The warning signs of a toxic Culture (Deloitte, May 2017)

Auditing and assessing a Corporate Culture has been encouraged and then prescribed for quite some years in the UK. In May 2017, Deloitte published a report that got my attention: some good points listed, and a clarification of what is meant by Culture. But my organization was not ready at the time. In today’s discussions and regulations on ESG (especially the S and the G) and the role of Internal Audit (IA), I look back with interest at this report on the “warning signs of a toxic Culture”.

A short and interesting Deloitte report from May 2017

The Deloitte report emphasizes the role of Corporate Culture in preventing scandals and fostering ethical behavior. But Culture as a complex mosaic of subcultures influenced by values and beliefs, which makes assessing and shaping it challenging. And there is a gap between recognizing the importance of Culture and effectively driving the right Culture.

The document shows the spectrum of organizational Cultures, from toxic to positive, and the importance of balancing the shaping of desired Cultures with mitigating risks that lead to toxicity. Indicators of a Culture at risk include overemphasis on financial metrics and leadership behaviors misaligned with organizational values. It outlines considerations for Boards in Culture governance, including the need for a clear "tone at the top," monitoring cultural indicators, and aligning compensation with core values.

https://www2.deloitte.com/us/en/pages/risk/articles/on-the-boards-agenda-may-2017.html

Five Culture macro indicators

Deloitte identifies 5 macro indicators for organizations to measure their culture:

·?????? “Performance statistics. Unexpected variations in sales results, growth, product orders or cancellations may provide indicators of cultural pressures on performance.

·?????? Human resource related statistics. Analytics on employee turnover, absenteeism, and percentage of staff on extended leave may provide indications around the health of the organization’s Culture.

·?????? Feedback from other internal and external parties. Observations from the organization’s internal auditors, external auditors, legal advisors, and other groups could point to whether the organization’s Culture is at an optimal level.

·?????? Customer surveys. Information about the quality of customer service and the customer’s overall satisfaction with the organization may provide insights into Culture.

·?????? Whistleblower (WB) program. Important insights into the organization’s Culture can be obtained through the whistleblower program, or helpline. A common feature among many organizations whose Cultures resulted in misbehaviors was a breakdown in their reporting processes. It could be that employees didn’t know about the program, didn’t trust the system, or the organization either ignored the complaints, or worse, took action to cover them up and punish the individuals who reported the problem.”

I believe that WB programs are well identified and audited by IA. But, by and large, based on my experience and peer discussions, I am convinced that there is room for improvement for IA to have in scope, and then a chance to express an audit opinion on, the first four indicators.

5 Considerations for the Board of Directors/Supervisory Boards

Deloitte suggests 5 considerations for the Boards to help shape a corporate Culture:

·?????? Culture governance. "Devote sufficient time for culture discussions” in the Board, with the idea of creating a specialized “ethics/Culture committee”.

·?????? Monitoring culture. Is the Board “getting the quantity and quality of information surrounding Culture that is needed”?

·?????? Public commitment. “What information does the organization disclose about its Culture and values”… “The board should also make sure that the organization’s activities and decisions are consistent with its stated Culture and values”.

·?????? Board and management oversight. The “Board and senior management must set the appropriate tone at the top”.

·?????? Compensation practices. The “Compensation Committee may wish to review the CEO’s and senior management’s compensation to ensure that no inappropriate activities are being inadvertently incentivized”.

Overall, looking at the journey of the Supervisory Board of my organization since I first attended its Audit Committee in 2005, a formidable progress and maturity level have been achieved on all 5 dimensions.

As for IA, I think that several IA functions review and opine on Compensation practices – at least at effectiveness level (not so much at design level), but in my view the first 4 considerations are still pretty much virgin territory for IA. ESG regulations combined with the several stakeholders’ pressures are an encouragement to accelerate the IA efforts on this.

7 years ago, when suggesting a possible audit focused on Culture, I was told that my job was not to audit the art on the walls of the Head Office (!). I am glad that things have changed in Continental Europe and that a healthy Corporate Culture is now seen as a competitive advantage that needs monitoring and oversight. IA is in a better spot to support and advise Leadership on this matter.