Esther An

This article was first published in the March 2015 international edition of Accounting and Business magazine.

In 2014 ACCA and the UK’s Economic and Social Research Council (ESRC) completed an international research project that examined the influence of corporate culture, regulation and compliance systems in driving either functional or dysfunctional behaviour in organisations. The conclusions, outlined in the report Culture and channelling corporate behaviour, aim to provide business leaders with innovative guidance on the path to cultural assessment and change.

Effective channelling

If you have ever used the London Underground, the following will all sound familiar to you: please mind the gap; please stand behind the yellow line; please stand on the right; please keep left - in other words, please go with the crowd and do not ever interrupt the flow of movement. 

On the Tube system, around a million commuters are trying to make it to work on time every weekday morning. Securing a smooth and uninterrupted flow of trains and passengers is therefore the main priority of Transport for London (TfL) as an organisation. Effective traffic regulation is needed to channel users’ behaviour, and constant reminders are displayed and broadcasted all over TfL’s routes. At peak times, staff are on the platform, tirelessly repeating that customers should stand behind the yellow line and let passengers off the train first. 

London is a particularly cosmopolitan city, bringing together people of various cultural mindsets, yet nearly everyone eventually comes to conform to the ‘herded-sheep’ behaviour that makes the Tube as efficient as it can be, even at peak hours. 

The behaviour of others significantly influences the behaviour of individuals. On the Tube, standing on the wrong side of the escalator or blocking opened train doors by standing right in front of them causes remonstration. Generally, though, people will comply with TfL’s exhortations. 

Taking the Tube reveals an extraordinary journey into British culture (or at least its clichés). While some cities experience chaos during peak traffic jams, or when workers go on strike, in London people grumble in line. The culture at the heart of the Underground system has been passed on to its users through the effective enforcement of its norms and practices. Rules and procedures are critical in ensuring appropriate conduct, and the constant reminders of the staff on platforms prove effective tools in channelling passengers functionally. 

"In London people grumble in line."

London Underground shows that regulation is critical to functional organisations. It also reveals how culture influences behaviour, how groups get organised, and how norms get passed along to newcomers. Finally, it demonstrates how this is a day-to-day job. Signs throughout the stations, members of staff everywhere and recorded traffic updates flawlessly aired all contribute to channelling functional behaviours that allow the smooth and organised movement of crowds. Regulation, together with softer behavioural ‘nudges’, provides an effective system of control.

Similarly, regulations on their own will not influence ethical behaviours until governance and risk management improve. Filling the office with ‘I love ethics’ stickers will not help, but creating an environment where people can comfortably discuss their concerns may. A safe and effective whistleblowing procedure should also be seen as a key safety valve for the organisation.

Limits of rules

In the UK’s banking sector, the Libor scandal, which involved the manipulation of interbank lending rates, highlighted how extensive rules, procedures and compliance systems failed to create the conditions for ensuring appropriate conduct in some of the largest financial institutions. The sub-prime crisis and the mis-selling of financial products to businesses and individuals likewise showed how rules and procedures did not protect customers and certainly failed to regulate ethics in finance. 

Implementing ethical practices in business is difficult. The definition of ethics is subjective and often works on a case-by-case scenario. Yet sound corporate governance and internal control can help promote ethical behaviour – as long as that is what the organisation wants. During the inquiry into the Libor scandal, it was argued that misconduct was not solely characteristic of a small number of traders but more deeply entrenched. Investigations into banks’ business practices also concluded that both their incentive structures and control systems were ‘so defective that they incentivised traders to benefit their own book’ - behaviour made possible because management ‘turned a blind eye to the culture of the trading floor’.

"Management ‘turned a blind eye to the culture of the trading floor. "

In the UK, the Financial Stability Board now expects boards of financial institutions to assess their risk culture, and boards in other sectors might soon be required to do so too. In Culture and channelling corporate behaviour, ACCA proposes a framework to help organisations understand the drivers of behaviour (in terms of risk, challenge or reward), and explains how to go about assessing their own culture. 

The report lists a number of trade-offs that need to be balanced by the boardroom and by staff. For example, is there openness to mistakes or is there zero tolerance and a blame culture? Is the organisation innovative or tightly controlled? Does profit rule or does public value matter more?

The model is a first step towards developing other tools for behavioural analysis. It is hoped that both businesses and academia will contribute to advancing this new and important area of research.

Pauline Schu, policy and research officer, ACCA.