Corporate culture

Does your business define, measure and monitor its organisational culture?

Question collaborators: Engage for Success, Starboard

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Evidence suggests that corporate culture is not given the prominence it deserves: only 14% of FTSE100 businesses discuss their culture (according to research by Black Sun). However, corporate culture is of critical importance, it affects businesses from top to bottom: what they do, how and why.

The necessity for a broad, all-encompassing definition of corporate culture was the focus of a recent collaborative study undertaken by the FRC and partners. In their report (Corporate Culture and the Role of Boards, July 2016), the research indicates that corporate culture is a source of competitive advantage and the foundation of how a company approaches risk. They regard organisational culture to be a key determinant of how businesses approach any social, environmental or ethical issue, and argue that ignoring it can lead to significant financial and non-financial risks. Given that culture impacts so significantly on how a business operates and how it relates to and impacts upon wider society, businesses should expect scrutiny regarding the definition, development and monitoring of their culture.

A company’s culture may dictate how its staff is treated, how consumer and other stakeholder interaction is carried out or how a company manages its approach to risk. Culture is crucial to understanding how employees perceive their work and interact with their peers and employers, and to successful employee engagement. However, culture can no longer be regarded as a workforce-specific phenomenon only.

Given the abstract nature of ‘culture’ and the difficulty in providing a quantifiable definition, it is often reduced to ‘beliefs and values’. The real measure of the culture that is in place is the accumulated behaviours of people from across the organisation, which jointly not only delivers performance, but also demonstrates embedded attitudes, i.e. 'the way we do things around here'.

There is no 'right' or 'wrong' culture for an organisation to adopt; it is the role of its leaders to define what is most appropriate and suitable for their organisation. Importantly, this can and does change over time as its leaders, the organisation itself and its business environment change. The aim of defining a required culture is to support the delivery of the agreed business aims and objectives and, as such, there is no single culture definition that every organisation should adopt. The key is that it must link to what the organisation is trying to achieve, creating clarity for everyone across the business, thereby informing and influencing people's behaviour in carrying out their every-day duties. The better an organisation defines this cultural profile, then manages activity against it, the more likely it is that the culture will in reality become the 'norm'. Through this, it is then more likely to support the delivery of the organisations objectives.

Often there is an attempt to embrace this into a single phrase or short soundbite, such as "putting the customer first" or "a winning culture", which, whilst creating a clear focus, usually never describes the full profile of the culture that the leaders actually want for their organisation. If the culture is defined or understood solely by a single item like this, all sorts of anomalies are likely to occur when people interpret it in their own way. It is likely that the 'license to operate' and hence the sustainability of the organisation will be at risk, as such a license increasingly requires a wider range of issues to be addressed.

Directors should lead by example and ensure that good standards of behaviour permeate throughout all levels of the organisation. In addition to the values and beliefs articulated by a company at the senior management level, culture also includes the actual policies and processes of a company, and the nature of the interaction between the people who implement the policies (employees) and the people who develop them (owners/managers). Therefore, a firm’s leadership should ideally seek to be the enablers of company culture rather than simply regulators of it. In a workplace with a strong and successful company culture, employees take personal responsibility for the business’ success and are likely to be more positive about business transformation programmes. Hence, culture must be embedded within the company’s purpose, strategy, and business model.

EY considers corporate culture to have 4 ‘architectures’. In its June 2016 report, Governing culture: practical considerations for the board and its committees, EY conceptualises culture as having four key components: political, social, performance, and organisational. The political component entails the distribution and balance of strategic power within the company. The social is the nature of interaction between all stakeholders. Performance sees how external economic and risk factors influence behaviour. The organisational demonstrates how internal rules, practices, and processes influence attitudes. Other more complete, holistic typologies of organisational culture, which also recognise that the prevailing organisational culture of a company influences every facet of its operations, are offered by - among others - The Institute of Business Ethics, and the Chartered Institute of Independent Auditors.

To remain appropriate, effective and fit-for-purpose, corporate culture must be measured. As with definition, monitoring the abstract nature of culture is difficult. A helpful though indirect approach is to consider ‘proxy’ indicators that reflect a variety of functions across the business. For example, monitoring employee turnover, levels of sickness related absenteeism and customer satisfaction scores could illuminate whether there is a potentially unhealthy culture within a company. In addition, instances of whistleblowing or other grievances may indicate problems. Finally, monitoring organisational culture, though difficult, is vital; an unhealthy culture can take years to reverse and ongoing surveillance allows senior management to make early changes if problems are detected.

Culture

An organisational ‘culture’ is the collective ideas, customs and behaviours of an organisation or company. As it can be difficult to identify such an abstract concept, it is helpful to think of culture as the articulated values or beliefs of a company. A company’s culture does not just refer to interactions between individuals, but rather embodies all elements of what a company does, from the boardroom through to day-to-day operations. Culture is a key component in any business, influencing the strategic direction, decision processes, response to risk, management and all business functions. It may be informally categorised as ‘the way we do things around here.’

Core values

‘Core values’ are principles that guide all of a company’s actions; highlighting an ultimate set of behaviours and skills. A company’s values lie at the core of its culture.

Employee engagement

‘Employee engagement’ is a workplace approach which hopes to produce conditions in which all members of an organisation are able, and feel motivated and incentivised, to give their best each day. Effective employment engagement strategies ensure that the goals and values of organisations and its employees are aligned, leaving staff with an enhanced sense of purpose and wellbeing.

Employee voice

An ‘employee voice’ is heard when an organisation sees its people not as the problem, rather as central to the solution, to be involved, listened to, and invited to contribute their experience, expertise and ideas. Employee voice exists where the organisation has put mechanisms in place to enable it to have an ongoing conversation with its staff, in different ways, to ensure every voice is heard (source: Engage for Success).

Engaging managers

'Engaging managers' are those who focus their people and give them scope, treat their people as individuals and coach and stretch their people whilst building strong relationships. Duties may include identifying company wide areas for improving culture, running and managing employee surveys and educating employees about culture. (source: Engage for Success).

Internal auditing

‘Internal auditing’ is a catalyst for improving an organisation's governance, risk management and management controls by providing insight and recommendations based on analyses and assessments of data and business processes.

Proxy measures

‘Proxy measures’ are indirect measures of the desired outcome which is itself strongly correlated to that outcome. It is commonly used when direct measures of the outcome are unobservable and/or unavailable.

Examples: Proxy or indirect measures include values training undertaken by a company, references to culture a the company chairperson’s annual reports, and embedding values in long-term pay incentives.

Direct measures

'Direct measures' means that one specific variable is measured without the additional measurement of any intervening variables, or proxy measures. A direct method of measurement removes any interpretive linkage needed between the proxy and the variable of interest.

Examples: Direct measures include publicly stated principles and values, or a survey used to assess an understanding of company culture.

Metrics

‘Metrics’ are standards of measurement, here used by a business to assess their culture

Answering YES

All Businesses MUST

Explain the lens through which they recognise and monitor their culture (e.g. stakeholder engagement, customer satisfaction or staff absenteeism records, employee turnover)

Set out their defined values and purpose and explain if and where those are made public (e.g. via a website)

Describe any strategy for incorporating and demonstrating core values across the organisation

Describe their organisational culture and if and how these issues are considered at the board/senior management level

Confirm that they monitor organisational culture on an ongoing basis and describe how

All Businesses MAY

What are the key elements of your company’s culture?

Explain how their culture is manifest in day-to-day practices and processes

Explain how they correct misalignment between desired and actual organisational culture within the organisation

Explain whether they take a ‘tone from the top’ approach to corporate culture

Explain how they identify and manage any gaps between defined culture and wider stakeholder perception

Describe examples of how board members (or executive directors) have embodied and demonstrated the desired culture

Explain whether various departments are resourced and informed to embed and assess culture and values

Explain whether engagement managers are in place across the organisation

Explain whether they engage with investors on the behaviours they are encouraging in organisations and to reflect on their own culture

Explain whether they enable the employee voice to be heard across the organisation

Explain who in the business is responsible for influencing and enabling culture

Does the business recognise/regard its culture as an asset, if so, how?

Does the business have any awards or certifications based on, or borne out of, their recognition of and high standards of performance on culture?

Answering NO

All Businesses MUST

Explain why they do not or cannot answer YES to this question and list any mitigating circumstances or any other reasons which apply

All Businesses MAY

Indicate any relevant practices and policies, even if they do not fully address the specifications for answering YES

Mention any future plans

DON'T KNOW is not a permissible answer to this question

NOT APPLICABLE is not a permissible answer to this question

Version 1

To receive a score of 'Excellent'

Developing healthy culture is a strategic priority. Organisational culture is defined and measured in a fully inclusive, open and accountable fashion.

  1. E.g. Behaviours consistent with desired organisational culture are incentivised
  2. E.g. Values are clearly articulated – e.g. via company website and/or annual report
  3. E.g. Uses a comprehensive variety of direct and proxy measures to measure and monitor culture
  4. E.g. Integrates culture with company purpose, strategy, and business model
  5. E.g. Proactively outlines future plans and intentions
  6. E.g. Employees have a clear idea of what is expected from them
  7. E.g. Encourages feedback from a wide range of sources (stakeholders, evaluators, independent experts, suppliers, customers, etc)
  8. E.g. An effective ‘employee Voice’ enables members of the workforce to proactively engage with developing and manifesting healthy coporate culture
  9. E.g. Acknowledges and corrects errors with employees and/or customers
  10. E.g. Success and good performance are analysed through the lens of culture
  11. E.g. Hiring practices consider whether applicants are a good ‘fit’ for the company, in addition to competency
  12. E.g. Has whistleblowing procedures in place
  13. E.g. Board has identified if ‘misalignment’ between desired and actual cultural values represents risk
  14. E.g. Displays a robust commitment to monitoring various non-financial risks
  15. E.g. At the board level, can demonstrate how cultural considerations play a role in the thought process and reporting of committees
  16. E.g. Ensures management understands the everyday operational duties of staff
  17. E.g. Leadership effectively provides clarity of purpose and expectations
  18. E.g. Has clearly defined strategic narratives
  19. E.g. Has policies in place to ensure all stakeholders are able to provide input
  20. E.g. Has reporting processes in place to ensure various stakeholder inputs are appropriately considered
  21. E.g. Engagement managers have the appropriate and necessary coaching skills to progress their team members
  22. E.g. Effective stewardship measures implemented to engage others about culture and encourage better reporting
  23. E.g. Has a process in place for reviewing and revising employee voice on a regular basis
  24. E.g. Board members and Senior Managers take a personal responsibility in demonstrating their delivery of the agreed culture
  25. E.g. Internal auditing is undertaken to monitor corporate culture
  26. E.g. Describes metrics and direct or indirect indicators used to measure company culture
  27. E.g. Company is an exemplar of good cultural practices to other businesses in the field
  28. E.g. Culture is a key strategic decision in supply chain and investment decisions
  29. E.g. Understands and describes the work environments necessary for company culture to be most easily demonstrated
To receive a score of 'Good'

Importance of organisational culture is understood. Attempts to define and monitor culture are undertaken with different stakeholders in mind.

  1. E.g. Encourages feedback primarily from stakeholders
  2. E.g. Effectively manages conflicting priorities between stakeholders
  3. E.g. Develops goals and objectives against which success can be measured
  4. E.g. Demonstrates awareness of the impact culture may have on risk
  5. E.g. Company leadership is engaged in circumstances where actual/desired culture are misaligned and feel engaged with the organisation's goals
  6. E.g. Employees understand what is expected of them
  7. E.g. There are measures in place to discourage deviant director, manager, and staff behaviours
  8. E.g. Strategies are in place to address customer misalignment between actual culture and public perception
  9. E.g. Consistently demonstrates a positive ‘tone from the top’ with regards to company culture
  10. E.g. Facilitates open dialogue between management and workforce through ‘open door’ policies, scheduled conversations/meetings or similar
  11. E.g. Has reporting procedures in place to ensure employee input is appropriately considered
  12. E.g. Has training policies to ensure managers know how to effectively engage staff in a positive manner
  13. E.g. Uses a comprehensive variety of proxy measures to measure and monitor culture
  14. E.g. Culture is considered when determining supply chain and investment opportunities
To receive a score of 'Okay'

Organisational culture as a concept is recognised, although attempts to define and monitor it may only be undertaken in an ad-hoc and/or superficial way. Some future plans and commitments are outlined.

Examples of policy and practice which may support the OKAY statement:

  1. E.g. Culture is treated as a standalone issue, without reference to other aspects of business
  2. E.g. Measures taken to deliver a positive culture are often ad-hoc and non-comprehensive
  3. E.g. The definition of culture is shareholder driven with minimal input from wider stakeholders
  4. E.g. More comprehensive future policies are well articulated but not yet implemented
  5. E.g. Communication channels between between board/directors, managers, and employees could be improved
To receive a score of 'Poor'

No meaningful engagement on culture and/or no acknowledgement that culture is an important business and responsibility issue.

Examples of policy and practice which may support the POOR statement:

  1. E.g. No engagement with culture as a salient topic
  2. E.g. No indication of positive future intention to identify company culture
  3. E.g. No measures in place for employee voice to be heard and reviewed