Corporate culture an increasing legal and reputational risk

In a report released from Allens, corporate culture is identified as an increasing legal and reputational risk for companies.

Significantly, the report's findings move beyond broad recommendations, identifying the key factors singled out by the law and regulators as drivers of corporate culture and naming general counsel, governance and compliance teams as having an essential contribution to make to assessment of culture and advice to senior executives. Essential to the process, it stresses, is the need for a clearly articulated culture and an explanation of how that relates to the corporation's strategy, organisational structure and governance arrangements.

Partner and Head of Allens' Risk and Compliance Advisory practice, Rachel Nicolson, said: 'Our research has identified the law is very clear about what really matters and it is very clear there is a price attached to getting it wrong – including greater:

• regulatory penalties;
• exposure for executives – reputationally and legally;
• willingness from regulators to litigate;
• risk of shareholder and consumer activism; and
• risk to attracting and retaining top talent.

'There is also significant upside for companies who get culture right, as those with a 'good reputation' tend to attract and retain talent, increase shareholder value and enjoy positive engagement with their customers and community,' Rachel said. At the economic level, too, a positive, thriving and well-articulated culture can deliver dramatic and sustained increases in productivity and performance.

The Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry concluded governance, as well as remuneration, were closely connected with culture. Tone from the top, as set by the board and senior management, was also acknowledged as an important aspect of governance. Policies and frameworks that articulate rules and processes are also consistently identified by the law and regulators as key components of culture.

'To ensure an assessment stands up to regulatory and legal scrutiny it is necessary to implement independent, cross-functional and ongoing assessments, and have legal and compliance leads involved,' Rachel said.

Allens' research identified the following practices to help organisations make a long-lasting mindset shift:

• develop an action plan for the business where there are opportunities to strengthen corporate culture;
• constant testing to see whether improvements have achieved success; and
• ongoing review.

'Boards and management teams willing to consider issues relevant to culture, will be better-placed to set the right tone and earn the respect of employees, customers and regulators. said Rachel.

Allens' Partner-elect in its Risk and Compliance Advisory practice, Chris Kerrigan, said: 'Assessment of corporate culture is challenging. In our experience, it can't be a box-ticking exercise. Rather, it involves helping an organisation make a mindset shift and commitment from boards and senior management to consider issues raised in assessments. The law and regulatory guidance provide a useful roadmap, detailing how to go about assessing culture from a process perspective and what data points to focus on as part of the assessment are key'.

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