Given the importance of maintaining a healthy corporate culture in a challenging business and risk environment, the Audit Committee Institute interviewed directors and subject matter experts from around the world to gather their perspectives on the board’s role in helping to reinforce, assess, and oversee the corporation’s culture. Sharing their insights will hopefully help you to facilitate robust boardroom discussions about the challenges and opportunities related to corporate culture oversight in your own organizations.
While their individual views offer varying perspectives, some universal takeaways emerged from the discussions that should be worthwhile for all boards to consider. Here, we summarize the key interview insights:
- Culture is not simply a once (or twice) a year discussion.
The board should monitor and discuss organizational culture on an ongoing basis, including event-driven discussions and a formal review at least annually. Whereas audit, risk, nomination and remuneration committees should take the lead in addressing culture, the Internal Audit should incorporate a values assessment in the annual audit plan that reviews the extent to which the company’s culture and values are evident in the behavior of employees.
- Strategy, risk, and culture should be tightly connected.
Research suggests that the best-performing companies have well-aligned strategies and cultures that typically share attributes such as:
- High integrity in all interactions with employees, customers, suppliers and other stakeholders;
- A focus on performance management with compensation closely tied to performance;
- Strong individual accountability and ownership;
- Agility and adaptivity; and
In fact, strategy and risk management are critical drivers of organizational culture. At the onset, there must be alignment between the overall business strategy and the risk appetite statement that defines acceptable risks. The selection of key performance metrics and targets also influences culture and behavior. For example, if the targets for sales and profits are too aggressive, that may motivate excessive risk taking. During the execution of the strategy, there may be natural conflicts between strategic goals and risk management constraints. How does management resolve these conflicts? The board should be concerned not only about what business results are produced, but how they were produced.
- Culture should start at the top and cascade down through all levels of the organization.
In addition to its monitoring role, the board plays a critical role in helping shape the tone at the top by modeling the behaviors leadership wants to drive.
- Make sure the board is getting an unfiltered view of the company’s culture.
The board needs be aware of how stated corporate values and written policies are interpreted and applied within the organization. Most companies say that they value their customers and employees, and that they operate with the highest ethical standards. But, what really matters is the actions that management takes when there are organizational conflicts, customer complaints, employee grievances, and ethical lapses. The “unwritten rules” are set by the cumulative actions and reactions of the organization’s leaders.
- Leverage internal audit to help assess and monitor culture.
A specially trained internal audit team can help develop the dashboard and begin to “audit” the culture, interviewing employees, managers, other stakeholders, and reviewing processes and business practices, and other factors to measure day-to-day practices against the company’s values, behavior, codes of conduct, etc.