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Leadership Dishonesty

21/02/2019 4:21 PM

A STORY OF “LEADERSHIP DISHONESTY”

Commissioner Hayne’s report into Misconduct in the Banking, Superannuation and Financial Services Industry is a shameful story of extraordinary leadership dishonesty. 

Whatever the leadership roles – chairman, director, MD/CEO, senior executive, professional advisor, business partner, industry/professional body, or in the many other capacities, the organisations’ leaders treated people dishonestly. It is an appalling governance story. 

82 per cent of Australians consider leaders have a key role in influencing an organisation’s ethical behaviour. Yet the then CEO of the Governance Institute Steven Burrell reported from a survey that “neither they (the leaders) nor their organisations are perceived to be very ethical.”

Commissioner Hayne’s report is a defining moment. It demands an immediate change in the present governance practices. Communities are entitled to have as leaders only those people who are prepared to address the systemic dishonesty which appears so all pervading of our current governance practices.

Leaders need to be strong models of probity

Leadership dishonesty accurately describes the present cancer that is so pervasive in the governance practices of so many organisations. Dishonesty covers a gamut of behaviours including deceit, untruthfulness, fraud, sharp practice, unfairness, untrustworthiness, corruption, misconduct, funny business and malfeasance.

It would not be difficult to find examples of every one of those descriptors of dishonesty that were on display at the Commission hearings.

What are the implications for organisational leaders?

A good starting point is Hayne’s emphasis on the primary responsibility for misconduct (in the financial services industry) being with the entities concerned and with those who manage and control them. While the focus was the financial services industry, every sector is on notice. Other sectors may have been heard saying – there but for the grace of God go us.

Further, Hayne recommended leaders assess their entity’s culture and its governance; identify any problems with that culture and governance; deal with those problems; and determine whether the changes it has made have been effective.

Directors and management together, need to now identify how their present governance frameworks can be strengthened. Our own work strongly advises that it cannot be to continue doing the same old practices.

This report reinforced the need for strong governance foundations by noting that boards and their “gatekeeper committees” must:

  • sufficiently challenge management;
  • do all they can to satisfy themselves that they are receiving the right information and inputs from management to make complex decisions;
  • monitor, measure and assess corporate culture and governance; and
  • provide rigorous oversight of risk, including non-financial risks.

Boards continue to struggle to better understand what in real life circumstances, are their role and responsibilities. Most directors are reasonably good at identifying and articulating their role and responsibilities from the Corporations Act; or adopting the many glib descriptors found in training materials. Little, it seems, goes to the heart of changing the actual behaviours and activities of the directors and senior management.

The irony in all of this is the availability of sound evidence which strongly supports why organisations ought to be “doing the right things”, irrespective of the law and Commissions.

As Peter Drucker said, “Management is doing things right; leadership is doing the right things.”

This is core in our Governance Intelligence® Audits.

PwC’s recent 21st CEO Survey, again revealed what many know about the importance of organisations having a purpose with shared values and behavioural expectations. In fact, the study overwhelmingly found that, “93% of CEOs say it’s important their organisation has a strong corporate purpose that’s reflected in its value, culture and behaviours”.

In other words, many acknowledge that the organisations boards and senior managers need to be more sensitive to the communities in which they operate; they need to be actively engaged in their organisations’ culture; and to align the growth of their business with social impact.

When utilising Governance Intelligence® Audits, we refer to this as “The Intelligence of positive social impact”.

Interestingly, Bain & Company, speak of world-class business performers being convinced that “(their) stated values effectively drive frontline actions, even when no one is looking.” This effectively guarantees that everyone within the organisation will always act in the best interests of the enterprise.

Sir Winfried Bischoff, Chairman of the UK’s Financial Reporting Council (July 2016) stated in the Culture report: Corporate Culture and the Role of Boards: “A healthy culture both protects and generates value. It is therefore important to have a continuous focus on culture, rather than wait for a crisis.”

He further says: “The strategy to achieve a company’s purpose should reflect the values and culture of the company and should not be developed in isolation. Boards should oversee both.”

It seems that for far too long governance has been the captive of addressing risks, compliance and administration. All, very important, and will continue to be so. However, this cannot be pursued to the evident detriment of people, whether internal staff or external customers, or the community more broadly.

It is clearly time for the core focus of governance to be rebalanced and re-calibrated. While boards and senior management operate, theirs must now be done so within a framework that acknowledges the effect their actions and decisions have on a wide range of people. In other words, being the organisations’ leadership group, then they should be held accountable for the consequences of their omissions and commissions when making decisions.

Arguably it is well overdue, but if courts adopted a modernisation of Lord Atkin’s neighbour principle; then it would open a realistic avenue to address the very issue of dishonesty highlighted in the Commission. Surely it is not too difficult to describe those who spoke so personally of their awful experiences as “neighbours”.

And surely too, what board or senior manager could truly argue that any these people and the groups they “represent”, were not within their vision (foreseeability).

For any reasonably professional, experienced, responsible and caring leader; would have them within their contemplation when making decisions or omitting to make decisions. Of course, the expectation of the necessary changes in our governance practices, can only happen if boards and senior managers commit to embedding “doing the right things” in the very governance practices that are valued and supported.

None of this is really rocket science. But it does demand a committed will; especially from the Chair and MD/CEO of each organisation.

Hence the core challenge for every organisation is for the Chair and separately the MD/CEO to answer the following question:

“Do you commit, in the carrying out of your role, to be held to account for ensuring that you always will demonstrate doing the right things?

As the Governance Institute of Australia’s CEO Megan Motto says the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry has been a “wake-up call the industry needs”. It was a “sobering insight into the sector’s governance failings, driven by a culture of profits over service”; and “… is the wake-up call the industry needs. The sector has seen a failure of leadership and accountability, especially around governance, reputation and risk management. The pursuit of short-term profit above ethical conduct has hurt both customers, investors, and the community at large, and the damage will take some time to repair,” said Governance Institute CEO Megan Motto.

“The royal commission has highlighted just how badly we need to open up a discussion on how we measure business success, especially in terms of key intangibles such as business culture and ethical conduct. How do we create new ways of incentivising our business leaders to perform, beyond the current obsession with profit-based metrics?”

It is clear there is a need for independent feedback loops to the board which is separate from the usual reporting lines.

Her challenge is for all leaders “to consider these kinds of changes here too?”

When it comes to “New metrics to measure success, incorporating culture and ethics ………… should now be seen as a positive opportunity …… to do a hard reset and look at new ideas to fundamentally rethink their governance, especially how boards and management interact.”

We would agree. Also, the hard reset and new ideas are already within a deliverable solution.

We urge every organisation to annually undertake a Whole of organisation Audit and experience the benefits of an average 64% change in their performance. 

DISCLAIMER: This article is general ONLYin nature and is not advice

For more information contact Damien Smith on smithdj@enterprisecare.com.au or +61 418 325 781.

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