Governing culture and behavior - a guide for directors

Organizational culture is the invisible yet pervasive force that drives long-term performance and success. At its best, a company's culture galvanizes its workforce, fostering an environment where talent thrives and innovation flourishes. Such a culture positions the organization as a respected and influential player in the wider societal landscape. As the world continually evolves, so too must an organization's culture—remaining relevant and vibrant, and striking a judicious balance between innovation, diversity and risk awareness. Given this pivotal role of culture, the board's responsibility in shaping, monitoring and adapting it is paramount.

Quick take:

• Effective governance is foundational in shaping and monitoring organizational culture, emphasizing the importance of setting the right 'tone at the top'.
• Assessing culture's vibrancy and relevance demands regular review, adaptiveness and integration of stakeholder feedback.
• Activation of corporate culture requires clear communication, embedding it into decision-making and identifying and supporting cultural ambassadors.
• Employee engagement in cultural discussions, understanding and addressing cognitive biases and employing technology can support alignment with organizational values.

10 questions for boards

#1. How are we governing and overseeing culture?

Effective governance shapes desired, and monitors actual, organizational culture:

• Discuss culture in the boardroom: How often does our board discuss cultural matters? Are discussions on culture evolving with societal and business changes? Which board committee(s), if any, is assigned the duty of monitoring and assessing our culture and behaviors?
• Champion ethical leadership: Is our board taking active steps to set cultural expectations with senior management? How does our board and senior management promote ethical behaviors and decisions? Are there specific examples where our board or management demonstrated ethical leadership? How are these behaviors being communicated to the broader organization?
• Set the 'tone at the top': How clear and consistent is our board's tone and communication style when it comes to emphasizing organizational values and behaviors? Is senior management’s tone aligned with the board’s? How is their tone being perceived and mirrored throughout the organization? Do our senior leaders exemplify the desired culture and values?

#2. How are we assessing the vibrancy and relevancy of our culture?

Assessing and, when necessary, adapting organizational culture helps it endure:

• Review corporate culture: How well does our current culture align with the company's purpose and core values? How do we make sure our culture reinforces our strategy and vice versa? How well does our culture promote innovation, diversity and risk awareness?
• Assess adaptiveness of culture: How do we preserve our culture and core values when responding to cultural shifts or industry changes? How are larger societal movements, media narratives and public perception influencing our culture? Are we sufficiently agile in adapting to these external pressures? Are there processes in place to consider our cultural values during strategic changes?
• Check alignment with actual culture: Are there mechanisms in place to revisit our desired culture periodically and compare it with our actual culture and behaviors? Are there any known gaps between our desired culture and what is experienced day-to-day? How are we addressing these gaps?
• Accommodate diverse cultures: As we expand nationally or globally, how are we maintaining our core culture, while respecting and incorporating local norms and values? In what ways does our culture adapt to incorporate and accommodate others’ cultures?
• Integrate stakeholder feedback: How successful are we in creating a unified vision that resonates with our stakeholders? How actively do we consider feedback from employees, customers, suppliers and other stakeholders when we (re)assess our culture and values?

#3. How are we activating our corporate culture?

Culture needs to be woven into decision-making and championed explicitly across all management levels:

• Communicate a clear culture vision: How do we describe our culture and desired behaviors to our employees and other stakeholders? How effectively do we communicate the reasons "why" behind, and benefits of, our desired culture and behaviors?
• Embed in decision-making frameworks: How do we make cultural and ethical considerations an integral part of our decision-making at all levels? Is the need for such considerations understood by all employees, from leadership to the front lines?
• Identify and promote cultural artifacts: What symbols, rituals and stories represent and reinforce our culture? How are they integrated into the daily life of the organization? Are we confident they align with our desired culture or are not remnants of a past culture?
• Reinforce 'tone in the middle': How proactive are our managers in promoting and modeling the desired culture? Are their actions, decisions and communications aligned with the company's cultural objectives? How well is our middle management echoing the tone set by senior leadership? Are they adequately equipped and motivated to communicate and model the desired culture? Are they actively escalating ethical and behavioral matters up to senior management?
• Identify and support culture ambassadors: Who are the identified personnel driving and influencing our culture? How are they empowered and supported in their roles? How are we anticipating and addressing resistance to our desired culture?

#4. How are we helping our employees appreciate and exemplify our culture?

Engaging employees in cultural discussions and creating transparent feedback mechanisms are key to a successful organizational culture:

• Prioritize cultural awareness: How frequently are employees updated on our cultural values and their importance? How are we equipping employees with knowledge and tools to recognize and address cultural risks or deviations? How frequently are HR, risk and compliance amplifying cultural training and awareness programs?
• Promote integrity and ethics: How accessible is our code of conduct to employees? How do we keep it relevant and up-to-date? How frequently do we conduct training on ethical decision-making? Do we use real-world examples to make this training relatable and actionable?
• Nudge employees’ behaviors: How are we leveraging understanding of employees’ cognitive biases (e.g., over-confidence, risk aversion or groupthink) to shape our culture? How frequently are nudges (i.e. interventions) or behavioral prompts (e.g., visual reminders, email or software prompts) used to reinforce desired behaviors? See below for common cognitive biases.
• Strengthen onboarding processes: How do we immerse new employees thoroughly in our culture from their first day? How do we monitor the alignment of new employees with our cultural expectations in their initial months?
• Promote a unified digital culture: How do we align our digital communications with our desired culture? Are there guidelines, training or tools that aid our employees? How are we delivering a consistent cultural experience across distributed/remote teams? How do our digital tools and practices help in this endeavor?
• Emphasize ‘tone at the bottom’: How are we assessing whether employees at every level are not just compliant with, but enthusiastic proponents of, our culture? How well do employees’ daily interactions and decisions reflect our values?
• Assess employee sentiment: How are we keeping a pulse on employee sentiment regarding our culture and behaviors? Are there anonymous surveys or other tools in place? How do we act on insights derived from these assessments? What trends are causing management most concern?
• Leverage technology: How are we using technologies, such as artificial intelligence-driven analytics, to provide a more granular assessment of our culture? What potential issues are we identifying using such technologies that are not surfacing through other reviews or channels? What actions are being taken to address identified issues?
• Promote ‘bounce from the bottom’ upward feedback: How easily can employees voice concerns or challenge decisions that seem misaligned with our cultural values? What mechanisms are in place so their voices are heard without fear of retribution? How are we making sure employee feedback is not just collected, but addressed? How transparent are we about steps taken in response to feedback?

Common cognitive biases

Cognitive biases can lead to perceptual distortion, inaccurate judgment and illogical interpretation. Recognizing and addressing these biases can play an important role in nudging employees toward desired behaviors. Here are some common cognitive biases:

• Confirmation bias: The tendency to search for, interpret or remember information in a way that confirms one's preconceptions. For example, if an employee believes a certain project is doomed to fail, they might only pay attention to setbacks and ignore successes.
• Anchoring bias: The reliance on the first piece of information encountered (the "anchor") to make subsequent judgments. For instance, if the first proposal for a project budget is very high, subsequent budgets might also be skewed high, even if actual costs are much lower.
• Availability heuristic: Relying on immediate examples that come to mind. If a team had a recent project success, they might be overly optimistic in subsequent endeavors, even if the execution risks are high.
• Recency effect: The tendency to weigh the latest information more heavily than older data. An executive might give undue importance to last quarter's results, overshadowing the overall annual performance.
• Status quo bias: The preference to keep things the same by doing nothing or maintaining one's current or previous decision. This can prevent companies from innovating or adapting to market conditions.
• Overconfidence bias: When someone's subjective confidence in their judgments is greater than their objective accuracy. This can lead to managers or team members underestimating risks or challenges.
• Loss aversion: The tendency to prefer avoiding losses, rather than acquiring equivalent gains. This can hinder companies from taking calculated risks that could lead to growth.
• Self-serving bias: The habit of attributing positive events to one's own character, but attributing negative events to external factors. Leaders might take credit for successes, while blaming external factors for failures, hindering true organizational learning.
• Negativity bias: The inclination to give more weight to negative experiences than positive ones. A single negative product review might be given more importance than numerous positive reviews, leading to skewed decision-making.
• Groupthink: The desire for harmony or conformity results in an irrational decision-making outcome. Team members might not want to rock the boat, so they don’t challenge prevailing opinions or strategies, even when these are flawed.

#5. How are we cultivating a culture of innovation?

An enduring corporate culture is one that fosters innovation and growth:

• Instill a culture of innovation: How are we fostering a spirit of innovation within our organization? How are we making innovation a central part of our strategy and not just an afterthought? How do we recognize and reward innovative efforts?
• Support ideation: Do we have dedicated resources, be it budgets or teams, for researching and developing new solutions? Are we investing in spaces, both virtual and physical, dedicated to brainstorming and ideating new solutions? Are these spaces equipped with the necessary tools to facilitate experimentation and prototyping? How robust are our processes for capturing, evaluating and implementing innovative ideas? How frequently are these systems reviewed to make sure they are not stifling creativity?
• Encourage cross-functional collaboration: How are we promoting collaborative efforts across departments to foster innovation? Do we have systems in place for seamless knowledge sharing? How are we breaking down silos to enable diverse inputs and ideas?
• Stay updated on innovation trends: How are we keeping an ear to the ground regarding global innovation trends? Are we collaborating with or keeping an eye on startups, technology hubs or innovative sectors? How are we incorporating learnings in others’ practices to enhance our own innovation culture and processes?

See the following for ideas on promoting innovation in artificial intelligence , quantum computing, digital assets and the metaverse .

#6. How are we fostering collaboration, diversity and inclusion?

A collaborative, diverse and inclusive culture enhances creativity and problem-solving within the organization:

• Develop strategies for idea nurturing: What measures are in place to promote open dialogue and diversity of thought? How are we assessing whether employees feel safe voicing their opinions or sharing unconventional ideas?
• Prioritize cultural intelligence: How are we training our employees to understand, relate to and work effectively across diverse cultures? Are there programs in place to continually assess and enhance our organization's cultural competency? How often are our employees exposed to different departments or teams? How are these exchanges structured to maximize learning and appreciation of diverse perspectives and advance our culture?
• Optimize team dynamics: How do we assess whether diverse teams are functioning cohesively? What mechanisms are in place to measure team performance, cohesion and adaptability? Are leaders equipped to manage diverse teams effectively?
• Engage in continuous dialogue: How are we maintaining an open conversation about the importance of diversity and inclusion as a foundational element of our culture? Are there forums or platforms for employees to share experiences, learn from one another and contribute to the ongoing development of the organization's diversity strategy and culture?

See Governing and advancing diversity for more on encouraging a diverse and inclusive culture.

#7. How are we enabling a risk-aware culture?

A strong culture prioritizes risk awareness and compliance:

• Make risk everyone’s responsibility: How do we make sure everyone recognizes their role in managing risks on an everyday basis? How do we inform employees of what risks we are currently taking and their essential role in helping us stay within approved risk levels? How frequently do we educate teams about our risk management frameworks and policies? Are these trainings tailored to different departments or units and are these trainings adjusted based on changes in our risk landscape or compliance requirements? See Governing risk for more on risk culture.
• Clarify and communicate desired risk behaviors: How do we articulate and promulgate acceptable risk behaviors? How are we educating our employees about the risks and potential repercussions of misbehaviors? How do make sure we nurture a mix of backgrounds, expertise and perspectives to provide a richer understanding of our potential risks? Are employees aware of what our regulators expect of us with regard to desired behaviors? Are our current policies and procedures congruent with the organizational culture we aspire to? Where are the gaps, if any, and how are these gaps being addressed?
• Promote regulatory and compliance awareness: How are we promoting a culture of compliance with laws and regulations? How do we stay abreast of evolving regulations and educate our employees on required changes to adhere to new regulations? How do we assess our employees’ understanding of existing regulations?
• Spot systemic cultural issues: Are there recurring themes or findings across risk management reviews or internal audits that suggest broader cultural challenges? How are we leveraging data analytics in our risk reviews or audits to preemptively identify potential cultural or compliance risks? Are there trends we are seeing in new or long-dated issues that suggest we may have cultural challenges? See Governing issues management for more.
• Assess management culture: How receptive is management to cultural feedback? Are they proactive in driving cultural initiatives based on such feedback? How frequently is management reviewing the robustness and effectiveness of our internal controls? Are there any recurring issues or weaknesses? How well does management promote the importance of an effective control environment?
• Leverage culture metrics and reporting: What quantifiable metrics have we established to measure cultural health and alignment? How regularly are these assessed? How often do we report on our cultural metrics to the board and senior management? See table below for illustrative metrics.
• Seek insights for internal and external audit: What insights does internal audit have with regard to our corporate culture and values? What potential issues have they identified in their audit work? What insights do our external auditors have on our culture, values and behaviors? Where do they see differences - positive and negative - between our culture and that of our peers? See below for more on external auditor insights.
• Assess cultural alignment of partners and suppliers: How do we assess whether external entities, such as strategic partners of suppliers, align with our cultural values, ethical standards and business objectives? Are there specific criteria or assessments we use during selection or collaborations?
• Implement robust whistleblower mechanisms: What mechanisms are in place to allow our employees to report potential concerns anonymously? How do we protect employees who flag unethical behavior? How do we communicate the importance and safety of these mechanisms to our employees? How are investigations conducted and culprits held accountable? What is reported to the board and how frequent is this reporting?

Potential metrics to monitor culture

It is difficult to identify specific metrics that measure culture directly. However, there are plenty of available metrics and data inside organizations that can be pieced together and evaluated to identify potential cultural or behavioral issues that may require additional analysis and enquiry.

#8. How does our reward system support our culture?

Desired cultures and values need to be firmly embedded in the organization’s evaluation and reward systems:

• Integrate culture into goal-setting: How do we make sure goals set across all levels align with our desired organizational culture? How do we select goals that promote innovation, risk awareness and a respect for diversity? How do we assess alignment between individual and team goals with broader departmental and organizational objectives related to our desired culture and behaviors?
• Incorporate balanced scorecards: How effectively are we integrating key performance indicators linked to our desired culture and behaviors into individuals’ performance scorecards? Are these metrics indicative of the health and vibrancy of our culture?
• Incorporate 360-degree feedback: How is an individual's alignment with, and contribution to, company culture assessed during reviews? Are there specific criteria or indicators we prioritize? How regularly do we collect feedback on executives and employees’ behaviors? How do we use the feedback constructively to guide their development?
• Align incentive structures: How well do our compensation and promotion processes promote behaviors that reflect our desired culture? Are these processes reviewed and adjusted to maintain cultural alignment? How well does our compensation approach balance innovation and growth with informed risk taking?
• Champion reward and recognition programs: How do we celebrate individuals and teams that exemplify our culture? How do we reward and leverage these individuals and teams to influence and inspire others?

#9. How is continuous learning supporting our culture?

Continually reinforcement is essential for fostering a resilient and adaptable culture:

• Dive into cultural immersions: How are we deepening our employees' engagement with the company culture? Are there immersive experiences, activities or training sessions that help everyone understand and embody our organizational values?
• Encourage knowledge sharing: How are we facilitating knowledge exchange among employees on ethical or cultural matters? What platforms are in place to promote a continuous learning environment about our culture, values and history?
• Expose to external cultural nuances: How often do we organize trips or exchanges with other organizations? How do these initiatives help in gathering diverse perspectives or best practices? How do we incorporate learnings or insights from these external exposures into our own cultural activation strategies?

#10. How are we maintaining the currency of our culture?

Periodically evaluating and refining an organization’s culture is part of keeping it relevant:

• Extract insights from past failures: After a lapse in practice or behavior, how thoroughly are we analyzing the incident to avoid future recurrences and reinforce our desired culture and behaviors? How frequently do we evaluate external incidents or failures in corporate culture and values to learn and bolster our own internal strategies and processes?
• Conduct in-depth cultural assessments: How regularly do we explicitly assess culture? What methodologies are in place for these assessments? How do the findings inform our cultural activation strategies?
• Engage in best practice benchmarking: How do we measure up against industry leaders in terms of cultural health and effectiveness? Which best practices are we adopting? How regularly are we participating in industry-wide reviews and discussions about culture and conduct?
• Gain insights from other stakeholders: How do we collect perceptions of our company's culture from customers, partners and the public? How frequently is this done? How do we use this external perspective to inform and refine our cultural activation strategies?

In conclusion

The very soul of an organization is embedded in its culture, serving as a compass that guides behavior, decision-making and strategy. As society and the business landscape continue to evolve, it is imperative that organizations keep pace, revisiting and realigning their cultural practices and values to remain vibrant and relevant. Through effective governance, continuous assessment, active engagement and aligned reward systems, an organization can make sure its culture remains its strongest asset.

Cultural insights from external auditors

With a diverse client base and extensive industry knowledge, external auditors can offer value insights that can guide cultural realignment and enhancement:

• Assess management's control stance: How do our management's reactions to audit recommendations compare with other organizations? Are there signals indicating openness or resistance? Are there patterns in how management accepts or pushes back against audit suggestions? Does the response patterns indicate a culture of continuous enhancement or not?
• Contrast with industry benchmarks: How does our organizational culture and risk approach compare to industry peers? Are we leading, lagging or aligning with the norm?
• Evaluate leadership's cultural tone: How is our leadership tone perceived in terms of ethical behavior and transparency? Are there perceived gaps between what is said and done? Are there observed actions or statements that may raise concerns about leadership's commitment to our company's values? How clearly and frequently are our ethical values communicated? Are employees uniformly aware and aligned?
• Review control ecosystem: How effective and adaptive is our control environment? Are there identified weak spots? Are there ways to encourage management to focus more on making the control environment resilient to emerging risks or challenges?
• Monitor behavioral indicators: Are there signs of undue stress or pressures related to hitting our targets that could lead to potential ethical lapses? Are there high turnover rates or information hoarding in certain departments that could signal underlying cultural or ethical concerns? Are there recurring themes from substantive tests that could point to potential cultural challenges?
• Spot financial reporting anomalies: Are there discrepancies in our financial reporting suggesting potential cultural misalignment? What could these inconsistencies signify?
• Scrutinize whistleblower processes: How effective and accessible are our whistleblower channels? Are raised concerns addressed promptly and thoroughly? What enhancements or changes can we adopt based on successful practices observed in other organizations?
• Gauge training impact: How effective are our training programs in instilling a compliant, ethical and risk-aware culture? Are there gaps to address? Based on industry shifts or common challenges, are there new training topics we should consider to promote an ethical culture and appropriate behaviors?

The views in this article are mine. The insights reflect an engaging and sparring discussion between me (as governance and risk expert, and accomplished author) and Open-Source AI ChatGPT (as know-it-all and so-so author). Copyright: Mark Watson