Don’t ignore the corporate culture challenge: Action and integrity at the top are critical

It is probably breaking with corporate culture to write about a report that hasn’t yet been published. We say “probably”, because the assumed culture at the Association of Chartered Certified Accountants (ACCA) and most other organisations is that we keep things under wraps until publication date.

 

But it’s just too relevant and timely to keep it under wraps – and surely the “culture” will allow it under these circumstances? After all, the report is about organisational culture, about doing the right thing, and about the critical role of the C-suite in setting the tone from the top.

 

In the wake of various high-profile cases of corporate misconduct in sectors and industries that were seen as highly regulated, many have come to the conclusion that the one area which is not easily measured and which cannot readily be regulated – organisational culture – was the root cause of much corporate wrongdoing. 

 

This has damaged reputations, share prices and customer confidence. Trust has been eroded across a range of sectors, from politics to the media to big business. Society now demands more accountability at board level.

 

Culture is now a key issue for regulators, particularly the culture of financial services organisations. Bank supervisors are now expected by the Financial Stability Board (FSB) to assess risk culture, and their starting point will be boards’ own assessments.

 

It is likely that boards in other organisations, private and public, will need to make similar assessments. They will want guidance on how to do this, and so this soon-to-be published report from ACCA and the UK’s Economic and Social Research Council (ESRC) aims to help in this new world of measuring culture. 

 

Culture and risk management should run hand in hand. A key part of risk management should be the assessment of the control environment, including such hitherto intangibles as culture and ethics. 

 

While organisations will have rules and codes, the human factor is central to whether and how they are followed and to risk management. Many businesses have a sophisticated code of governance, but it is ultimately employees that make the words of a code resonate and actually mean something.

 

But culture is a nebulous concept. It’s a phrase that is often misused and misunderstood. It is a vast subject to research, and one to which people devote a lifetime. This is why ACCA and ESRC undertook research with the goal of understanding what causes dysfunctional behaviour in organisations. 

 

We see culture as a set of shared beliefs, norms and values that defines what is important and appropriate for individuals belonging to a group. We’ve come to the conclusion that culture is elusive, idiosyncratic and decisive. It isn’t something you can grab. 

 

Within organisations, culture comes down to the way “things get done”, where organisations use the phrase “this is how we do things round here.” 

 

Corporate culture relates very tangibly to the brand, identity and image of organisations. When a corporate culture has failed, its public standing fails. This means that an organisation’s culture should be one of its most important assets, as it is vital to productive capacity and the value of the brand. Culture can help to stave off reputational risks. 

 

Effective leadership results from a trustworthy system of accountability, and promoting accountability at board level is key to a healthy corporate culture, featuring sound ethical practices. The top must align and embed a clear set of values that define the purpose of the business – walking the talk has a positive “trickle down” effect.

 

Diversity of thinking in the boardroom, independence and the involvement of directors are key to promoting challenge in the decision-making process. This can help to kill groupthink, which so often distorts decisions.

 

And lastly, while relationships with shareholders are critical, effective leadership must not lose sight of other stakeholders – a business ignores what its customers think and say at its peril in this digital age, when a negative view can go viral.

 

Boards should strive to ensure that they understand their culture, and that it is as good as it can be. But how do they do that? That really matters when working for a global organisation like ACCA, where cultures and attitudes are very different around the world. 

 

Our research included roundtable discussions in the UK, Belgium, US, Middle East, India and Hong Kong and a members’ survey. Over half the members who responded worked in multinational or multi-centred organisations. Such organisations will have many different cultures, ways of doing things, and attitudes to following regulations, policies and procedures. 

 

For many organisations, such diversity can be an asset, but it also presents a risk which boards and senior executives should understand. They will want to understand the cultures in their organisations but, as a participant in one of the New York roundtables said, “you cannot measure culture, and that only indirect measures or proxies can be found.” Culture was also seen as an intangible, because it can’t be seen or touched. So any assessment mechanism to capture culture can at best detect or measure the observable tip of something much bigger, like an iceberg.

 

The FSB Guidance rightly lists “tone from the top” as one of four indicators of risk culture. It says the board and senior management are the starting point for setting the financial institution’s core values and expectations for the risk culture of the institution, and their behaviour must reflect the values being championed. 

 

At the other roundtables, people in India and Dubai, but also in London, cited the importance of the example set by those at the top: that they should “walk their talk”. Actions and values of leaders are strongly believed to be key in maintaining ethics and integrity in organisations. 

 

The boardroom is central to setting the tone, but a purely top down approach sounds very hierarchical. We suggest in this report that it is essential to involve staff in assessment and take care to create an environment where they can participate without fear of adverse consequences if they are to be honest about problems or issues.

 

If you’re thinking of corporate culture, here are some questions to ponder: 

 

What sort of culture does the board want for the organisation and what sort of behaviours does it wish to encourage and discourage? How is the tone at the top set out and conveyed through the organisation? Do management practices drive people to do things that they regard as unethical?

 

Do people who do not “walk the talk” get promoted? How best can boards satisfy themselves that the information coming to them is fair, balanced and sufficient? How is diversity of thinking and challenge encouraged? Does the organisation have a “speak up” system in place that staff believe they could use without fear of retribution? 

 

That’s a lot of questions, and there are many more. I hope they’ve acted as food for thought and made you think about the culture where you work. 

 

The fact there are so many questions means there are no absolute truths or “right ways” when it comes to assessing culture. Attempts to manage culture may not work or may have unintended consequences. 

 

The key issue is that, with so many obvious challenges facing business, it is all too easy for them to overlook the importance of an invisible threat. But they overlook it at their peril. Think News of the World and Olympus, and you should get the picture.

 

Pauline Schu is a researcher at ACCA. Professor Paul Moxey is head of corporate governance and risk management at ACCA.