Insights

11/07/18

"The way we do things around here" - corporate culture in the energy and resources sector

Corporate culture in an energy and resources setting

Barely a day passes without mention of “corporate culture” in the mainstream financial press. The concept appears to have morphed from a convenient and general description of a corporation’s collective value set, to a theory of organisational performance and, increasingly, to a basis of legal liability for a corporation’s conduct.

Most recently, as a result of the Hayne Royal Commission, the focus has very much been on alleged cultural failings in the financial sector.  However, we know from experience that energy and resources companies will not be immune from the same criticism, particularly in the context of crises.  For example, press reports of the Samarco dam disaster were quick to target BHP Billiton’s supposed “culture of risk taking and cost cutting” as the cause.  Similarly, the culture within BP’s American operations were what many argued lay at the heart of the Deepwater Horizon accident.

Energy and resources companies already invest heavily in building and maintaining their social licence to operate, a concept which while nebulous, has wide acceptance.  Is the concept of social licence inextricably tied to culture, or are the two distinct? Will the Board discharge its legal obligations (if there are any) in relation to corporate culture by ensuring an appropriate level of investment in the corporation’s social licence?

As we will see, there is little consensus around what the phrase “corporate culture” actually means.  However, social licence, dealing as it does primarily with external stakeholders, is only one manifestation of corporate culture.  In line with regulators’ evolving attitudes, directors of energy and resources companies will need to take a more holistic approach to cultural issues. We set out below a potential theoretical framework to assist Boards in this area.

What is corporate culture?

Corporate culture is the embodiment of the unwritten and informal expression of the set of values and behaviours which predominate within the corporation.  This is often expressed, in simple terms, as "the way we do things around here".  But it is an impractical expression, as “the way” is often not embedded in anything that can be written or read.

Indeed, as the experience of poor conduct in the financial sector shows, a corporation’s culture (or the culture within a particular business division) may be entirely contrary to what is written or read.  No one has suggested to the Royal Commission, for example, that the Big 4 banks had anything other than exemplary corporate governance policies and procedures.

So it is clear that when we talk about corporate culture we are talking about something other than corporate governance.  We are talking about a set of “meta rules” which transcends what is written in a corporation’s policies and procedures.  And we are also talking about something which affects external stakeholders as much as it does internal ones, via the so-called social licence to operate.

What do regulators say about corporate culture?

Regulators are beginning to develop their views on corporate culture as deeper conversations are held on the importance, and components, of a desirable culture. 

The ASX Corporate Governance Council is seeking to place greater focus on corporate values, culture and the social licence to operate (see ASX Corporate Governance Council’s proposed changes to the Corporation Governance Principles and Recommendations).  Particularly, Principle 3 outlines how a listed entity will be expected to act ethically and responsibly, and instil and continually reinforce a culture across the organisation of acting lawfully, ethically and in a “socially responsible” manner.

In the financial field, APRA has identified a number of attributes which go towards poor corporate culture:

  • complacency;
  • “a slow, legalistic and reactive, and at times dismissive, culture”;
  • becoming insular in “turning a tin ear to external voices and community expectations about fair treatment”; and
  • the downsides of the “collegial and collaborative working environment” including good intent to “too readily used to excuse poor risk outcomes” (see APRA’s Prudential Inquiry). 

ASIC takes the view that a poor corporate culture “leads to poor outcomes for investors and consumers, impacts on the integrity of the Australian financial markets, and erodes investor and consumer trust and confidence”.

There is an acknowledgement among the regulators, including APRA, that maintaining and changing culture is “a multi-year journey that will require sustained effort and attention”.

The importance of corporate culture and social licence to operate for energy and resources companies

The social licence to operate in an energy and resources context is critical.  It is identified as the seventh biggest business risk facing the mining and metals industry (see EY Report).  How does corporate culture impact such social licence in this industry? 

The social licence to operate is very closely related to the trust of the local community in which the organisation operates.  In turn, an organisation’s internal culture and practices are the most critical aspect of establishing such trust (see KMPG – AICD Trust Survey).  That is, only through a desirable corporate culture can trust-based community relationships be pursued and the social licence be effectively maintained.  The interconnectedness of these elements – like the legs of a stool - means that an organisation needs all three to remain stable and profitable.

This interconnectedness presents a particular challenge to the energy and resources industry, where organisations often have city based office and regional sites.  Creating a common, consistent and transferable culture throughout the organisation as a whole is difficult.  However, it is especially necessary when working to create a social licence built on trust in the relevant local communities, whether this be in the business community in capital cities, the community where resource extraction activities are located or employees housed, or in local Indigenous communities affected by operations.

How should energy and resources boards think about culture?

The board of an energy and resources company can easily point to its "policies" and "rules", which have been the mainstays of the corporate governance practices of major corporations for some time. But, as a matter of law, how does one go about identifying "attitudes", "courses of action" or "practices", in order to effect a desirable corporate culture?

A strong corporate governance structure alone does not lead to desirable corporate conduct, the establishment of social licence or communal trust.  It is only half the picture.  A more holistic approach is required beyond any sub-set of governance policies or procedures.

ASIC identifies corporate culture as being “a key driver of conduct”.  We agree: and predict that, combined, governance and culture will be viewed by regulators and potentially courts as being at the core of a Board’s responsibility for the corporation’s conduct.    In our view, Boards should consider corporate governance and corporate culture as being reflective of each other: corporate governance – being the means of restraint – is the set of meta-rules governing risk, whilst corporate culture – being the means of enabling – is the set of meta-rules governing strategy.

Whilst governance and culture are different perspectives on the one internal force, together they lead to a final product of corporate conduct that is reflected in the organisation both internally and externally.

In our view, energy and resources companies can take comfort from one of the most important advances in the industry in the last two or three decades: the emergence of a “safety culture”.  While a combination of technological advances and process improvements have no doubt played a part, most mining executives say that it is an increased “consciousness” of safety issues, and the instilling of a culture of “looking after your mates”, that has provided the real breakthrough.  There is no reason why instilling the same cultural attributes towards, say, environmental compliance, sexual harassment, or bribery and corruption, cannot yield similar, transformative outcomes.

Conclusion

In the field of corporate governance, the law is on a journey from rules to principles, and now, with the increasing focus on corporate culture, from principles to values.  In order to navigate this journey, the Boards of energy and resources companies will need to take a holistic view of their “culture”, and maintaining and enhancing their social licence to operate is but one, externally facing element of this.

However, as the emergence of a “safety culture” in the industry has shown, energy and resource companies should take comfort in their ability to translate desirable cultural norms into tangible commercial and practical outcomes.  There is no reason why the experience in this area cannot be replicated to achieve the same desirable outcomes in other areas of operation.

Co-author: Gabrielle Sumich, Graduate

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