In the Australian financial industry, risk has traditionally been measured in terms of its financial elements, but as we observe the fallout of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, what can we learn when chastened leaders confront their own ‘risk blind spots’ to reimagine a more holistic understanding of their organisational strategy – one that manages social risks (relationships, trust, accountability to the community) as much as financial risks, such as market, credit and operations?
The Importance of Managing Social Risk
According to Ian Laughlin, former Deputy Chair at APRA, “institutions have failed to understand and manage relationships with society and their associated social risks (which has) resulted in great reputational damage and loss of social capital for those institutions.”
He suggests that ‘relationships and associated risks’ need to be understood and taken seriously by boards and leaders of financial institutions, and that the associated ‘social condition’ of an organisation is as important as the financial condition to its success and sustainability. “Manage and mitigate ‘social risk’ as seriously as financial risk”, is the clear warning, and responsive, responsible businesses are listening.
It is a challenging view, where leaders have overlooked critical social risk factors and must now look inwards at cultural and structural conditions that allow these conditions to flourish unchecked. It is a tough reality that when organisations don’t behave in line with the values they espouse. If they become blind to community expectations, overlook poor behaviour without thought of customer perception, or expose themselves to “revenge risk” (the term Laughlin uses to describe angry customers airing their complaints via social media), they expose themselves to the same level of damage and disruption as any financial risk they should be responsible for mitigating.
Internally, social risk includes critical ‘people’ measures such as employee engagement, which, when measured as poor, can indicate serious issues such as lack of trust in leadership and confusion around organisational values, behaviours and strategy – issues that will undoubtedly show up in poor customer satisfaction scores and falling brand loyalty.
What if leaders started to understand that social risk does exist in these less-measured but equally potent forms, and it is their job to address it? The Haynes Report, handed down after the Royal Commission, starkly spelt out what can leaders can expect if they underestimate or ignore social risk – fines, reputational damage, even gaol terms, let alone the damage they have caused their customers – the very people they are meant to be serving.
The work that needs to be done by leaders isn’t to double-down on existing risk mitigation practices, nor to abandon them – but instead to develop leadership awareness and capabilities to create and embed ‘speak-up’ cultures, where unethical, destructive and potentially illegal organisational norms can be challenged and replaced by a more human-centred approach to culture and strategy. This approach still requires leaders to inspire and support their team to achieve business strategy, but in this new scenario, they do so without condoning or ignoring a culture where financial risk is managed, but equally-potent social risk is not.
Banking Royal Commission: Our case study
Senior leaders working in one of the Big Four banks had begun to recognise the importance of culture in the early days of the Royal Commission. Whilst the terms social risk and social condition were not then widely used, these leaders had already understood the importance of culture in achieving strong financial conditions and social conditions.
Lysander partnered with the organisation to design a Culture, Leadership and Collaboration program that would develop and support leaders to co-design, communicate and embed deep cultural change that was so urgently needed. The aspirations of the program were clear: build stronger internal and external relationships, enhance collaboration skills amongst and between teams, identify clear accountabilities around behaviour, and create an explicitly safe speak up culture, where unethical, non-compliant and non-inclusive practices could be called out.
They may not have used the term ‘social risk’ back then, but by initiating this Culture, Leadership and Collaboration program, the leaders had recognised the social risks that a ‘business as usual’ approach was exposing them to and were committing themselves to strengthening the social condition of the business to benefit the organisation as a whole.
Lysander took the leadership team through a culture strategy process at the beginning of the program to establish vulnerability, trust and team cohesion – creating a common language and set of ‘above and below-the-line’ behaviours to form a success map to roll out across the business. Ongoing leadership development and coaching was crucial to equip leaders to engage their managers, who they then coached to drive and embed transformation throughout their teams. Interactive team culture workshops at the start of the program allowed everyone to share their experiences and ideas around existing culture, and built team cohesion – two significant factors in the success of the program. Finally, a series of coaching and collaboration workshops were run for every team to build collaboration and coaching skills that enabled everyone in the business to build productive, authentic relationships with all their customers and partners.
The Culture, Leadership and Collaboration program ran during a time of upheaval, uncertainty and public shaming, yet the results have been exceptional, with the business even winning an important industry award. The work is ongoing, but the momentum is there and people speak of feeling energised to continue the transformation.
The Haynes Report placed a strong emphasis on the need for financial institutions to take seriously the powerful role that organisational culture has on their social condition, and in turn, it’s role in mitigating social risk. Lysander supported the organisation in this case study to cohesively and successfully understand their levels of social risk and then commit themselves to addressing all the cultural issues that contributed to their appearance in the Royal Commission in the first place.
For leaders and boards managing the demands of shareholders, and customers now hyper-aware of brand reputation – reimagining organisational risk strategy to prioritise social risk as much as financial risk, will inspire a new way of doing business – one that is more sustainable, human-centred and will result in organisations being better equipped to thrive.
You can hear more from Janet as she presents on the impact leadership has on creating positive culture and wellbeing at the RMIA Conference in Melbourne in November 2019.