“Creating good culture With the right people, culture and values, you can accomplish great things.”
The above quote comes from the US businesswoman Tricia Griffiths. How often, however, do we in the pensions industry focus on good culture? The Pension Regulator’s 21st Century Governance campaign talked little about the importance of culture, instead focusing in the main on traditional areas of governance such as policies, meeting processes and risk management.
A simple definition of culture would be ‘the way we do things around here’ and the culture of a pension board, ‘the way we do things on this board’. To find out what ‘the way we do things’ looks like requires a step back from the day-to-day running of a pension scheme. This may be difficult to find given the increasingly complex demands of pension scheme governance but could be vitally important to the success of the scheme and ultimately to member outcomes. A board with a good culture is an attractive board for others to join and thereby assists with succession planning. A board with a good culture is strong yet flexible and makes good quality decisions. A board with a good culture is an asset to any pension scheme.
What words would describe your board? Is it a board where members feel empowered to have open and honest discussions, where new ideas are welcomed, where discussions consider alternative viewpoints and decisions are made after careful deliberation? Is it a place where counterproductive behaviour is dealt with swiftly and appropriately? Or does it have a stale and old-fashioned feel, with new ideas passing it by, or overdominated by one or two loud and confident individuals?! Culture is a difficult thing to define, but it is not something that should just be left to develop by chance. A good culture develops because of the right people being in place, the right tone being set, and clear and robust values which are lived and enforced.
People, leadership and values
Getting the right people on a board is critical to its success. It is also important to have the right number of people. Too large a board can be unwieldly and inefficient whereas a very small board can run the risk of lacking diversity of thought. Within the agreed optimal structure, the people who make up that board must be engaged, committed, and together have a diversity of background, experience and skills which enables the board to collectively function well.
In governance circles it is common to talk of the ‘tone from the top’ meaning that the leaders in an organisation need to live the values of that organisation for them to hold any weight, for them to be believed in and followed by others. The leadership of a pension board often rests in the Chair role, and it’s critical that the Chair does indeed set the parameters of how meetings will run in a cultural sense as well as a practical one, inviting opinions from all, being firm in curtailing excessive contributions that don’t add value, and challenging advisers where appropriate.
However, it is not just up to the Chair to set the cultural tone; the best way to do this is likely to be through agreeing the values and style of how the board will operate through a consensus from the whole board, perhaps to be evaluated and retested at an annual away-day or governance review meeting.
Creating good culture through soft-skills development
Despite a slow start, the pensions industry is finally waking up to the importance of soft-skills. These are skills like communication, awareness, adaptability, preparation, sense of collaboration, and strategic thinking. Testing such skills is due to form part of the professional trustee accreditation regime and increasingly pension governance bodies are recognising that such skills, which are all part of a good culture, contribute significantly to their ability to make effective decisions. This is particularly the case in defending against the unconscious bias that can run through decision making. I outline some of these below:
Anchoring occurs when an initial idea is presented (‘the anchor’). This anchor sets the baseline for the following discussion, often affecting the interpretation of future information. For example, when a dominant member of the board takes a very strong view on investment strategy at the start of a discussion, it is very likely that this will heavily sway the ultimate decision.
Good board culture, that does not allow overdominance and whose members are self aware, helps to mitigate this risk.
Groupthink occurs when a desire for harmony in a group and the minimisation of conflict to reach a consensus decision quickly leads to a poor decision. Good culture, which is not about harmony at all costs, but about open and appropriate challenge, and considering all reasonable courses of action, will mitigate against this tendency.
Overconfidence occurs because individuals tend to overestimate their own abilities, knowledge and skills. A culture of reflectiveness, peer challenge, and good use of advisers, will help with this common human tendency.
Sunk cost fallacy occurs when a bad decision or loss has been made in the past, yet individuals continue to stand by it because of the investment they have already made. A board that has a culture of being able to recognise when it is time to make a change and take swift action to correct issues will assist in this case.
Status quo bias occurs because it is often human nature to stick with the current situation: better the devil you know’! A culture open to new and fresh ideas and input is a living culture, one that does not stagnate and become stale. In its 2016 report on board culture, the Financial Reporting Council argued that the value of culture should be recognised as a source of competitive advantage, ‘vital to the creation and protection of long-term value.’ Whilst pension scheme boards are not looking for competitive advantage, they are certainly concerned with long-term value for the pension scheme members. Greater attention to board culture can only assist with this focus on long-term value. Let’s challenge our own status quo bias which may lead us to focus heavily on process, policy and technical matters.
Good culture is the heart of good governance.
Head of DC Governance –Hymans Robertson