Auditing your culture

Cultural change will only occur when senior leaders act as role models and work to embed the desired culture in everything the organisation does. By Dera McLoughlin.

Culture has attracted a lot of interest in the media and in public discourse in recent times. The financial and regulatory problems to which Ireland has been exposed have firmly placed the issue of culture on the boardroom table.The extent to which an organisation’s culture supports the execution of its strategy, the management of risk and the treatment of its customers are increasingly under the spotlight and weaknesses in culture are now frequently blamed for failings in these areas.The board and executive management, who have always been responsible for culture, are increasingly being held to account when culture fails. Organisations are also under more scrutiny to ensure that the culture they espouse is transparent and clearly supports the delivery of their strategy in a manner that is consistent with their values.However, culture is intangible and elusive. What exactly is the culture of an organisation? How can it be defined? How can it be assessed? And where it is not working, how can it be changed?Following a number of years researching the issue, Mazars has developed a structured tool to assist organisations in auditing culture. This tool helps organisations to define their “target” or desired culture, and then measures actual culture across the organisation against that target.It also assists in defining a plan to address any material gaps between target and actual culture – in particular, those that create a risk that the organisation won’t be able to achieve its strategy or deliver on its mandate. But first, what exactly do we mean by culture?

Culture defined

Culture has been defined as “the pattern of basic assumptions that the group has invented, discovered or developed in learning to cope with its problems of external adaptation or internal integration, and that worked well enough to be considered valid, and therefore be taught to new members as the correct way to perceive, think and feel in relation to those problems”. In more simple terms, the culture of an organisation can be expressed as “how we do things around here”. It is the sum of everything an organisation stands for and how it operates – its values, its beliefs, its mission, its behaviours and its interactions with employees and customers. These powerful ingredients make up the unique character of an organisation – its culture.Culture is complex. In an organisation, it is everywhere; it is subjective and ever-changing. Some organisations have several sub-cultures, which is absolutely fine as long as they are compatible. Culture is not how risk is managed, it is not values, it is not static, it is not conduct, it is not integrity and there is no such thing as a “good” culture. Rather, a strong culture is one that supports the organisation in the achievement of its objectives.

Our findings

Mazars has spent a number of years studying culture and in a recent research report entitled Board Leadership in Corporate Culture: European Report 2017, which was published in association with INSEAD, our research identified that while believing that an organisation’s culture can be influenced from the top, particularly by the Chief Executive Officer, only one in five board members believe that they are spending the right amount of time addressing cultural issues. Additional findings from the report include:

  • Setting the right tone from the top is seen as the main way a board can influence organisational culture;
  • Culture is ranked third by boards in terms of importance, behind only strategy and financial performance;
  • 40% of board members believe they either do not devote enough time to cultural issues or that culture is not valued as a discussion topic at board level;
  • Half say their board is “reasonably clear” on the desired culture while one-third are “not very clear” or say there is no discussion. Only one-fifth “fully consider” culture;
  • One-third of boards are not confident that they have the right information on their culture, and are unclear as to the alignment between the desired culture and that which exists in the business. Only 5% are very confident that there is any clear alignment;
  • Half say there are either significant gaps between strategy and culture, or they have not spent much time considering alignment between the two. However, the other half believe they are very clear on alignment between strategy and culture, or that their strategy is broadly consistent with their culture;
  • 43% indicate that the culture of the board itself is seldom discussed at board meetings, though one-third say the board’s culture is always assessed during a board evaluation;
  • There is a three-way split on opinion over managing the risks associated with culture: 36% say such risks are fully embedded in their risk-management systems; 32% say that, while not part of formal management, it is discussed at board level; and 31% do not routinely consider the risks associated with culture;
  • Directors are generally inward-looking when considering their culture: two-thirds rely on employee feedback to assess existing culture. While half also consider customer feedback, an equal number look to “risk events” such as rule breaches for measurement. 17% say culture is not measured at all;
  • 78.3% of investors state that they would like to see more extensive reporting on culture; and
  • Employees are the main targets for cultural change programmes: enhancing employee motivation and productivity was cited as the main type of cultural change programme undertaken by most organisations.

Overall, the findings indicate that although awareness of the importance of culture to the success of an organisation is recognised, boards have yet to find a way to set, assess and change culture in a meaningful way.

Auditing culture

An increasing number of boards and audit committees are examining the concept of culture and assessing whether the culture in their organisation is strong or weak – supportive of their strategy and mandate or otherwise. Executive management teams are examining what aspects of culture they should change, and how. As a result, many Irish human resource and internal audit functions in both the public and private sectors are being asked to conduct a review or audit of their organisational culture. Many are unsure as to where they should start.

Mazars’ cultural audit tool

Mazars’ cultural audit tool – the Cultural Compass – has been developed by auditors, behavioural scientists and human resource professionals, and is designed to support the challenging process of auditing culture.This audit of culture begins by assisting the board or executive management team in defining their “target” or desired culture. This forms a baseline for the audit and the tool is then used to determine actual culture against this base.The Cultural Compass is based on the belief that culture is like the organisational immune system – it keeps the organisation healthy when working well. Just like an immune system, it works on the basis of triggers and responses.Cultural triggers are based on choices made by the organisation and its leaders. It includes values, office design, recruiting processes etc. Once a trigger is activated, it creates a specific response – a company policy, for example. Cultural triggers are the antigens of organisational culture.Cultural responses are the specific reactions resulting from the trigger such as a behaviour, a bias, an action or an inaction. These cultural responses are not necessarily based on logic but rather, on how an employee feels and thinks. Cultural responses are the antibodies of organisational culture. Responses tend to trump triggers by rendering them inaudible, explaining the weight of some aspects of a company’s culture over a long period of time.The Cultural Compass examines culture across six dimensions: decision-making; structures and controls; recruitment, recognition and development; attitudes and behaviours; leadership and management; and values, mission and purpose. These dimensions encompass the most important trigger and response elements of culture. In turn, cultural triggers and responses are examined by auditing triggers and responses across 60 variables grouped under these dimensions.The results can often be challenging, with significant divergence in key dimensions or in specific areas of the organisation from the desired culture.

The benefits of a cultural audit

So, what can an organisation do with the results of a cultural audit? The key is to focus on a small number of specific and important cultural gaps and the behaviours that have the greatest impact on these gaps.Changing a culture purely through top-down messaging, training or development programmes seldom changes people’s beliefs or behaviours. In general, cultural change will only occur when senior leaders act as role models, explicitly modelling the desired behaviours and beliefs, and work collaboratively to embed the desired culture in everything the organisation does.

Dera McLoughlin FCA is a Partner at Mazars.

This article first appeared in Accountancy Ireland  April 2018.

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