Culture is strategy and strategy is culture

Lyn_Goodear

In what is now a well-known piece of testimony given to the 2018 Hayne Royal Commission, a then senior executive, Matt Comyn, reported proposing to his then CEO, Ian Narev, that he wanted to do the right thing by the bank’s customers by abolishing a range of lucrative junk insurance products.

The response from the CEO received at the time was to “temper your sense of justice”. Comyn reportedly added that he did not take that flawed advice to the board because he believed the board shared the same view: that financial results mattered and that customers were expendable in achieving them.

Three years earlier the same bank had put a remuneration report to its annual general meeting which consisted of executive bonuses paid on the basis of meeting a number of non-financial key performance indicators that included good governance practices and customer satisfaction targets. A number of institutional shareholders objected, complaining that bonuses should not be paid on the basis of meeting ‘soft performance targets’ and that only financial indicators can be taken seriously.

It’s worth reflecting that even though Ian Narev was ostensibly a powerful chief executive of a prestigious institution, he was part of and captive to the culture of an entity that was bigger than one person, and that entity included the board to which he reported and the shareholders to whom the board reported.

It was therefore a pleasure to hear in March 2019, three years later, the Australian Prudential Regulation Authority chairman, Wayne Byers, state that the formulaic approaches to executive pay, that some investors favour, based on the single metric of shareholder return is “not going to cut it”.

In calling for a remuneration metric based on an even balance of financial and non-financial considerations, the regulator has picked up on Kenneth’s Hayne’s conclusion about the vagaries of human nature.

When Commissioner Hayne concluded that “entities and individuals acted the way they did because they could,” it seems reasonable to infer that he wasn’t simply touching on the fragility of the moral compass that order individual lives; he was also making a judgement about how the group thinking of people within entities is self-generating and requires effective self-checking and correction mechanisms.

In delivering his report to Government, the Commissioner left little doubt that while it might be people who create value in an organisation through their ideas, innovations and dynamism, it is also the people in an organisation who will lose their way if there are no corrective instruments preventing them doing so.

It is those instruments that have the potential to contribute to culture, a word often used as shorthand to describe ‘the way things are done around here’.

While the Hayne Commission has been a sobering experience for the Australian finance sector and business in general, as the head of the HR peak body, I noticed with a degree of curiosity that the executives called to give evidence and reveal the lamentable flaws in their corporate practices, were almost all in charge of operational divisions.

The counsel assisting the Commission, Rowena Orr QC, refrained from calling chief human resource officers to the stand even though they would ostensibly be the executives charged with the ownership of culture.

There may be a number of reasons for HR flying under the Commission’s radar but the one that interests me is the likelihood that the HR function was not taken sufficiently seriously within the entities that appeared at the Commission. By that I mean not only did the counsel assisting believe HR executives did not exercise enough influence to deserve a grilling from her, but that the entities themselves did not believe so either.

The Hayne Commission is not the only time I’ve been struck by the phenomenon of the HR function flying under the radar when it might be expected to be in the firing line. Another was the VW emissions scandal, which if nothing else was a case of a company living comfortably with a people culture in which coyness to speak out about grossly unethical and illegal behaviour was acceptable, and in which remaining mute was the unspoken code that was rewarded.

In resisting the temptation to suggest that business needs to take the HR function more seriously, I would say that a greater number of HR executives and practitioners, many of whom are members of the organisation I lead, need to be more upfront and visible in assuming their role as the owners of culture, and where that is not seen as their role, to take a lead in putting the case to the entity for doing so.

For that eventuality to succeed, HR leaders must be credible professionals in their own right so that the organisation has the confidence to vest the HR function with responsibility for culture in its own interests.

There are organisations which have done just that. They have seen that HR can boost the performance levels of its people which in turn contributes to achievement of its mission and sound financial results by paying appropriate attention to its customers.

A contemporary example of such a company is the entertainment service to which many of us subscribe. I refer to Netflix, which over the past decade has moved from physically shipping DVDs, to mailing content, to streaming movies digitally, to where it is now – a major creator of content, the 2018 Oscar winning movie Roma being a case in point.

In a 2018 Harvard Business Review article, the Fast Company co-founder Bill Taylor put Netflix success down to three things.

The first relates to big data, but not so much to the data itself as the ‘big ideas’ generated by using big data.

The second is a point about disruption. Netflix’s success involved breaking free from the accepted wisdom within the industry of which it was part. The company was not simply interested in how its customers watched but was keen to influence what thy watched, and it replaced an industry focus on demographics with the creation of ‘taste clusters’.

Taylor’s point is that Netflix didn’t just disrupt an industry, it also disrupted itself in the service of its mission. A company that ships DVDs is not the same company that makes content.

The third point goes to Netflix’s philosophy, described as ‘culture is strategy and strategy is culture’. Taylor sees Reed Hastings, the CEO of Netflix, as a leader who thinks just as rigorously about people and culture as he does about digital streaming and content.

Culture for Reed is about values, and he believes that values written down are less indicative of culture than “the real values of a firm which are shown by who gets rewarded or let go”.

And going to the question of who gets rewarded, he says they are people “who say what they think, when it’s in the best interest of Netfix, even if saying it is uncomfortable”. They are willing to be critical of the status quo and make tough decisions without agonising.

Netflix doesn’t make artificial distinctions between financial and not-financial metrics. They are the same thing. If the company can service its customers within the bounds of its mission better than its competitors, it will be successful. And it has at the expense of Blockbuster, which no longer trades.

So we are talking about a serious success story with Netflix, and on all three of Taylor’s success measures, people are central.

Only people can generate big ideas.

Only people can decide that in order to disrupt an industry it’s necessary to disrupt yourself, and then do it.

And only people can decide to adopt a philosophy about the interconnected centrality of culture and strategy, and make it work.

If Netflix is a stellar success story founded on a people culture, the aftermath of the Hayne Royal Commission is a crisis presented to the finance sector with culture at its core, and survival of 2019 annual general meetings without incurring a second strike on executive remuneration.

When Winston Churchill wanted to set up a United Nations at the end of World War II, he reminded world leaders that they should “never let a good crisis go to waste”.

For the HR profession in Australia, there has never been a better time than now to assist the banks in dealing with a culture crisis. Since 2015 the Australian HR Institute has set a high certification bar on professional HR standards and practice. We now require eligible practitioners to undertake a set number of exacting internationally benchmarked postgraduate units, as well as minimum years of service, and mandated continuing professional development.

In a profession which has previously set no bar to entry, this is a significant initiative that recognises the demands that businesses are now making on the skills, knowledge and behaviours required of an HR professional working as a partner to the business. HR certified practitioners can and will take ownership of driving economic performance while at the same time exercising the influence and courage where necessary to ensure the people and the entity remain ethically and legally focused on achieving its mission.

Lyn Goodear FAHRI GAICD is the CEO of the Australian HR Institute, www.ahri.com.au.