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Leadership Framework Director Comments on the Australian Banking Royal Commission

The current Royal Commission into the banking and financial services industries brings into focus several issues on effective managerial leadership and the impact of common practices such as KPI's and incentives. While I have no more knowledge of the internal operations of these institutions than what is in the media, it is easy to speculate the key issue is one of culture, but what drives culture?

Business outcomes are the result of the thousands of decisions made every day by employees, acting in accordance with the information they have and their beliefs on what is important and what is not. This information comes through the working organisation i.e. the structure, systems of work, symbols and managerial leadership. Each component provides the context for people's work and drives organisational culture.

People often talk about leadership however leadership happens at every level in an organisation. Managerial leadership is not just about setting direction, it is also about creating a working environment that both enables and sustains productive work. An organisation's leadership team defines and sustains its culture through what it values and embeds through the design and deployment of its structure and systems of work, i.e. its rules, regulations, policies, procedures, and symbols. These are the things that create custom, practices, traditions, beliefs and assumptions and create standards and expectations on how work is done. They are a significant influence on how people experience work. Leadership that is dependent on role modelling alone will not last, as behaviour will revert unless it is reinforced by a system of work.

The issues highlighted in the Royal Commission seem to be:

Conflict within the structure

Conflict of interest appears to be present in two ways. Conflict within functions caused by poor alignment of the roles, accountabilities and authorities between line managers and corporate functions such as risk, audit, HR and Finance. Conflict within in a role, for example is a financial planner a planner providing independent advice or a sales person of the organisations products and services? To be successful structure, functions and roles need to be designed with clear accountability and authority. The interaction of roles must complement each other and not be in conflict.

Ineffective systems of work

Systems of work must be designed in a way to deliver the organisations strategy.  They need to be integrated with the organisations values and allow the executive team to monitor and verify that the organisation's purpose is being achieved in accordance with the cultural, ethical and moral standards. Assuming these standards existed, how were they reflected in the systems of work? Were systems designed to consider customer needs?

Inappropriate use of measures and targets

Measures and targets must be focussed not just on "what" was to be achieved but "how" it is to be achieved. Measures for quantity and quality must be balanced. Were there measures for trust, honesty, the application of good practice or customer satisfaction? How did the Executive Team set these for the organisation and did this flow to managers at levels with "value added engagement"? Were these aligned with organisational values?

Reliance on bonuses and incentives as a tool for performance

It appears that everyone from the top down was "incentivised" with performance targets and bonuses. There is a basic flaw in bonuses and incentive systems:

  • If employees are engaged to do their best (i.e. to work to their full potential), then it is illogical to attempt to reward for greater performance. Is the assumption that people basically lazy and need to be urged to work? Better results can be gained other ways such as improved recruitment, goal setting, systems or communication.
  • Employees in organisations can only be held accountable for working to the best of their ability and as the organisation allows. Every employee's performance effectiveness is impacted by the performance of their own manager and organisational factors such structure and systems of work. Furthermore, external influences, such as market conditions and supplier issues, are outside the employees' control and can significantly affect the outcome.

In summary

The problems in the financial industry culminate from all aspects within the working organisation i.e. from its structure, design of roles, systems of work, symbols and managerial leadership. All aspects will need to be reviewed, using a wholistic and integrated framework. I fear that unless the Boards of these organisation consider the working organisation, as a coherent and integrated unit, they will not make meaningful change.

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