Culture infuses the shared values and attitudes that frame how an organization thinks and behaves. Culture gives each organization its particular character. Good or bad, culture is almost always at the root of all reputational and financial performance outcomes, as it is a potent source of strength or weakness for an organization.
What do the following events occurring over the past 10 years have in common?
- Three former officials of a major university, including a former president, were sentenced to short jail terms followed by home confinement for their roles in failing to report a child molestation scandal that rocked the institution.
- A car manufacturer intentionally programmed the turbocharged direct-injection diesel engines in about 11 million cars worldwide to activate emissions controls only during laboratory emissions testing, resulting in the vehicles’ nitrogen oxides output meeting regulatory standards during testing but emitting up to 40 times more emissions in real-world driving.
- A reputable global bank created millions of unauthorized accounts and enrolled customers in online banking services without their knowledge or consent, resulting in unanticipated fees. Although the blame was initially laid on branch managers and their staff, further investigation pointed to incentive compensation structures intended to drive cross-selling of financial products.
- Accusations of sexual misconduct against high-profile and powerful men across multiple industries and in the public sector led to dismissals, resignations, suspensions and jail terms, sparking the global #metoo movement.
- A firm once hailed as the “Goldman Sachs of crypto” and led by a CEO labeled by some commenters as “the next Warren Buffett” is now considered by U.S. prosecutors as “one of the biggest financial frauds in American history.”
The answer: A dysfunctional culture is likely a major root cause of each situation. And these are just a few examples over the past decade. There are many others, looking back at the Theranos scandal, the 2007-08 financial crisis, the Enron era, the Challenger disaster and Watergate. Each of these examples points to a toxic culture — one that enables, if not encourages, unethical, illegal behavior, misleading investors or reckless, irresponsible risk-taking. Most historians would agree with the notion that a severely flawed culture leading to a dangerous downward spiral and ultimately ending in a disastrous outcome is as old as humanity itself.
Everyone agrees culture is important, but not everyone can agree on exactly what culture is, much less how to fix it if improvement is needed. Until a broken culture is exposed by a reputation-damaging outcome, decision-makers often must undertake corrective action based on reports of near-misses, close calls, unexpected surprises, policy violations and audit findings reporting control weaknesses and waving red flags. Often, the data comes in drips before the spigot is turned on in full force. Making the management of culture actionable is a challenge for leaders of all organizations.
That all said, when the inevitable consequences finally manifest themselves, dysfunctional cultures are easily recognizable. Take the events described above. Each one leaves most observers wondering, “What were they thinking?” And then there’s the question that logically follows and should give pause to every leader: “Can that happen here?” A toxic culture raises serious questions regarding the organization’s commitment to ethical and responsible business behavior, requiring a reset in rebuilding trust in the brand. In each situation, the dreaded “What did they know, and when did they know it?” inquiry drags on endlessly as everyone involved runs for cover.
It is important to emphasize that culture is an enterprise asset. Most observers are quick to note the unique aspects of the culture of organizations they admire for their impressive track record of sustained success. For example, consider the organizations listed as “most admired companies,” “most reputable companies” or “best places to work.” As people seek to understand the underpinnings of these and other successful and highly innovative companies, they tend to look for what makes them tick. Most often, that includes the distinctive characteristics of the unique cultures they have in place that contribute to their sustained performance in the marketplace.
What is culture?
At its core, culture is essentially the DNA of the organization, meaning that it consists of the fundamental and distinctive characteristics or qualities that define the company. While there are many definitions available in the public domain, for purposes of this discussion, corporate culture is defined as: The behaviors that people experience when they work for or interact with the organization’s management team and other representatives; these behaviors manifest themselves through day-to-day decision-making, attitudes and actions.
The focus here is not on what leaders say, but on what they do. Whatever the belief systems are, they are manifested through the enterprise’s actions. Enron had a world-class code of ethics statement, so mere talk is cheap.
To be sure, culture is complex. It evolves over time and is a function of many factors: the company’s mission, vision, pervasive core values and beliefs; its strategy, risk appetite and performance objectives; its organizational structure; the character of the people it hires; the standards, rules, conventions and encouraged behaviors explicitly articulated or implied by its policies; and the mechanisms, protocols and communications to influence compliance with those policies. A strong, positive and transparent culture contributes significantly to the alignment of employees with the mission, vision and strategy.
As a strategic asset, culture lays a foundation for driving enterprise value creation. For example, the culture of a highly innovative company sustains its commitment to reimagining processes and reinventing products and services. The culture of an agile, resilient organization encourages the focus, discipline and processes that lead to timely recognition of market opportunities and emerging risks and promptly acting on that knowledge.
Organizational culture includes myriad subcultures. For example, innovation culture, as noted above, is a topic that has gained traction as companies pursue their never-ending quest for the “secret sauce” to become more innovative so they can take the necessary steps to improve continuously and generate new revenue sources.
Other examples of subcultures include a quality-committed culture, a safety-conscious culture, and a diverse, inclusive culture. Cultures within a corporation may vary across the organization at different locations, in different functions and departments, and, of course, in different countries. Ask anyone involved in a significant acquisition, and there almost always is a reference to addressing distinctively different cultures in the merging entities. Subcultures need to be understood because they can create conflict, presenting a challenge to directors and executives to manage.
A key subset of organizational culture is risk culture. It is “the set of encouraged and acceptable behaviors, discussions, decisions and attitudes towards taking and managing risk within an institution that reflects the shared values, goals, practices and reinforcement mechanisms that embed risk into the institution’s decision-making processes and risk management into its day-to-day operations.”
An actionable risk culture helps to balance the inevitable tension between the entrepreneurial activities creating enterprise value and driving performance on the one hand and the various control mechanisms that protect enterprise value on the other hand, such that neither one becomes too disproportionately strong relative to the other. In effect, it balances the push and pull between growth strategies and mitigating risk and encourages risk-informed decision-making across the enterprise.
Exercising intellectual curiosity: Obtaining the unvarnished truth
Proactive management of culture requires an intellectual curiosity on the part of executive management. With the board’s support, the CEO and executive team must be committed to knowing the unvarnished truth about the company’s culture. This means management must inculcate a safe speak-up environment in which employees are confident that they can offer feedback without fear of reprisal. It also means that employees believe that their feedback is valued (e.g., their leaders really want to listen to what they have to say — even when it isn’t what leaders want to hear — and are committed to dig beneath the surface to understand the underlying root causes driving the feedback and act to address them). Unless these environmental attributes exist, employees won’t think their participation and input will matter.
To be sure, creating such an environment is not easy. This is not just a discussion about hotlines, although they are certainly a source of data. Rather, this is a conversation about a proactive commitment to managing culture by fact and earnestly seeking out ways to improve it continuously. “Manage by fact” is a decades-old notion: If a leader wants to improve something, they must know the facts at the source. If that knowledge doesn’t exist, the wheels spin and the enterprise is reactive to events.
Part of the challenge is the tendency to limit the focus to the tone at the top. Many boards neither assess nor understand the tone in the middle because they are focused primarily on the tone at the top. It is one thing to understand the tone at the top but completely another to assess whether that tone is translated into an effective tone in the middle.
A more comprehensive focus is the tone of the organization, which encompasses the collective impact of the tone at the top, tone in the middle and tone at the bottom in shaping corporate culture. While tone at the top is important and a vital foundation, the real driver of behavior on the front lines is what employees see and hear every day from the managers to whom they report — irrespective of what the CEO and executive management communicate regarding the organization’s vision, mission and core values. If the behavior of unit, functional and middle managers contradicts the messaging and values conveyed from the top, it won’t take long for lower-level employees to notice.
So the lead question is, “Do the CEO and executive team really want to know whether the tone in the middle is aligned with the tone at the top?” If the answer is yes, here are three ways to get that knowledge:
Deploy an effective survey methodology. When conducted on a confidential, anonymous basis, surveys are one way to obtain an understanding of the current culture. Surveys gauge how employees perceive the current leadership culture and enable comparisons of employees’ collective perceptions about the culture desired or expected. They provide a practical way for leaders to feel the pulse of the corporate culture through the voice of the workforce. Gaps almost always provide informative insights into what’s really happening in the business and what people below the senior management team really think, revealing opportunities for leadership development and improving the tone in the middle as well as the tone at the top.
Interact with stakeholders. Another way to get a handle on company culture is face-to-face interactions with key stakeholders at all levels of the organization through focus groups and interviews. Such interactions can take place in a variety of forums and should utilize open (qualitative) questioning as well as ratings-based questions using electronic voting for comparison of selected factors. Formal survey results can be used to validate themes from stakeholder interactions to gauge consistency of views regarding the culture throughout the organization.
Gather evidential matter in the normal course of business. Relevant data metrics also provide useful evidential matter concerning actual day-to-day conduct. They include risk metrics, conduct-related complaint data, issue escalation and resolution data, human resources data and reports, whistle-blower reports, turnover data, ethics hotline reports, unstructured social media data and employee demographic data. These and other metrics and data should be used as a supplement to performance measures linked to the strategy to drive the type of organization that management and the board would like stakeholders to experience when they interact with it. They also supplement insights from surveys and direct interactions with stakeholders.
In summary, the organization’s directors and executive leadership should seek out the facts regarding the organization’s current culture and whether there are any aspects of it requiring improvement. Surveys, stakeholder interactions and evidential matter offer a forward-looking view of culture and feed proactive steps by leaders to improve it.
Culture shapes an organization’s character
Culture shapes an organization’s character, impacting its reputation and financial performance. Dysfunctional cultures have been at the root of various scandals and unethical behaviors. Understanding and managing culture is crucial for leaders, as it sets the foundation for sustained success. Culture encompasses the behaviors displayed by the management and representatives, reflecting the company’s values and beliefs. Risk culture, a subset of organizational culture, balances entrepreneurship and risk management. To proactively manage culture, leaders must foster an environment where employees feel safe to speak up and provide feedback. Surveys, stakeholder interactions, and data metrics help assess and improve culture.