Is APRA using the wrong analogy?
Culture has become the number one topic in the finance industry thanks to the Royal Commission. APRA and other regulators are moving fast to demand action be taken to shift negative cultures.
But all this begs the question: what is ‘culture’? A night at the opera, perhaps? Bad jokes aside, most agree that culture is easy to see, but incredibly difficult to define. Borrowing from a courtroom scene in the iconic Australian film ‘The Castle’, my colleagues at Board Matters muse that the best we can do is call it ‘the vibe’.
So how does an organisation build and drive a positive culture?
In answering this question, we like to consider two scientific terms – complicated and complex systems – and reflect on how they differ.
Chairman of APRA, Wayne Byres, delivered a speech in April called ‘The incentive to fly safely’. In his talk, he said the superannuation industry is like flying a plane. While we agree with the overall sentiment of his presentation, we respectfully point out that his analogy misses one very important difference between a flight cockpit and the investment industry.
An airline cockpit is a complicated system, but financial markets are complex systems, and the methods behind managing these two systems are completely different.
In the complicated cockpit, when the pilot pulls back on the yoke, the flaps on the wing move and the nose of the plane is lowered. There can be accidents of course, but the laws of physics always apply. In a complicated system like this, checklists are effective and invariably cover all bases. Over the years, the aviation industry has embedded a comprehensive checklist system that pilots complete before every flight and this has dramatically decreased the number of accidents.
But financial markets are complex systems, and they do not work in this way. There’s no law of physics. You could have a checklist of 100 questions or 1000 questions, but the outcome will never be concrete. At its simplest, this is because the outcomes are influenced from the bottom up with no overarching control mechanism. It doesn’t matter how much you read the legislation, how much you understand the laws of economics, how many questions you ask – you will never achieve the level of precision that’s possible when operating an aircraft cockpit.
Complex systems also evolve, so what worked yesterday won’t always work tomorrow. In the financial markets, the right checklist that would have worked ahead of the tech bubble (which saw high prices for companies with no earnings) would have been completely inadequate ahead of the GFC (which was preceded by an earnings bubble).
But that doesn’t mean it’s random, and it doesn’t mean your decision-making process is irrelevant. Quite the opposite. In complex systems a process of rigorous questioning is essential to guiding your outcome, but instead of running through the precision of a detailed checklist that some hope will deliver a concrete outcome, you must think a little more broadly to keep you on track and move towards your ultimate goal.
So this brings us back to culture, which we explain as being like an organisation’s true north. You will get side-tracked because any number of unpredictable events will veer you off course, but it is within the Trustees’ control to identify and manage events that would tailspin the culture south.
To set the true north, Trustees can ask a series of broad questions that will set up the GPS, if you like. They can oversee the incentive systems and KPIs that are put in place and make sure these motivators and measures drive actions that will keep everything moving in the right direction.
For Trustees, our true north is our members’ outcomes. The link below to the Investment Funnel, gives you some inspiration on the broad questions you can ask at each step in an investment process. This kind of guided process and these kinds of questions will help you set a positive culture. This aligns the moving parts of your organisation so they drive a culture in the best interests of your members.