Steering clear of a toxic culture

An ability to sense a toxic culture can separate great directors from the good and merely competent. Tony Featherstone suggests some ways in which the board can help drive, measure and monitor a high-performance culture.

Few directors understand the challenge of organisational culture better than General Peter Cosgrove. The former chief of the Australian Defence Force has seen how high-performance cultures can bring out the best in people – and the worst, if tribal or predatory behaviour is allowed to develop.

Now a prominent company director, Cosgrove AC MC FAICD watched with sadness the Australian army’s latest sex scandal this year, reportedly involving at least 17 soldiers and officers swapping footage of sexual acts without the knowledge of women who were depicted.

“If the allegations are proved correct, it would represent a terrible let down of a culture in the Australian army that has been hard-won over a century. Despite all the cultural training provided in the army, we still have pockets of behaviour that is unacceptable and damaging,” says Cosgrove.

“We create this fantastically exuberant, aggressive, high-achieving, indomitable ethos in the military. We train an organisation dominated by men, but increasingly looking to use the great talents of women and invest in them a huge amount of culture training. We encourage an aggressive culture to help military people achieve difficult missions and for the most part it works a treat.”

But this type of culture is extraordinarily hard to maintain, says Cosgrove, a non-executive director of Qantas Airways, Cardno and the Australian Rugby Union, chairman of the South Australian Defence Advisory Board and Leading Age Services Australia, and Chancellor of the Australian Catholic University.

“You have to ceaselessly monitor high-performance cultures and act decisively when pockets of inappropriate behaviour occur,” he says.

“A high-performance culture can only work if there are clear, irreducible requirements for behaviour. High-performance cultures get out of hand when staff forget there are limits to behaviour and predatory behaviour begins to develop in a ‘tribe’.”

Company directors might see the army’s sex scandal as specific to military organisations that are dominated by men and have aggressive cultures. But the army’s scandal shows how hard it is to maintain high-performance cultures and how no amount of culture training is a safeguard.

Other high-performance sports organisations have also been beset by scandal this year – from the alleged use of banned performance-enhancing substances at Essendon Football Club and Cronulla-Sutherland Sharks Football Club to incidents of bad team behaviour across swimming, cricket and myriad other sporting codes.

The problems suggest a failure of organisational culture – a win-at-all-costs mentality that allowed inappropriate behaviour to develop – and a failing of boards of sporting clubs that did not see the signs of a toxic organisational culture or had poor monitoring processes in place.

Organisational culture is a complex topic. Global management consultant Booz & Company, in its May strategy + businesspublication, described a company’s culture as: “The collection of self-sustaining patterns of behaving, feeling, thinking, and believing … the patterns that determine ‘the way we do things around here’.”

The role of boards in organisational culture is just as complex.

Boards often describe themselves as “custodians of corporate culture” and many chairmen and non-executive directors talk about the board and CEO’s role in setting values and ensuring they are adhered to throughout the organisation.

Yet for all the focus on organisational culture, there is never a shortage of scandals in high-performance organisations. In this internet age, it may be that scandals are simply more visible or that elite performers, such as young sports people, are in the spotlight more than ever.

Could it also be that boards need to step up efforts to understand and monitor their organisation’s culture and its link with corporate reputation?

The stakes have rarely been higher. It is well understood that robust, engaged organisational cultures underpin high-performance results and that culture and strategy must be aligned.

Also true is that oft-quoted line, “bad culture will kill good strategy every time”, if staff do not embrace change.

The Booz report Culture and the Chief Executive notes: “At its best, an organisation’s culture is an immense source of value. It enables, energises and enhances its employees and thus fosters ongoing high performance. At its worst, the culture can be a drag on productivity and emotional commitment, undermining long-term success.”

Complicating matters is the need for high-performance organisations to give staff more autonomy and move away from command-and-control management styles; the challenge of managing more so-called Net Generation or Generation-Y workers; and the rising threat of organisational culture failures being exposed via the internet and quickly hurting corporate reputation.

Moreover, in large organisations, the culture may have several sub-cultures.

A director who attends eight board meetings a year could be forgiven for failing to understand the nuances of wide-ranging sub-cultures in a corporation with tens of thousands of employees worldwide.

How does a director know that front-line staff understand, uphold and enhance the organisation’s culture, for instance?

It’s a fine line for boards. They have to ensure the organisation has the right culture to support strategy; that the CEO and executive team drive culture; that the right conditions exist to encourage and sustain high performance; that good behaviour is rewarded and bad behaviour quickly identified and punished; and that the culture is sufficiently strong enough to control risk.

Although boards play an important role in shaping organisational culture, Insync Surveys CEO Nicholas Barnett says many pay lip service to the concept.

“Directors do not always place sufficient importance on culture or on the need to oversee its measurement and to implement a deliberate process of ongoing change and improvement,” he says.

Organisational culture is a passion of Barnett’s on two fronts. His firm, Insync, is a leading provider of employment engagement surveys to companies and he has personally led dozens of board reviews. Barnett is also the author of GPS for Your Organisation, which helps boards, CEOs and leadership teams understand their organisation’s long-term direction, purpose and values through guidance and positioning statements (GPS). It was published last year.

Barnett says the board’s role in shaping organisational culture is larger than many directors recognise.

“Chairmen, boards, CEOs and leadership teams need to know everyone is listening to and watching them like hawks. If they set a high bar for their own integrity and performance, that high bar has a good chance of cascading down through the ranks. That’s what many directors refer to as the ‘tone at the top’. Many talk about it, but it’s more important they model it by their actions. Many don’t.”

Barnett says boards that do not take appropriate action when performance measures are missed, send a message to the CEO and leadership team that poor performance is acceptable.

“Having reviewed the performance of more than 60 boards, I have found that when the board does not set a high performance bar there is rarely a high bar set by the CEO or leadership team. There are some exceptions, but they are rare.”

Barnett recalls a human resource executive who had just finished a work health and safety (WHS) session with senior staff.

“The CEO walked in and made a derogatory comment along the lines that ‘it’s good to have the compliance discussion behind us so we can focus on more important issues’. That CEO, probably without even knowing it, undid all the great work of the HR head in less than 30 seconds and effectively said WHS does not matter within that organisation.”

Barnett recounts another example where a CEO pulled up a staff member for sending an inappropriate email soon after the CEO started.

“The behaviour that had been acceptable until that time was all of a sudden unacceptable and the relevant person knew it. The amazing part was the culprit let a few other people know the story about unacceptable behaviour and it spread through the organisation like wildfire. The CEO did not have to say another word. A new cultural norm had been set.”

Like others interviewed for this feature, Barnett believes organisational culture starts with the board. It requires nominating directors with impeccable credentials, standards and ethics, who are capable of working as a high-performing team for the organisation’s greater good. But that means little if directors do not understand the board’s own culture and board effectiveness is poorly measured.

Director induction processes can play a critical role. Ensuring new directors understand the organisation’s mission, vision and values is an obvious first step.

Former Grey Advertising chairman Paul Gardner AM, now a director of ESP Analytics, which has developed tools to survey employee engagement, recalls a chairman once asking him to interview 10 of the company’s emerging leaders as part of his board induction.

“It was a great way to learn about the culture and how its future leaders viewed the organisation,” he says.

Gardner believes boards have delegated too much responsibility for organisational culture to the CEO.

“Too many boards say: ‘We have this highly paid executive team who have the job of strengthening culture.’ The board then sees it as its role to monitor how the CEO and executive leadership team maintain culture and perhaps build soft targets around culture into executive performance indicators.”

Gardner says: “It is a risk for boards to leave too much of the monitoring of culture to the CEO. Organisational culture is too important – and too big a risk – for boards to consider half-heartedly. I wonder how many boards include culture as a discussion item in board meetings.”

Opinions vary on how boards should understand and monitor culture.

Insync Surveys’ Barnett, understandably, believes boards can only monitor culture through regular benchmarked employee alignment and engagement surveys and briefings on the results from independent firms administering the survey.

He says boards should also ensure appropriate customer engagement or satisfaction surveys are conducted, and they should be briefed on the results for another perspective of organisational culture.

“The board then needs to ensure an action plan is put in place to move the dial on key metrics and hold the CEO and leadership team accountable to do so,” says Barnett.

Gardner believes traditional culture survey tools are becoming less effective. The 360-degree feedback process, popular in organisations such as BHP Billiton, can have flaws if staff use the process as part of a vendetta.

He says surveys based on employee satisfaction also have faults.

“Lo and behold, the employee who is having a good week rates as being more satisfied and another who missed the bus and was caught in the rain says she is less satisfied. But satisfaction does not necessary lead to better performance or employees changing their behaviour to benefit their employers.

“Frankly, all these rudimentary surveys about employee satisfaction don’t tell boards anything.”

Working with academics from Stanford and California universities, Gardner has helped commercialise the new ESP (engagement, satisfaction and performance) tool.

Launched in Australia in April, it measures, monitors and weights employee engagement and satisfaction and aims to help deliver improved company performance.

Other consultants say relying too much on culture surveys is a trap for boards.

David Deane-Spread, founder/director of leadership consultancy Metattude says the big board risk is not acting on surveys.

“I’ve seen too many boards get briefed on the results of engagement surveys and then take no action; it is more about compliance and risk management than taking clear, decisive action to fix cultural issues.”

Deane-Spread argues that directors should meet a cross-section of employees to gauge how different types of employees understand and implement company values.

“Directors will never understand culture if they sit in a boardroom and rely on surveys,” he says.

“You have to get out of the boardroom and sense organisational culture for yourself. If each director spoke to a dozen different people within the company each year, the board collectively would have a much better understanding of culture.”

Deane-Spread says some directors do not know how to have the right conversation with employees to gauge culture.

“They struggle to engage different types of people through the organisation and consequently cannot get the right information. An introduction as simple as ‘I’m a director of your company and I’m here to learn about how things are for you in the company’ can be very effective.”

He adds that meeting a cross-section of employees is also vital.

“All too often, the CEO gets his or her team to arrange meetings with the company’s up-and-coming stars. By only meeting high performers, boards can get a warped view of the organisation. Just as important is meeting low or moderate performers to understand what is inhibiting their performance.”

In addition to using engagement surveys and informal meetings, it is also said that top directors have an “antennae” to sense emerging culture problems.

Their scanning of media, customer and industry reports can highlight issues, as can their own experiences from dealing with the company – for example, rude customer service or being put on hold at the call centre for too long.

Top directors always look for signs of an emerging cultural problem, such as higher absenteeism, safety issues, too many excuses, poor regard for employees at the management level, office politics, siloed teams, weak managers and CEO behaviour that does not fully uphold organisation values.

An ability to sense a toxic culture can separate great directors from the good and merely competent. But there is also a risk in forming views about culture based on anecdotes and small sample sizes.

Cosgrove says strong benchmarking processes on organisational culture are critical.

“You have to have a measurable, mechanical process when it comes to assessing if the company you govern has the right culture for its strategy,” he says.

“Good directors monitor everything, but you can’t run back to the chairman with every anecdote about organisational culture and suggest the sky is falling.

“For me, organisational culture starts with the DNA of the board and the leadership team.

“If you have a board of highly reputable, experienced individuals and executive team members that give culture the importance it deserves, in their words and actions, you have an excellent foundation for a high-performance culture.

“At the end of the day, the board mostly interacts with the leadership team, so it is here where your directors mostly get their cues about culture.”

Ensuring the board is an exemplar of culture, and that the organisation has strong processes to drive, measure and monitor culture, formal and informal, are critical. The next question is whether the organisation’s culture is the correct one for the chosen strategy – a huge topic in its own right.

This article originally appeared in Company Director Magazine on 01 Aug 2013