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Can You Audit Corporate Culture?

Jose Tabuena | May 29, 2013

Corporate culture, like an individual's personality, is an amorphous quality that exerts a powerful influence over all behaviors and actions.

Every compliance officer agrees that culture is important and works to improve the culture and ethical aspects of the company. Yet for all of its implied significance, culture is often viewed as a soft issue that leaders aren't sure how to address.

Academics define corporate culture as the organization's values, visions, norms, working language, systems, symbols, beliefs, and habits. Organizational culture affects the way people and groups interact with each other, with clients, and with stakeholders. Although a company may have its own unique culture, in larger organizations, there are diverse and sometimes conflicting subcultures that co-exist due to different characteristics of the management team. Complicating matters for global companies is that organizations can have very differing cultures over geographic regions or across functions.

In more basic terms, culture is the set of enduring and underlying assumptions and norms that determine how things are actually done in the organization. A coherent culture is based on shared values and beliefs, and the evidence they are shared is that they shape behavior across the organization. The challenge for leadership is knowing how to instill or modify those assumptions and norms in the direction that is needed.

The potency of culture can be both a blessing and a curse for organizations as they ponder strategic and human resource issues. Culture can take on increased importance in large corporate mergers and acquisitions, where a significant percentage of integrations get stuck or fail outright as a result of cultural issues. For example, studies have found a greater incidence of successful mergers between companies where executives displayed similar leadership styles or when the cultures tolerated different ones.

Culture Breeds Ethics

It is important to note that an important feature of a good culture is that the majority of employees can be positively influenced by values and environments that reinforce strong company values. Such a climate arises when the workforce believes that certain forms of ethical reasoning and behavior are expected norms for decision making. The ethical climate of an organization serves many useful functions in organizations. It helps employees identify ethical issues and address those issues by giving answers to “What should I do?” when faced with an ethical dilemma.

Companies have been to known to blame a problem on rogue employees, but for a rogue employee to operate, there has to be a lack of organizational oversight. In a sense, the rogue employee argument is a tacit admittance that the control system is broken as impacted by organization's culture and internal communication systems. Attributing misdeeds solely on an employee gone wild is really an attempt to deny the flaws in the system and the culture that spawned the bad acts in the first place.

Auditors have already been assessing specific elements of company culture that pertain to the ethical climate for some time. The control environment under the COSO internal control framework, for example, includes integrity and ethical values as key components to be evaluated by auditors.

Behavioral scientists have devoted considerable attention to compliance issues that internal auditors can begin to take into account. There is the potential for robust audit testing to evaluate whether explicit compliance messaging and processes appeal broadly to company values and aspirations and actually activate those values so that they are expressed in workplace compliance decisions.

Culture Can Be Measured

An effective high-performance culture is a product of a company's actions and is typically reinforced by day-to-day systems, processes, and symbols. These factors tend to be controllable and thus measurable to a degree.

Compliance and audit professionals have increasingly included ethics and compliance program questions into employee surveys. Such questions probe areas related to the “tone at the top” and management's overall commitment to upholding the company's ethical and legal standards.

But given its impact, it is also an opportune time for internal audit to go beyond ethical climate and support the measurement and analysis of the overall organizational culture. A strong culture exists where staff respond in a manner aligned with organizational values. In such environments, strong cultures help companies operate like well-oiled machines, engaging in outstanding execution with only minor adjustments to existing procedures as needed. Conversely, a weak culture persists where there is little alignment with organizational values, and control must be exercised through extensive procedures and bureaucracy.

By identifying cultural strengths and areas needing improvement, a cultural assessment can guide the creation of communications plans and culture-building initiatives that are tailored to the company's needs.

Auditors have used several techniques to evaluate corporate culture. Some audit departments integrate soft control evaluations into their everyday audit procedures. Others conduct structured, entity-level interviews and may combine those with the use of focus groups. Employee surveys, however, have become acknowledged as one of the most effective and efficient ways to measure corporate culture.

By identifying cultural strengths and areas needing improvement, a cultural assessment can guide the creation of communications plans and culture-building initiatives that are tailored to the company's needs. In many cases, an effective strategy may be to target weak spots while simultaneously anchoring the overall message to positive values already strongly shared across the organization.

Learning how employees perceive the company's values can be eye-opening, with results are categorized by position, functional area, geography, or operating unit without compromising anonymity. Don't assume that culture is uniform across departments or locations, or that line employees will have the same opinion of the company's values as the executives, the law department, or the human resources group. Even a simple, one-size-fits-all anonymous survey may be useful to get the C-suite to consider what they think employees will identify as the company's core values and cultural drivers. Later, they can compare and contrast these predictions with actual results.

Measure Outcomes

Operational pressures can greatly influence a company's culture, making it periodically necessary to determine whether the company is on track. Measurement is essential but it also can be difficult. Measurement is worth attention because human behavior is notoriously difficult to predict. Even in a company that astutely manages cultural change, it's rare to have addressed everything the first time out. Internal audits and other forms of evaluation and measurement allow for course correction and reinforcement as needed.

The most accurate metrics should be associated with outcomes. Suppose a company was striving for a culture in which innovation was supported and shared, for example, rather than losing product and service ideas to the hoarding that can happen in a competitive environment. One way to measure this is to survey everyone to find out how they felt about sharing ideas. A better approach, however, would be to assess how the company had done in terms of producing ideas and how those ideas had generated income for the company.

Other areas of culture measurement for the internal auditor to consider include:

·         Retaliation Factors: Studies have suggested that the highest indicator of workplace misconduct is fear of retaliation and the confidence employees feel when raising issues. Fear of retaliation is not only significant in and of itself, but may be a proxy of other problematic cultural factors such as distrust of management. Data on employee willingness to address matters with their immediate supervisor or to use the compliance hotline, as well as their views on what would happen if they reported misconduct, can be meaningful. Even better would be measures on how issues are reported and ultimately addressed.

·         Rewards and Incentives: Recognition, reward, and incentive programs can convey positive cultural messages. Notably, Walmart announced that it will begin basing a portion of compensation for top executives on the company's ability to meet compliance goals. If executives don' meet compliance objectives, they risk having their annual bonuses reduced. A measure to develop is the degree to which ethical business practices have been factored into executive-level performance evaluations and/or compensation criteria.

·         Management Operating Style: Query the company turnover and retention for information where turnover has not achieved acceptable levels. Through employee interviews, ascertain whether the turnover rate is attributed to organizational transition or stress stemming from management's philosophy and operating style (e.g., inappropriate compensation packages, unreasonable sales goals requirements, etc.).

·         Talent Management System: A company can actively recruit new hires based on culturally consistent, desired behaviors and reinforce these when people join the company. To measure, sample the records of employees who have had poor performance evaluations in the past years, and determine whether those employees had appropriate qualifications relative to their job descriptions. Perform the review with an eye toward ascertaining whether the company's hiring practices appropriately matched employee qualifications, skill set, and delegated authority to their formal position and job description.

Achieving a high-performance culture deserves to be a top agenda item for every company hoping to stay competitive. Beyond ethical climate, the collective corporate culture can, be an important driver of financial results and an element of other key business issues, such as talent acquisition and management and innovation-fueled growth.

Companies should rigorously assess their company culture and whether it is suited to achieving their business vision in the light of global competition and talent scarcity. Opportunities to seize culture as a competitive weapon will become apparent to some and remain a mystery to others. The ability to effectively gauge the organization's culture and to link strategy and culture is an area where internal audit expertise can prove paramount.