Culture is an Ephemeral Concept - So Should Board Members be Responsible for a Bad Culture?

26 April 2018

At a recent University of Sydney presentation at ASIC the question for debate was: "Are directors liable for seriously flawed corporate cultures?" While the discussion at the presentation was mainly addressing directors of large public Australian and international organisations such as banks, the concepts discussed are still relevant for boards of all types of organisations, including school boards. This article discusses some of the key concepts raised and what school boards can do to ensure good culture permeates all aspects of their school.

What is Culture?

Culture is rarely defined in legislation however the Criminal Code Act 1995 (Cth) has this definition: "corporate culture" means an attitude, policy, rule, course of conduct or practice existing within the body corporate generally or in the part of the body corporate in which the relevant activities takes place.  That definition is included in section 12.3 of the Criminal Code and relates to offences where body corporates have a culture that "directed, encouraged, tolerated or led to non-compliance with (the commission of an offence)" or "failed to create and maintain a corporate culture that required compliance with the relevant provision."  The definition applies to offences committed under Commonwealth legislation such as the Competition and Consumer Act 2010 (Cth) and the Corporations Act 2001 (Cth) - both of which will have varying levels of relevance to non-government schools in Australia depending on their governance structures and how they market and provide their education services. As noted by this law firm's commentary on the Code, ''essentially the Code equates the intentions of a corporation with its ‘corporate culture’...(it) imposes a positive duty on bodies corporate to put in place adequate precautionary measures and supervisory mechanisms to reduce the chances of an employee, agent or officer of the body corporate engaging in contravening conduct.."  Similar expectations are placed on non-government school boards - albeit not through legislation but through community expectations.

Commonwealth law matters aside, John Colvin, Consultant at Herbert Smith Freehills noted the ambiguity of the definition, particularly in understanding the meaning of ''attitude.'' In terms of directors facing liability under the Criminal Code, how can they be held liable for having a corporate culture that "directed, encouraged, tolerated or led to non-compliance" when the meaning of culture itself is unclear? Recently, an AMP executive, when giving evidence to the banking royal commission, gave this description of culture: "It starts with culture, it goes to governance, it goes to capability control systems ... culture is the invisible hand that ensures people are making the right decisions," he said.  This definition was given at the same time as AMP admitting it had lied to regulators.  Often culture is under the microscope once the company is in the news!

The ambiguity around the meaning of culture also has relevance for school board members who increasingly, are expected to create cultures that achieve many objectives, including minimising the risk of child abuse.

Cultural Expectations of Schools

School Governance has written many articles about the types of cultures school boards should try to create and implement. In terms of defining culture itself, Craig D’cruz's three part series How do I create a culture of awareness? What is culture?  talks about school culture as being "intangible, but it’s essential" and Dr Alec O’Connell, Headmaster of Scotch College, Western Australia in his article Don’t jump at shadows – back your culture explains that "culture is the habit of being pleased with the best and knowing why. It is a way of saying ‘this is how things are done around here‘."  Legally, legislation that directly governs school operations (registration legislation, child protection legislation) does not define "culture" but various related sources impose cultural requirements on schools. For example:

  • Victoria: The 2015 Victorian Child Safe Standards in Ministerial Order No.870 aim to create child safe cultures and require strategies to embed an organisational culture of child safety  - compliance with the Standards is a registration requirement.
  • WA: The Guide to Registration Standards and Other Requirements for Non-Government Schools July 2018, Chapter 8 Levels of Care: the Director General expects schools to ''implement strategies to build a positive school culture that fosters caring and respectful relationships between students and their teachers."
  • SA: The 2016 Child Safe Environments Principles of Good Practice includes various references to a school's culture, including that a culture should have embedded in it a ''commitment to protecting and supporting children'' such that ''everyone is aware of their responsibility''. The Children's Protection Act 1993 (SA) requires schools to establish and maintain policies and procedures for child safe environments in line with the Principles.

While other states and territories don't address culture directly in their registration-related legislation, they do require evidence of a culture being implemented, such as by implementing training for staff.

In addition to registration expectations, The Royal Commission into Institutional Responses to Child Sexual Abuse, in its report entitled The role of organisational culture in child sexual abuse in institutional contexts suggests “that stakeholders of institutions that provide services to children and young people pledge to introduce a culture in their organisations that is the opposite of one that…facilitates child sexual abuse.”  Leaders are encouraged to “behave in ways that convey the suggested culture; by training staff members to embrace such a culture; and by engineering cultural artefacts and practices that symbolise this culture.”

Policies are Not Enough

In the school context, some states and territories impose cultural requirements on school boards but don't actually define what culture is. A failure to meet the requirements may lead to registration consequences and worse, a threat to student safety.  Such expectations place great responsibility on school board members, especially since ''culture'' is not universally defined.  Furthermore, given that many members of school boards are volunteers, including current and former parents, questions are then raised about the risks of volunteering and the importance of school boards having proper information reporting processes to ensure that board members have enough information to govern effectively. This situation, being the imposition of responsibility and liability on directors in relation to a term that is undefined, was the crux of the University of Sydney presentation.  Helpfully, some tips for boards to ensure that the culture they create and promote is successfully implemented in an organisation include:

  • having more than just paper policies - a compliance program is required
  • having effective training of employees
  • ensuring that all levels live by the same cultural expectations - from the board down to staff on the ground.

Craig D'cruz's article provides further useful strategies that can be used by school boards to promote cultural change: How do I create a culture of awareness? What actions can be taken?

Things to Think About

What is interesting from the discussion about culture is how it remains an elusive and difficult to regulate concept for all types of organisations in Australia.  From large banks to small schools, a good culture is critical to avoid reputation damage and compliance breaches but a board's best intentions can be undermined by the challenges of running an organisation. From a governance perspective, culture is a part of effective risk management and there are many ways schools can implement risk management programs and procedures that reflect the cultural objectives of the board. Ultimately though, if a school's culture tolerates bad compliance behaviour, it will be symptomatic of greater governance issues which if, revealed by a whistleblower, the press or social media, will lead to reputational damage and other issues.

In the News

The coverage of Australian banks' misconduct in the news at the moment has lead to some interesting legal developments including a Federal Government proposal to give ASIC strengthened powers, and to increase the severity of penalties (civil and criminal) that can be imposed on individuals and corporations.


Xenia Hammon

Xenia joined CompliSpace in 2014 having previously worked as a lawyer in Melbourne for six years. Xenia was a lawyer at a leading Australian law firm in their corporate team before taking up the role of in-house Legal Advisor at an ASX listed company. Xenia has experience in Australian and international law on various areas of commercial practice. She is currently completing a Graduate Diploma of Applied Corporate Governance at the Governance Institute of Australia.