Governing culture is a board’s most challenging task. John Neil and Michelle Bloom of The Ethics Centre outline the dangers of “shadow values”. Here’s how to walk the talk.

This article was first published in the March 2021 edition of Company Director magazine for the Australian Institute of Company Directors.

While an organisation might be measured by its share price, profitability or reputation, it is defined by its culture. Culture matters because it influences everything an organisation does. It defines not only individual and team performance, it also influences how organisations manage, change and navigate complexity and uncertainty. While it is critical to an organisation’s performance and reputation, culture is notoriously difficult to identify, measure and evaluate. As a result, understanding and governing culture is a perennial challenge for boards. This is because it is comprised of implicit and explicit dimensions. It includes the shared values, principles and beliefs of people, how they work together and with each other. Many of these dimensions are visible, but many are not.

On the face of it, corporate values of excellence, respect, integrity and communication are admirable and worthy. Most organisations would be happy to identify with them. But Enron espoused these values only 12 months before declaring bankruptcy in 2001 — the largest in US history. The company had received plaudits for its 64-page code of ethics and Fortune magazine named it “America’s Most Innovative Company”. It had received numerous awards for its corporate citizenship and environmental policies.

Enron’s failings have been well documented as the prototypical case study of what can happen when an organisation decouples values from its behaviours. Less well-documented is how the implicit and unstated dimensions of an organisation’s culture shape and influence for better or worse. These aspects of culture determine what and how things get done in organisations and are driven by the implicit values/principles people hold.

“The biggest challenge for boards in governing culture is that while unspoken dimensions are difficult, but not impossible, to identify and measure, they are more powerful than the official ones because they operate below the surface.” – John Neil, The Ethics Centre

The dark side

The biggest challenge for boards in governing culture is that while unspoken dimensions are difficult, but not impossible, to identify and measure, they are more powerful than official ones because they operate below the surface. They are key to changing an organisation’s culture because they more closely reflect its actual operating culture — its “shadow” values and principles. In psychology, the alter ego is the dark side of human nature. Jung identified it as the “shadow” to describe the subterranean aspects of the psyche; those unpleasant traits we prefer to hide. As in the psyche, the shadow gains its power in an organisation by being repressed and unacknowledged, which manifests in unintended, often detrimental behaviours.

Shadow values are typically cultivated in environments where organisations are stressed by the complexity of changes occurring or a lack of focus on supporting cultural alignment with existing values and principles.

In our work with a financial services company, our evaluation revealed each of its official organisational values had powerful corollaries (shadow values) that served to shift the organisation off course significantly. One of these official values was excellence. While officially expressed in a tagline, it was experienced and evaluated in ways such as “having pride in our work”, “being willing to challenge”, and “continuous improvement”. We also found it manifested itself through a powerful shadow side driven by the unstated value of success — in behaviours such as “individualistic”, “maintain status”, and “hit targets at all cost”.

The key driver of this shadow value was an unwavering focus on “the numbers”. While the measurement of inputs, and outcomes was regarded as a management responsibility, in this individualistically success-oriented culture, hard metrics such as hitting the numbers came to serve as the sole measure of success. Individual behaviours became distorted in pursuit of that goal alone, obscuring non-financial costs and risks, which, when not easily calculable are not seen, let alone prioritised. Unintended consequences of not being aware of or managing shadow values were highlighted in the Banking Royal Commission.

Alternate shadows

The connotations of “shadow” overstate the negative effect of these values. While an organisation’s shadow values at their worst are less constructive mutations of the official ones and will always benefit from being exposed and dealt with, there are two other types, both potentially of great value for an organisation to identify and unlock.

The first is neutral in relation to the existing values/principles but offers significant potential for tipping into positive or negative manifestations. In our work with the Australian Olympic Committee (AOC), its value of excellence — with associated behaviours and traits of exemplary performance and achievement by elite Olympic athletes — was undermined by a powerful shadow cast by the implicit value of pragmatism.

The second type of alternate shadow values reinforce, amplify or supplement official values and principles. These were also present at the AOC (see breakout, right).

In our work with a large superannuation fund, a primary shadow value was that of harmony, operating below the stated value of excellence. The value of excellence was commonly expressed in behaviours such as “keeping costs low”, “continuous improvement” and “leading the industry”. The shadow value of harmony in its most positive expression meant people were respected and included. At its worst, it manifested in the avoidance of conflict, resulting in over-consultation, delaying and avoiding difficult decisions. As a result, excellence was hamstrung by a lack of agility and responsiveness to the changing environment and competitive pressures, with innovative ideas often deferred until unreasonably high standards of mitigation were in place.

Getting below the surface

Particularly for boards wanting a “true read” of a culture, a challenge is getting below the surface-level reporting facade. Because of its intangible nature, culture is not easily distilled into standard metrics. Complaints, grievance resolution time, staff turnover and engagement surveys provide a limited view of the dynamics underpinning the culture — but often, they are the board’s only sources of information. While they may identify a range of proxies for an explicit culture, they are of little use in identifying implicit beliefs, attitudes and behaviours that actually drive the operating culture.

A significant limitation is a reliance on self-reporting. One organisation we worked with displayed a widespread cultural practice in staff surveys and performance reviews. “Click five to stay alive” referred to the five-point Likert scales used to evaluate a leader’s performance — and to an expectation for subordinates to rate leaders as a “five” across all evaluation criteria to avoid recriminations. Not only did these reports give an inaccurate evaluation of performance, they also underlined a range of potential shadow values linked to inappropriate use of positional power, fear of reprisals and lack of trust.

Unless board members are particularly proactive through direct engagement with staff, having visibility of the actual operating culture beyond what management reports provide is difficult. While there is no substitute for direct engagement — in particular with how the executive team works — using tools that better uncover shadow values can help boards better see the risks and opportunities below the surface — and thereby govern more effectively.

John Neil is Director of Innovation and Michelle Bloom Director of Consulting and Leadership at The Ethics Centre. They offer Shadow Value Assessments, working directly with organisations to identify and remedy the alignment gap between the official values and the lived culture and behaviours. Find out more. 

For decades, neoliberalism has fuelled enormous scepticism about the role of government.

Whereas the ‘invisible hand’ of market forces is used as a synonym for efficiency and progress, the ‘dead hand’ of bureaucracy congers up waste and delay. But after decades of bad press, the Covid-19 pandemic seems to be restoring Australia’s faith in government.

Almost nobody, in Australia at least, trusts the market to solve a pandemic. Over the past 10 months, Australians have assumed that their elected representatives, and the bureaucracies they oversee, will solve all manner of problems on our behalf. And, by and large, the Australian public’s faith in government has been well placed.

It was the federal government, not the travel industry, that suddenly closed our international borders on March 2020 to slow the spread of the virus into Australia. It was the state premiers who closed our state borders to slow the spread within Australia. And, via the formation of the National Cabinet, our state and national leaders have delivered clearer messages, simpler rules, and more effective policies than almost any other government in the world.

Needless to say, mistakes were made. Passengers should not have disembarked from the Ruby Princess, Melbourne’s hotel quarantine system should have been better, aged care homes should have been provided with better information and more support, and the tracing app developed by the federal health department has been a waste of time and money.

But, despite the mistakes, Australia is largely virus-free with an economy that is starting to grow again. And trust in Australian political leaders has risen to record levels. State premiers, in particular, have surged in popularity as they stepped in to protect their residents.

Nobody thinks that ‘market forces’ could have done a better job of protecting Australians from Covid-19. Indeed, the sharpest criticism from the Coalition of Daniel Andrews is that he relied too heavily on private security guards and didn’t rely heavily enough on the Commonwealth’s offer to provide troops to guard the hotels. Think about that. Daniel Andrews is being criticised for not relying on the public sector enough!

When a vaccine finally arrives, how will we decide who gets it first? Will we ‘leave it to the market’ and let drug companies set whatever price they want or will we develop clear (bureaucratic) rules for which vulnerable groups and key workers will get it first at zero price?

Governments aren’t perfect, and neither are markets. We have always relied heavily on governments to provide health, education and transport infrastructure and we have always relied heavily on markets to provide food, clothing and entertainment. Different countries, at different points in time, make different choices about how and when to rely on the government, with voters ultimately having the final say.

While it is clear that the Covid-19 pandemic will have a lasting impact on Australia’s economy, society and democracy, what is not clear is what shape that impact will be. Will we wind back the deregulation of our privatised aged care system that led to the untimely death of so many vulnerable Australians? Will we invest more heavily in public health? Will we expand and modernise our public transport system to make it less crowded? Or will we just go back to cutting taxes and cutting spending on services?

The economic language of neoliberalism has had a profound impact on our public debates, our public institutions, and perhaps most importantly, our collective expectations of what governments can and can’t do.

But as any Australian who has watched the enormous death toll and economic destruction taking place in the US and much of Europe can see, the Covid-19 pandemic has made it clear that government intervention, political leadership and a strong sense of community are essential for addressing some problems.

It’s not inevitable that Australians will translate their new-found faith in governments into support for more government action on issues like climate change, inequality or the liveability of our cities. But it’s not impossible.

After decades of hearing that governments are the problem, Australians have just seen for themselves how effective governments can sometimes be.

Despite the Covid-19 crisis, Australia is one of the richest countries in the world, and while we can afford to do anything we want, we can’t afford to do everything we want.

Neoliberal rhetoric about the inherent inefficiency of government action has for decades stifled debate about which problems we would like the government to fix and which problems we are happy to leave to the market. But the new reality is that everyone agrees that governments have an important role to play in solving big problems.

Should we have a ‘gas fired recovery’ or a ‘green new deal’. Should we invest heavily in public housing or provide tax breaks for individual property investors? While it shouldn’t have taken a pandemic to provide it, at least we finally have room in our public debate to ask such questions.

This project is supported by the Copyright Agency’s Cultural Fund.

Having navigated the first phase of the COVID-19 pandemic with a relatively low loss of life, Australians are hoping to return to a more familiar pattern of living.

For many of those Australians, they seek an illusion. The world to which they return will have been fundamentally altered – not by the virus – but by the decisions we have taken in response to its emergence.

At one point, we feared those decisions would be especially difficult for those working in a health system overwhelmed by infected patients. We imagined health care professionals confronted by the terrible dilemma of having to ration medical resources, deciding who should live or die. Fortunately we have largely been spared from that horror we imagined.

However, it would be a mistake to think that the worst of the ethical dilemmas associated with COVID-19 have been avoided. Rather, they have merely been displaced to another arena – the economy, and the world of work, in particular.

The devastation of the Australian economy has already claimed many victims – not least the hundreds of thousands of people who have lost (or are about to lose) their jobs once the JobKeeper ‘safety net’ is removed.

Those who join the unemployment queues or whose business collapse or whose opportunities dry up will pay the highest price for the choices we have made, so far.

However, there will also be a considerable burden borne by those who must make the terrible decisions about who keeps, or loses, their job during an extended recession – and by those who appear to have survived the crisis, seemingly unscathed.

Every organisation in Australia will be affected by COVID-19. A few will have prospered. However, most will be re-evaluating every aspect of their operations. It is our contention that those with the strongest ethical foundations are most likely not only survive the immediate crisis – but will emerge stronger.

This is not to suggest that the process of change will be easy … in fact, it will be incredibly difficult. However, there are three key insights that we believe will not only ‘limit the damage’ but actually set up organisations for a better future.

1. Crises usually bring to light the ‘shadow values’ at work within an organisation: the fewer the better.

Values and principles inescapably shape our choices – and therefore the world they produce. Many organisations enter a situation of crisis with an established set of stated values and principles. However, a crisis can bring into the light an operative set of values and principles that may otherwise dwell in the ‘shadows’.

These ‘shadow’ values and principles often arise as a ‘mutation’ of the stated set. For the most part, the process of mutation is subtle – beginning with an initial act that is at first tolerated (often because it delivers a profitable outcome) and then accepted as ‘normal’. The process of drift is known as the ‘normalisation of deviance’ – and often proceeds without being observed for what it is: a corruption of the norms of the organisation. Occurring in the ‘shadows’ of an organisation’s culture, the mutations are genuinely ‘unseen’ and therefore resistant to correction.

The most common reason for shadow values and principles gaining a foothold during a crisis is that they are ready-made to fill the vacuum caused whenever ethics is reduced to being an ‘optional extra’, or regarded as a luxury that can only be afforded during easier times.

This weakening of commitment to an organisation’s espoused values and principles allows the shadow set to grow in strength.

One of the best examples is that of the German automaker, Volkswagen, where their stated value of ‘excellence’, was mutated into a shadow value of ‘technical excellence’. The resulting decisions led to an emissions scandal that has cost the company a small fortune in fines and severe reputational damage.
Identifying the risk of mutation of the ethical ‘DNA” of an organisation before it occurs, or if this is not possible, having the tools needed to recognise and correct shadow values and principles when they arise will be critical for organisations moving through this next period.

2. Those who ‘survive’ a crisis may suffer the effects of ‘moral injury’ – leading to sub-optimal results for them personally (and their organisation) if the injury is not addressed.

Many people working in business and the professions have already been confronted by the need to make some distressing decisions – not least of which has been to weigh in the balance the good of the organisation versus the livelihood and well-being of employees.

In many cases, the people who lose their jobs will have been loyal and diligent employees who have performed their roles with distinction; roles that are either unaffordable during a recession or that no longer make sense in the emerging strategic environment where the risks posed by the virus are controlled but not eliminated.

Those who make necessary – but unfair – decisions will suffer a certain amount of personal harm from doing so. However, exposure to the risks of such decision making is generally understood to be part of the job. The greater risk is to those people who play no direct part in the decision making but who also feel that they are the inadvertent ‘beneficiaries’ of the sacrifices made by others.

There is much to be learned about this phenomenon by considering the experience of those who survive disasters like shipwreck. The first phase of the disaster will see strangers (and even rivals) driven to work together by the indiscriminate ‘lash of necessity’. People will bend themselves to the task of rowing towards safety – hopeful that a rescuer might be close at hand.

The second phase arises when the situation becomes more desperate … when rations are depleted, when the water is rising toward the gunwales of an overloaded lifeboat. It is then that some place their personal interests before those of all others – throwing overboard any sense of fellow-feeling. Yet, there will be others who decide that they will make the ultimate sacrifice – quietly slipping below the waves so that others survive.

Finally, the moment of rescue comes and the lash is withdrawn. It should be a time of celebration and euphoria. However, it is common for those who survive enter a stage of grief – because they have survived when others, each equally deserving, have not.

‘Moral injury’ is not only experienced by those who made the decision to sacrifice others, or who hoarded goods that could have helped others. The same injury is caused by those who remain without any reason to explain (or justify) their relative good fortune.

Telling any of these people that they should count themselves ‘lucky to have survived’ is worse than useless. Mere survival, as experienced by such people may be a welcome reality – but it is also an ‘empty achievement’ – and does nothing to protect against the consequences of untreated moral injury; which include depression, post-traumatic stress disorder and in the most severe of cases, suicide.

3. The best response to moral injury is to offer the opportunity to find meaning in adversity – a positive reason that justifies continuing effort.

There are only two ways to prevent moral injury. First, one can seek support when making the initial decisions so that, no matter how tough, they do not give rise to a form of regret and self-blame linked to a series of ‘if only’ statements (‘if only I had considered that perspective’, ‘if only I had thought of that option’, ‘if only I had asked one more question’ …).

Second, one can offer a purpose that transcends mere survival. It is only then that the sacrifice of others can be a source of positive motivation. Instead of individuals being beneficiaries, they become ‘stewards’ of a purpose that, if realised, will justify the sacrifices made by others.

Of course, the saving purpose must be something of real substance – not just a few words that make people feel good about themselves. The purpose must be non-trivial, enduring and deep, the kind that people can truly believe in.

However, there is a temporal ‘twist’ at this point. There’s not much point in having a purpose that will rescue an organisation from crisis if decisions made during the crisis render the purpose invalid or unbelievable.

The last thing you want is for those who survive to look back on their experience of crisis and conclude that all that went before makes the purpose seem to be a ‘hoax and the organisation’s leadership a group of hypocrites. That is why it is essential that organisations identify and manage any shadow values or principles that might undermine the better future it must create in the aftermath of the crisis.

In these circumstances, ethics is neither an ‘optional extra’ nor a ‘luxury’. It is a necessity!

The lesson in all of this is relatively simple

Those who wish to prosper in the aftermath of a crisis need to project themselves into the future and identify an underlying purpose that guides their decision making in the present.

Of course, it will be impossible to predict all of the details that define the strategic and tactical environment in which the organisation will need to operate. However, an organisation’s Purpose, Values and Principles (the three principal components of an Ethics Framework) should provide an enduring platform that is serviceable in all environments but one … where there is no genuinely useful role left for the organisation to perform.

Unless that exception exists, organisations and their leaders have an obligation not merely to persist, but to flourish for the sake of all those that made their continued survival possible.

The Ethics Centre is a world leader in assessing cultural health and building the leadership capability to make good ethical decisions in complexity. To arrange a confidential conversation contact the team at consulting@ethics.org.au. Visit our consulting page to learn more.