Commonwealth Bank of Australia and the APRA report – a Requisite Failing

APRA, Australia’s prudential regulator, recently released a scathing report on the Commonwealth Bank of Australia.  Coming in the midst of a Royal Commission into the Financial Sector, that has seen many in the financial services industry stumble, after the spotlight has been shone into their internal workings. The Australian Financial Review commenting on this report, said:

“The senior management were highly intelligent and collaborative (1) while the institution itself delivered financial success. By most measures, from return on equity to customer satisfaction it outscored its peers. Yet somehow this complex, but high-performing institution, has found itself the subject of one of the most scathing assessments of a corporation ever compiled.”

I want to dwell on the CBA and this report, as there are some important lessons to be learnt from an organisational design, operating model and leadership perspective. In the mid nineties CBA introduced Requisite Organisation – a meta model for structuring, organising and leading goal directed enterprises.  Requisite (as required by the nature of things) is the name given by Dr Elliott Jaques to a powerful set of models, constructs and practices for creating sustainable, transparent, goal directed (and felt fair) organisations.  This body of work has been supported by sound research and the work of many eminent scholars and public and private leaders.

Requisite has evolved over more then a half century, developing through theoretical changes and best practices usage globally.   That said, application is a different matter, and one needs to consider the culture into which it is being applied. If the principles become perceived as inflexible rules, and the practices and principles the domain of select specialists (when it is aimed at empowering managerial leaders),  the basics of felt fair and transparent leadership quickly become subverted into power politics and personal goals.  This has led to a poor image and damaged reputation, noticeable by publicized failures.  CBA was one of them(2).

In the mid 1990’s CBA introduced Requisite and this was used for a number of years, before being discarded.  I recall being on a plane to New Zealand with a senior executive from CBA who spoke about the autocratic, hierarchical style of management Requisite had created in the bank, while another person, could not bring themselves to mention the name because of the pain it has caused.  In contrast another employee at the time complained how the good work they had been doing had been curtailed, because it was seen as dismantling power fiefdoms.  Whatever the reasons, Requisite was dropped and its legacy was sadly tarnished.

Back to the APRA report and its findings; key issues identified at the CBA were the very issues that Requisite is designed to address. Requisite (or what we in WJ refer to as Requisite Enterprise) is about designing effective structure.  Firstly it needs the working spine – a vertical hierarchy of unique value adding work themes (or levels).  Consider this from APRA –

“Within CBA, the vertical lines of accountability that travel down business lines are generally well understood.”

Understanding a vertical reporting structure is very different from one that adds value in a unique way. Most vertical structure do not do this and this is validated by APRA’s comments re;

” a federated organisational structure that required but did not have clear roles and responsibilities for issues that spanned business units and a lack of collective and end- to-end accountability (Senior Leadership Oversight chapter)”

In Requisite, intent informs strategy which leads to structure. The complexity of the intent determines the number of work themes.  A quick glance at the graphic on proportion of staff in seniority in the AFR report, shows immediately one level too many.  This increases risk, blurs accountability, creates confusion, builds bureaucracy and results in a non value adding hierarchy.
Once structure and function is clear, role clarity becomes paramount; its what makes work fun, challenging, allows for ‘flow’ and delivers the intent. Coupled with role clarity is the commensurate authority to deliver on accountability and to make decisions.  This is where Requisite excels, it has the tools to do it well, individually or collaboratively. Consider the following from the APRA report:
“In the panel’s view, the focus on empowerment of individuals was not balanced with a corresponding focus on collective accountability”

If the vertical spine represents the skeleton, then the muscles, tendons and organs represent the functions, projects, teams and the systems of work.  They provide the ability to operate cross functionality, allowing coordinated goal directed actions, thus enabling value chains to work effectively.  Understanding how to make cross functionality work is well understood in the Requisite tool-set. Nowadays all organisation’s work cross functionally in flat agile structures, which require more then ever, for clear decision making authority and accountability to be spelt out. This is clearly a major fault at CBA as the APRA report makes clear;

“The Panel’s assessment, however, is that collective accountability across business lines has been poor. As a result, accountability in CBA has been, at best, opaque….The desire to move away from a past combative culture has led to some over-compensation in pursuit of collaboration. The result has been pockets of excessive consultation or consensus- driven activity, leading to slower decision making, lengthier processes and slippage of focus on outcomes. Referred to multiple times particularly by risk function staff, this type of behaviour has been at the expense of constructive challenge and cross-examination across the three lines of defence.”

Doing cross functional work correctly means risk management is build into the process.

Pendulums don’t stop midpoint.  Collaboration is necessary, as is the funding of purpose (via profit in private institutions) and these social memes of culture need to be understood and balanced.  Financial institutions appear by and large according to the Royal Commission of having done an appalling job in this regard.  CBA jumped from the blue and orange memes of culture(3) to those of internal green, (no one want to make a decision, everyone has to be consulted, collaboration on everything, trust in good intentions) while other parts of the business were low orange (unscrupulous profit drive). Healthy blue memes are needed for risk management (clarity around process, decision making rights, structure, accountability etc), while the yellow meme allows for discernment, balance and selecting what works with integrity.

” a cultural ‘mentality of trust’ and ‘over- consulting’, manifested in a lack of constructive challenge throughout the senior management levels and at the Board, and in bureaucracy diluting accountability” (highlighted in the Culture and Leadership chapter – a perfect example of the green meme);

Finally I see that leadership represents both the neural network and the brain, activating structure and function. It creates the culture and drives goal directed work.  Requisite offers an effective language to give meaning, leadership tools and practices that ensure a structure is fit for purpose and inhabited by people in flow. In other words, a healthy organisation.

In conclusion, I would like to leave you with the question, what might have been the outcome of this review if CBA had remained requisite? Perhaps by now it would be evolved into Requisite 3.0?  Evidence shows that once embedded, this operating model has supported companies for four or more decades, with regular refreshers and updates.  Like any sustainable operating system.(4)

Notes

(1) Requisite has three integrated strands; structure, leadership and people. Being highly intelligent and collaborative  is no recipe for success, but certainly an essential building block. What is also needed is understanding how to be an effective leader, being competent in the tools of the trade and  clear on what works needs to be done.

(2) Recently, when an executive team in an ASX top 100 was considering introducing Requisite for its 15,000 strong workforce, some of the team members cited the CBA failure as a reason not to do so.  Luckily this view did not prevail and this organisation, three years later, has hit many records, including employee engagement, market perception and share price performance.

(3) Memes are packets of culture, like genes. Memes represent dominant societal values and these are reflected in organisational cultures.  First articulated by Dr Clare Graves and called Spiral Dynamics by Dr Don Beck, they have recently been made popular by Frederick Laloux in this book ‘Teal Organisations’

(4) The fact that the CBA had a Group CEO leadership change during implementation may also have been problematic. Research has shown that for Requisite to deliver long term benefits, it needs to survive the first CEO transition successfully. This happens through culture, systems of work and daily practices.

 

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