapple with increasingly complex legislation and governance requirements and keen to outsource a function that was not consistent with their core strengths.

Over time, the acquisition strategies expanded to include various combinations of other financial institutions, such as financial planners and advisors, investment managers, asset consultants, custodians, stockbrokers, mortgage brokers, and many more. Some organisations chose to rebrand the firms acquired, so that customers saw a cohesive service offering. Other firms retained the original branding of the acquired firms to ensure the reputation of the organisation acquired was not adversely impacted.

So, here’s where the culture verses strategy debate gets murky. Two of the key rules of business that have stood the test of time are: if you don’t have competitive advantage, don’t compete; and stick to your knitting – which is another way of saying “play to your strengths”.

The acquisition strategies and, in most cases, the implementation strategies were clearly defined and executed. In contrast, the subsequent “business as usual” strategy did not consider the cultural and operational impacts of operating vastly different businesses. In some cases, these impacts were outside the experiences and skill sets of board members and executive teams. Conflicts of interest between both roles and duties within the acquired businesses, as well as between the different group entities, were not considered.

There are always going to be individuals and organisations who liked the safety and security (and let’s face it, the simplicity) of dealing with a large one-stop shop. There are others who prefer to deal with more boutique or specialised organisations who treat them individually and not as a number. So, whilst some consumers knew they were using the services of a large behemoth subsidiary, others thought that they were dealing with a boutique provider, unaware of the likely conflicts and limited service offerings of the products and services they were obtaining.

Financial services firms took advantage of this by not considering the conflicts of both roles and duties between the firms within the parent group, irrespective of the branding. In many cases, when the “build it and they will come” strategy did not achieve the post merger financial outcomes predicted, cash and other incentives were introduced to influence employee behaviour. In banking, this started out as a simple exercise with tellers suggesting alternative products or offering to make an appointment with a financial planner (the banking equivalent of “would you like fries with that?”). Unfortunately, it evolved into a range of conflicted arrangements, including only recommending related entity products and implementing both performance management and financial incentives designed to encourage staff to redirect customer’s business into one of the group entities.

Psychological safety is a key driver on whether whistleblowers will speak up. Challenging the status quo or speaking up in some organisations can be seen as an aggressive, negative or critical actions, rather than someone concerned who wants to identify and resolve issues. It can often be easier to go with the flow or hope that someone else speaks up, than risk being the person who steps out of line. As noted in our first article, when poor behaviour is not punished, it can be seen as acceptable and therefore, less likely that it will be challenged.

Similarly, strategies can restrict or prevent multi-team cooperation and result in business units operating in silos. Fear of losing knowledge power by sharing information with others also restricts cooperation.

“Setting the tone” doesn’t mean top down, it means communicating consistently and holding individuals accountable for their individual performance and team contributions relative to strategy alignment.

Governance

Hayne’s recommendations in relation to key governance objections included reinforcing the board’s oversight of culture and governance, and addressing remuneration. However, these are simplifications of much more complex issues, which do not necessarily improve governance.

Haynes noted six norms of conduct or basic norms of behaviour. Yet these are already basic legal obligations under the Corporations Act or ASIC Act for all financial services licensees (for which there appears to have been limited action taken since the breaches were uncovered). They are also core behaviours and expectations that clients/customers of any industry expect when dealing with any organisation, as follows:

• obey the law
• do not mislead or deceive
• act fairly
• provide services that are fit for purpose
• deliver services with reasonable care and skill
• when acting on behalf on another, act in their best interests

Language matters. Using the term “oversight” (a significantly overused term in the financial services industry) indicates to some that the role is more of a quick glance that requires a token effort. A more meaningful term with appropriate legal impact would be to ensure that the board is “responsible” for culture and governance, with legal obligations reflecting this. There is no such thing as a risk and/or governance culture, there is just culture.

A simple way to positively influence culture in relation to governance is to ensure all processes and underlying actions are client/customer focussed. This make governance everybody’s responsibility by ensuring that all actions and behaviours are firstly in the best interests of clients/customers. In contrast, aiming for a “compliance focussed” culture can be seen internally by employees as solely the responsibility of the compliance department.

The Royal Commission did not recommend that the scope of a director’s legal obligations be expanded to include being a good corporate citizen as expected. One key strategic decision that was overlooked by boards in acting solely in the best interests of shareholders ahead of clients/customers was that either directly (via a shareholding) or indirectly (via their superannuation), the shareholders and customers are actually the same people. This was short term thinking, not aligned with either being a good corporate citizen or acting in the best long term interests of the organisation. It is no longer acceptable to just be good (which many financial institutions failed anyway), organisations are now expected to do good. However, sponsoring various sporting and community events with the proceeds of ill gotten gains is no better than putting shareholder returns ahead of other stakeholder interests and expectations. In both cases, it is literally robbing Peter to pay Paul (or robbing Peter to pay Peter).

Remuneration

Commissioner Haynes commented that “culture, governance and remuneration march together. Improvement in one area will reinforce progress in others; inaction in one area will undermine progress in others”. While this may be the case in certain situations, it is old school thinking not supported by vast amounts of research conducted over the last 20 years across a variety of professions. This research continually finds, irrespective of professional or industry, people come to work for three reasons: the first is that it is just a job where they will do whatever is required to get through the day, then leave and do what they love outside of work. Remuneration is a means to an end (Bernard Tomic is a perfect example of this). The second reason is that it is a career where they are seeking to climb the corporate ladder, may or may not be motivated by money, but are interested in receiving new titles and social standing (Nick Kyrgios comes to mind). The third reason that people come to work is that it is a calling – a form of self-expression and fulfilment – where employees are likely to find their job more meaningful and will modify their duties and build relationships to make it more so (Ash Barty is living proof of this). Engaging employees (discussed further in article 3), moves them along with chain from a job, to a career, then hopefully to find their calling, where the remuneration is less relevant. Further, those that consider their work to be a calling are actually more willing to perform their role for less money.

Strategic considerations for directors and entities

The flow on effects of the Financial Services Royal Commission extend beyond the financial services sector and have implications for all company directors. The final report acknowledged that the board does not, and should not, need to be aware of everything going on in the organisation. However, directors do you need to be aware of significant matters arising in the organisation. They are also expected to continually review the strategic direction of the organisation relative to those significant matters.

A key enabler for this to occur is for directors to challenge management to ensure it has the right information about the right issues presented in a meaningful way. In addition, there needs to be proper processes for identifying exactly who is accountable for risk and other functions and how they are accountable. These are expected to be documented in accountability statements for each key executive.

Further, boards are expected to continually assess the organisation’s culture and governance, identifying any issues, dealing with them and ensuring the changes made have been effective. Another important assessment, which can sometimes be forgotten, is monitoring the organisation for any unintended consequences which can go undetected if no one is looking out for them.

Conclusion

The organisational culture can reinforce and perhaps more importantly, help achieve the strategy. But if there is no strategy, or a poorly conceived or implemented strategy, then having a great culture is not going to help. This contrasts with the opinion of many people who believe that if you get the culture right, then success follows. Culture merely enables (or restricts) the implementation of a strategy.

Great organisational cultures are intentionally designed and actively managed. Culture is the key driver of implementing a corporate strategy, however strategy is the car and navigation system.

The winner between culture and strategy is a mute point. They work together to enhance each other’s success. You need a clearly articulated, relevant and tactically implementable strategy for your business. Those organisations that focus solely on strategy without considering the underlying culture required to implement it may have to deal with unintended consequences when things don’t to according to plan (or lack thereof). You also need an engaged culture to ensure that the strategy can be implemented. So, culture doesn’t eat strategy for breakfast and those that focus solely on culture are likely to go hungry.

Please get in touch if you wish to discuss this article further.

Jenni Harding
Managing Director
Harbridge Optimal Performance
June 2019

About Harbridge Optimal Performance

Harbridge Optimal Performance is a specialist consulting company offering a range of services to optimise the performance of individuals, teams and organisations. We believe that applying a positive, strengths-based approach to traditional strategy, people and change management practices optimises individual, team and organisational performance. We work top down with boards and executives at the organisational level and work from the bottom up both one-on-one and with groups at the individual and team levels.

Our clients include investment managers, super funds, a university and other institutional investors, ASX listed companies/subsidiaries and various other professional services firms, as well as individuals from a range of industries.

© Harbridge Optimal Performance 2019

Ph 1300 665 456 www.harbridge.com.au