Over the past two years we have witnessed a significant increase in the focus on organisational culture. There are many reasons for this but the trust gap between consumers and business, exacerbated by high-profile corporate scandals in the UK and internationally, has undoubtedly played a part.
Government, regulators, professional bodies and investors recognise the need to address these issues and are actively promoting the importance of good culture in organisations, but there nevertheless seems little consensus on how to proceed.
The FRC published its guidance on Corporate Culture and the Role of Boards in July 2016, in which it set out its expectations for boards to provide governance and oversight to ensure alignment between their organisation's espoused culture and the sub-cultures that actually exist. Responsive and responsible leadership was also the topic of the World Economic Forum in Davos this year. So, with culture once again firmly under the spotlight, how should HR departments and business leaders seek to measure and manage this core component of their organisations?
In our experience, business leaders intuitively understand the importance of culture but many find it difficult to objectively assess what is happening on the ground in their organisations. Therefore there often tends to be a reliance on mechanisms such as controls, procedures, incentives and key performance indicators.
While few would deny that mechanisms should have a place in any organisation, an over-reliance can occasionally create a tick-box approach to compliance and lead to unintended consequences (as we have witnessed over the past few years). For example, too many rules that diminish the importance of judgment can sometimes have the reverse impact, leading to decisions that are not aligned to the individual or organisation's sense of ‘what is right’. Actions are justified on the basis that ‘the rules pointed the way’.
So what is the way forward? In our view the solution lies with elevating the assessment of culture in the boardroom by providing leaders and HR departments with a suite of tools to allow them to objectively assess culture within their organisation. The approach we are taking at EY applies data analytics to data from internal, external and bespoke sources. This can range from financial and HR information to social media posts and employee surveys. By combining these data sources we obtain an objective assessment of the impact that local cultures are having in an organisation. This helps to build a picture of both the local and overall cultural alignment in the business, while also measuring ‘cultural dysfunction’ and the consequential impact on risk and performance.
In a recent EY report Governing culture – practical considerations for the boards and its committees we also look at the role of board committees. In our view they should have an active role in examining the decisions they make and oversight through the lens of culture. If we take the nomination committee as an example, it has a vital role in attracting and hiring leaders who will instil and exemplify the desired culture, or bring about a much-needed change. In overseeing the executive talent pipeline it should gain some assurance on how senior talent ‘live’ the culture and values and, where there are issues, how these affect an individual’s progression.
These techniques combined can make a fundamental difference to the understanding and reporting of culture. It goes beyond just providing insight. It can help stakeholders such as the HR function, suppliers, customers, present and future employees, investors and regulators consider culture both as a lens on risk and as a means of improving performance. After all, creating high-trust environments, in which people feel confident that they will be supported when making decisions in line with the organisation's purpose and values, is a core component of many successful businesses.
Kevin Hills is UK head of integrity and compliance at EY
