What the Royal Commission reveals about culture
The Interim report of the Royal Commission demonstrates that, despite various reviews and historic incidents, the subsequent changes in regulations and practices have not led to the desired effect on customer outcomes. It also demonstrated that short-term incentives are likely to have contributed to ineffective outcomes.
The following are Adaptive Cultures’ perspectives on issues at the heart of the Royal Commission. A full discussion of these findings are included in our submission to the Interim Report and can be found here.
Key finding 1 – Short-term incentives
Focusing on short-term incentives erodes personal agency, creativity and intrinsic motivation. This is to the detriment of consumer interests, long-term organisational performance and human potential. Structures and communications need to encourage greater personal agency and intrinsic motivation to think and act towards effective customer outcomes at all levels of the organisation.
Regulators should be fully prepared to drive unacceptable business models out of the market. The short-term incentive model is clearly unacceptable.
We believe replacing short-term incentives with a slightly higher base salary, taking into account cost implications, is a big step forward.
We do not recommend proportion of remuneration at risk, as this may simply suppress the raising of issues that might lead to reducing remuneration.
Key finding 2 – Intrinsic motivation
The consequences of focusing on extrinsic rewards are far-ranging and include suppression of human development and the capacity of the organisation to adapt and mature over time. We believe that if extrinsic rewards are replaced by investment in intrinsic values and creating a culture of self-awareness, purpose and personal agency, that the financial returns for organisations would likely be higher and longer term than with a focus on short-term financial incentives.
In order to enhance intrinsic motivation, we believe organisations need to
- Develop cultures that align intrinsic motivation to desired customer, community and shareholder outcomes
- Invest in learning and ongoing development to build greater personal agency systems awareness and adaptive capacity.
Key finding 3 – Engagement AND enforcement
The commission findings identified an insufficient balance between engagement and enforcement. How the regulator can meaningfully balance enforcement and engagement is crucial to effectively influencing organisational culture. This is a complex skill that requires development.
Effectively balancing enforcement and engagement has implications for the culture of the regulatory body and the development of individuals within those bodies as much as implications for the culture of the organisations they regulate. These cultural implications include regulatory bodies having a deeper level of accountability to continually walk this balance.
Key finding 4 – The role of corporations in society
While many of the above recommendations can influence and shape effective risk cultures, their effectiveness is limited by the current perception that the primary stakeholder is the shareholder. The overarching governance framework must recognise the importance of all stakeholders if changes from the Royal Commission are to move beyond another temporary step forward and become genuine progress.
Consideration should be given to adopting additional corporate governance principles that explicitly recognise all stakeholders, enforced through Board responsibilities.
At the heart of these findings and recommendations is the reality that humans inside and outside of our organisations need to develop greater adaptive ability in order to make genuine progress. This means developing greater self-awareness and personal agency and ability to take responsibility for the impact they have on the systems around them. These capacities arise as we develop greater mental complexity.
While greater complexity is not a complete solution to self-interest, people at later stages of cognitive and psychological complexity are much more able to hold multiple perspectives simultaneously and see the longer-term consequences of their actions. They are also more able to put in place solutions that balance a variety of stakeholder needs and rights. Developing greater mental complexity in individuals consistently demonstrate financial and risk benefits to the organisation.