Businesses are operating in a climate of volatility and uncertainty. In such an environment, cultivating a strong corporate culture is key, and it’s high on the agenda of business leaders and regulators.
One of the fundamental roles of leadership is to create and maintain a culture that reinforces the company’s core values, encourages employees to do the right thing, and helps drive the company’s long-term strategy. Culture, done well, can be a powerful driver of organizational performance.
As boards and audit committees sharpen their focus on corporate culture, many are turning to internal audit to help them better understand and assess the company’s culture. Recognizing that internal audit’s skills, capabilities, and stature within the organization will vary widely by company, the following questions should be helpful in tackling this critical and timely challenge.
There is no one “right” culture; rather, there is a spectrum of behaviors which companies might encourage depending on their strategy. Behaviors encouraged at a disruptor company will be different than those encouraged at a heavily regulated company, and culture will need to evolve as the strategy evolves.
Leadership is an important element in any culture. The board is critical in driving the corporate culture – and in more ways than just ensuring that boardroom practices and decisions reflect the corporate culture it wishes to have. This is also reflected in the Code of Corporate Governance which recommends that the board sets the company’s values and standards (including ethical standards). The board’s role should go beyond to establishing values and standards. It should continually assess the corporate culture to ensure that the various moving parts are aligned and that corrective measures are implemented. The board should also regularly evaluate the style of the CEO and management, and how that style influences corporate culture.
One of the biggest challenges boards face in overseeing and assessing culture is visibility. While the tone at the top is often apparent, the culture in the middle and throughout the organization is more difficult for boards to assess. Directors can improve visibility by visiting company facilities and engaging employees, walking the halls of headquarters and monitoring social media - and they can also turn to internal audit to deepen their understanding of what is really happening and improve their line of sight at all levels of the organization. Besides this, internal audit can help reinforce the importance of clarity regarding the desired culture and related behavioral expectations, which can then be assessed and monitored over time.
There are several ways in which Internal audit can support the board in evaluating the organization's culture:
One option is to add cultural considerations to existing audits. For example, performing root cause analyses to determine whether a breakdown in procedures or controls was caused by lack of training, poor communications, or leadership style. This way, patterns and trends in cultural problems can be identified.
Another option is to expand the audit universe to include control instruments that the organization can use to promote desirable behavior and prevent undesirable behavior (e.g., whistleblower reporting, incentives and performance targets, training, health and safety, etc.). Within this approach, you focus more on the policy aspect of the cultural framework within your organization.
A third option is to perform a stand-alone culture audit, tailored to the organization’s cultural maturity and internal audit’s capabilities. This type of audit, provides insight into the current organizational culture by inquiring each employee (anonymous) within the organization on their personal perception of the organizational culture. As a framework for this survey, the KPMG Soft Control framework is used. Besides the organization-wide survey, some face-to-face interviews are held to put the results in a broader context.
It is critical that auditing and measurement be continuous in order to identify trends and gaps, quickly adjust course, and avoid major cultural blind spots and failings.
More information on auditing culture can be found in our latest insight piece: Auditing culture - Practical introduction to auditing your organizational culture
On top of auditing culture, internal audit can also help give the board better visibility and a more holistic view of culture at all levels by taking the lead - together with the ethics and compliance and human resources functions – in developing a culture dashboard.
All three functions have data - survey results, customer satisfaction data, human resources, and employee data, as well as ethics and compliance data - which can feed into a culture dashboard and provide a snapshot of the company’s culture. Similar to cyber risk dashboards, culture dashboards will evolve over time. Boards need to hold management accountable for developing an integrated picture of the organization’s culture, and a regularly updated culture dashboard can be a helpful tool and serve as the basis for management’s discussions about culture with the board.
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