Managing Organizational Culture as an Enterprise Asset

Every senior executive and director has read stories of companies behaving badly and asked themselves, “What were they thinking?” and perhaps, “Can that happen at my company?” On the flip side, many have also observed successful companies they admire and wondered, “What really makes them tick?”

As Peter Drucker famously pointed out, “Culture eats strategy for breakfast.”

Like everything else that has a demonstrable impact on an enterprise’s success in creating and protecting enterprise value, culture warrants a proactive agenda from directors and senior executives to understand, measure and reinforce it continuously and improve it as circumstances warrant.

In the 2019 Protiviti/North Carolina State University ERM Initiative global survey of board members and C-suite executives,^[1] respondents cited resistance to change as the #2 risk – a significant matter, given that the #1 risk is concern over competition from “born digital” firms, with nine of the top 10 risks identified in the survey driven at least in part by challenges arising from the digital age.

Our prior year’s survey indicated concerns about the potential impact of innovation, but these more current results reveal that leaders are concerned with the disruption that’s already upon them. The problem is, despite years of talk about digital transformation, most companies are still in the beginning stages of digital maturity. They aspire to be, but are not today, digital at the core. With one of the top 10 risks reflecting concerns about organizational resistance to change, this is a cultural issue.

Often part of the challenge with culture is that executive management’s and the board’s understanding of it doesn’t extend beyond the tone at the top, creating a risky disconnect. Our survey results indicate that board members and management are concerned about the risk that important information is not flowing up to them in a timely manner. In today’s fast-moving world, that suggests a cultural issue.

Thus, culture is rising rapidly as an issue in the boardroom, as it is unquestionably a vital enterprise asset that must be cultivated, nurtured and maintained. Below, we discuss some important points germane to understanding and managing culture as an enterprise asset.

Nurture Culture in a Changing Environment

“Culture” means different things to different people throughout the organization, from the board and senior management team down. In some companies, it represents strategy, particularly in smaller companies with an entrepreneurial focus on growth, passionate and hands-on leaders and an easier-to-manage size and scope. As such organizations scale and grow, gain visibility in the market and experience an infusion of new talent, the inevitable blending of styles may create conflict and the culture often changes – and not necessarily for the better.

There are many definitions of culture in the public domain. All of them relate to values, mindset and behaviors. A definition we like is as follows:

The behaviors that people experience when they work for or interact with the enterprise’s management team and  other representatives, as manifested through their decision-making, attitudes and actions day to day.^[2]

The focus here is not on what leaders and key employees say or what they aspire to, but on what they do. Whatever the belief systems are, they are manifested through the enterprise’s actions. Talk is cheap; actions speak much louder.

A complicating factor is that most organizations consist of multiple subcultures. For example, innovation culture is a subculture. So is a quality-committed culture, a sales culture, a safety-conscious culture, a risk culture and a diverse, inclusive culture. Organizations should pay attention to their various subcultures to ensure there is appropriate alignment and the avoidance of unmanaged conflicts that can breed dysfunction.

As a company expands, cultures within it may develop to the point where they vary across the organization at different locations, in different functions and departments and, of course, in different countries and regions. A significant acquisition often results in management having to address distinctively different cultures in the merging entities. Digital transformations often require a hybrid talent model combining employees from the analog, physical age with new employees armed with digital expertise and fresh ideas as to how to deploy them.

Thus, the influx of digital talent can bring with it different views and perspectives as to how the company should operate. In addition, some organizations, especially in the technology industry, can be dominated by the personality of the founder or founders. Such companies may lack a healthy, open, transparent and speak-up culture and can run into trouble if these dominant individuals drift away from the company’s values or acceptable societal norms through their behavior and example. All these aspects of culture can create friction across the organization.

Ultimately, as a company’s leaders manage a multitude of changes in processes, people and technologies to align the business model with shifting market realities, they must do it in a way that ensures a healthy, vibrant corporate culture remains intact. That is why the board and executive team need to ensure there is a discipline to periodically assess alignment of culture with the enterprise’s vision and values. If the culture is flawed or dysfunctional, for whatever reason, necessary actions should be taken to fix it on a timely basis.

Understand and Monitor Culture

Any time a leader’s actions stray from the entity’s mission, vision and values, they constitute a red flag to everyone who observes them. When developments stemming from a flawed culture adversely affect an organization’s reputation and brand, the question arises as to whether there were early alerts to directors, senior executives and operational and functional leaders.

Sometimes, these signals are subtle. For example, can directors, executives and leaders connect the dots between sales incentive practices and the subculture these practices create when the narrative around cross-selling makes sense from a growth standpoint and compensation consultants assure them that other industry players are doing the same thing? What if base compensation is lower than industry standards and the difference must be made up through incentive compensation – what story does that tell?

Similar issues arise with respect to demanding cost and schedule metrics vis-à-vis safety standards in situations that are environmentally sensitive or involve potential threats to the public interest. Yes, tone at the top is critical in driving behavior in areas like safety, but so is tone in the middle; the two must be aligned so that behaviors match the eloquently written and spoken words. Safety is more than just issuing policies, instituting appropriate procedures and practices and saying all the right things. It is also a mindset and something that must be practiced at all times – at the top and in the middle – so that the tone at the bottom fosters desired behaviors. When there is a conflict of metrics that places the focus on safety at risk at a crucial moment, the matter should be escalated.

How do leaders know what they need to know regarding the culture in their organization? More importantly, is their understanding representative of the entire organization or just in certain areas? Following are two suggestions:

Engage directly with operating personnel through site visits. Because culture can break down anywhere in the company, it is important to experience firsthand the real-world culture rather than rely solely on boardroom and C-suite discussions. During field visits, leaders can observe the physical signs of culture, interact with employees and experience how people communicate with each other.

Focus additional “eyes and ears” on culture. Leaders should insist on observations regarding culture from the CRO, CCO and CISO, along with HR, EH&S and other independent second-line-of-defense functions as they assist business unit leaders and process owners with assessing culture in their respective domains of responsibility. The third line of defense — internal audit — can perform a culture audit to evaluate the processes used across the entity by first- and second-line personnel to assess culture. With everyone having a stake in evaluating the enterprise’s culture, the board and executive team should be privy to the results of these evaluations – particularly from second-line functions and internal audit.

Measure Culture

Yes, culture can be measured. Keys to consider are values, mindset and the behaviors that follow. If there is alignment of these three keys through the organization’s recruiting, onboarding and training, a strong culture is likely to carry through. It’s also important to note that values are one thing, but behaviors are another. Simply having values doesn’t mean that they are being practiced. Companies in the Enron era claimed they had a world-class code of ethics, but their day-to-day behaviors reduced their codes to useless platitudes. As mindset, or attitudes, can be decisively influential in driving behavior, it is vital to assess behaviors and challenge whether values are being practiced and reinforced.

Metrics addressing such factors as mission and values alignment, innovation, resiliency (speed), collaboration and employee satisfaction focus attention on what matters and clarify management’s priorities. For example, employee satisfaction might be addressed through employee retention rates and feedback from anonymous employee surveys and exit interviews. The point is, the components of culture can be measured; so, the question becomes, are they being measured? There are methodologies available to companies for benchmarking their culture against leading companies. For example, Ethisphere offers a benchmarking survey tool to measure culture around eight pillars of corporate culture.^[3]

The key is to define the organization’s values and the behaviors that demonstrate them. Executive management should undertake the necessary steps to determine (i.e., measure) whether the tone in the middle is aligned with the tone at the top.

Be Curious Enough to Probe on Culture

Culture must be a priority to manage. The board and executive management have to want to know whether there are any concerns pertaining to culture warranting their attention. In the context of understanding and measuring culture, are they curious enough? Everyone who has read about scandals over the years in the financial services, industrial, higher education and technology sectors has asked themselves the question, “How did this happen, and why didn’t they know?” Leaders of companies that were rocked by scandal have asked, “Why didn’t we know?” The point is, in today’s optics, the board and management need to be inquisitive. Plausible deniability regarding a flawed culture carries little weight.

For example, is management investing in monitoring social media and message boards to get a sense of the ongoing dialogue about the company and its processes, products and services? Such monitoring may pick up subtle signs of issues or potential issues in the organization. For example, one might discern that a “get along, go along” culture is in place. Admittedly, online sources often contain vague, disparate pieces of information, much of which may be deemed unreliable. But nuggets of informative insights may be discovered. One possible solution for capturing insights is artificial intelligence and machine learning.

Directors should insist that executive management have effective escalatory processes and, as noted earlier, second- and third-line-of-defense functions focused on identifying early warning alerts and red flags regarding cultural dysfunction. In addition, useful insights that flag patterns suggesting potential issues can be obtained from independent, confidential surveys such as those available through Glassdoor. Ongoing research offering insight as to what the market is thinking and saying about the organization and the customer experience it delivers may be useful.

We end as we began: All things, good and bad, begin with culture. As a strategic asset and an essential component of corporate DNA, culture lays the foundation for creating and protecting enterprise value. Most importantly, culture does not remain static in a rapidly changing world. Corporate dysfunction, non-aligned subcultures and irresponsible business behavior can occur if leaders don’t pay attention to the fundamental attributes underlying their organization’s culture.

Questions for Senior Executives and Boards of Directors

Following are some suggested questions that senior executives and their boards may consider, based on the risks inherent in the entity’s operations:

• Can the board and CEO agree on the state of the current culture and whether it is aligned with the enterprise’s strategy and core values? Is the mood in the middle aligned with the tone at the top? Are there any gaps between the current culture and the desired one? How do we know?
• Do we measure culture? Do we monitor and improve our culture over time as needed? Do we have transparency into how well the culture is functioning? For example, how does culture impact employee performance, productivity, recruiting and retention?
• Are there subcultures that are in conflict with each other? If so, do these conflicts present exposure to organizational dysfunction (g., excessive risk-taking, off-strategy decisions, or unethical and irresponsible business behavior)?
• Is the culture in the boardroom and C-suite fit for purpose in today’s environment? Are diversity and inclusion considered in the organization’s succession planning process? Does the nominating committee consider diversity when evaluating candidates for the board?

[1] Executive Perspectives on Top Risks 2019, Protiviti and North Carolina State University ERM Initiative, December 2018, available at www.protiviti.com/toprisks.

[2] “Corporate Culture: Are You Curious Enough?” Protiviti, June 2018, available at www.protiviti.com/US-en/insights/bulletin-vol6-issue12.

[3] See the eight pillars at https://ethisphere.com/what-we-do/culture-assessment/.