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An ambitious model

22 August 2016 by Caterina Bulgarella and Adelle Elia

An ambitious model - read more

We are not powerless when it comes to shaping culture, say Caterina Bulgarella and Adelle Elia

As we reflect on some of the corporate governance fiascos of the 21st century − Enron, WorldCom, Lehman Brothers and AIG – it is easy to see the accelerated effect that this era of deep economic interdependence creates; a precipitous downward spiral that once started, is difficult to stop. Those failures earned headlines not just because they were big, or because the few people who tried to blow the whistle were ignored, but because the spiral that they started overwhelmed the governance systems that were intended to stop it.

When Gene Park of AIG told Joseph Cassano (then Head of AIG Financial Products) that certain ‘A+’ CDOs (collateralised debt obligation) were unlikely to be honoured, that was like a mosquito pricking an elephant − AIG’s size and complexity meant Park’s message was simply not felt. Likewise, Matthew Lee’s (then Senior Vice President at Lehman Brothers) letter to Martin Kelly, the company’s controller, to alert senior management to some accounting improprieties he had noticed, was followed only by silence and inaction.

The internal systems of governance, whistleblowing hotlines, risk managers and no doubt others, relied on by AIG and Lehman, were not prepared to address massive, systemic failures. They were not capable of detecting disasters in their early stages, before they started to snowball.

Not only is the environment in which companies operate today more complex and volatile, but business is finding ways to thrive by driving that complexity − even appropriating it to sustain revenue and growth. For example, banks and financial institutions have come up with sophisticated derivatives, and automakers have designed software to fake ‘superior performance’ that kicks in only when it is being measured.

The systems of governance have not developed fast enough or robustly enough to manage such new complexity and volatility. So, perhaps we are not approaching the problem in the right way. It is apparent that we need to look for a different solution. Governance frameworks are critical, but it is unrealistic to imagine that static processes truly address dynamic risks. These risks appear momentarily and slip through an entire organisation, unassailable.

Traditional governance systems rely on centralised functions and programs and are unlikely to be enough when it comes to catching dynamic risk. We need to create an environment where it is everybody’s business to consider the future effect of certain actions. That does not mean creating a system in which everyone plays ‘police’ – it is easy to imagine the pitfalls of that type of mentality.

If smart, forward thinking across the enterprise is what is needed, it could be tempting to assume that the answer is to make sure that people become more knowledgeable. However, the malfeasance of our time has grown alongside progressive intellectualisation of the workplace: organisations want smart, well-educated people to do smart, risky things. Training alone will not reboot governance. The insightful thinking that companies need today implies a shift in attitude, not just understanding, along with a shift in culture.

LRN recently published its HOW Report on culture, governance and leadership. One finding proves critical to this conversation: employees who feel fully responsible, accountable and dedicated to the purpose of their organisation, deliver a different type of contribution. It is not that these employees just work harder; it is that they think ahead in terms of the impact of their actions and their behaviour on others.

Let us imagine how this could play out with a team composed of people who hold that attitude of dedication, accountability and responsibility. Such a team can be hit by systemic failure, but the chances of this happening are lower because those team members will think in terms of their overall purpose and those who share in it, rather than in terms of next quarter results and their daily to-do list. They will think about their customers, partners and other stakeholders in the organisation. They will frame what they have to achieve in wider terms and will feel accountable to a range of third parties.

The issue with AIG and Lehman was not whether the senior leaders responded to the concerns when someone was finally brave enough to tell them. The issue is that nobody thought that they were messing with an entire system when they came up with the idea of fake A+ CDOs. If they did, they did not care − somebody else would eventually fix the problem.

The cocktail of dedicated, responsible and accountable is not easy to achieve. It is an ambitious outcome of an ambitious culture model, known as the ‘self-governance’ archetype. The model reassures us that in a world of convoluted intricacies, where complexity is sometimes appropriated for the wrong reasons, we are not powerless when it comes to shaping the culture of an organisation.

As the HOW Report points out, the work that an organisation needs to complete to become self-governing starts with creating a healthy core − a system of values and a sense of purpose that mean something. Once that system is created, it needs to be embedded in every aspect of the business as the set of operating principles that inform decision-making, rewards and recognition, selection and onboarding of new talent, professional growth, job and organisational design and leadership development.

The practice of shared purpose and values will inspire authentic dedication, full responsibility and accountability. In the wake of the Volkswagen emissions scandal, for example, it remains to be seen whether the company will go back to the drawing board − with the help of its employees and other stakeholders − to envision credible values that can command a different type of conduct, and if they will be propelled into every corner of its global business. That applies to the next Enron and the next Lehman, too.

Caterina Bulgarella is Senior Leader, Governance, Culture & Leadership Practice and Adelle Elia is Knowledge Leader, both at LRN

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