A cultural misalignment can handcuff your risk management
It’s no longer enough for leaders to understand that a healthy culture can make the difference between double-digit growth and a painful descent into failure for an organization.
Failure can also result if a culture is healthy but misaligned with the mission of the organization. It’s important for leaders to cultivate the right type of culture to successfully drive their organization forward.
“Is your firm’s culture aligned or misaligned to your desired culture?” said Erin Lentz, a Partner in Grant Thornton Risk Advisory Services practice. “That’s what you want to look for. You want to establish an environment and reward structure and other organizational attributes that are consistent with the results and behaviors you are seeking.”
For example, a technology-focused startup might never get off the ground if its culture and processes discourage risk-taking while creating a complex hierarchy and intricate rules that guarantee quality but hamper innovation.
In this article, we will focus on five general categories of corporate culture. Knowing which culture fits your organization best can help you align your processes to develop that culture and reinforce it through your ERM system and internal audit.
The following are types of corporate culture. It is possible that multiple subcultures may exist within a company and some companies, such as Amazon and Apple, may fit into two or more types. Do you know which one you fit into?
Customer-focused
Top area of focus: These companies make the customer the core of their focus and prioritize value creation for the customer above all else
Investment priorities: Processes, operations, technology and people to transform ability to meet customer needs
Key metrics: Customer feedback/satisfaction survey results
Organizational traits: Transparency and empathy
Examples: Disney, Hilton, Nordstrom, Apple, Trader Joe’s, Amazon
Employee-focused
Top area of focus: Creating an environment where employees feel valued and are inspired to perform their best helps these companies succeed
Investment priorities: Learning and development for employees, collaboration tools and employee well-being
Key metrics: Employee turnover, employee engagement survey results
Organizational traits: Collaboration, inclusivity and transparency
Examples: HubSpot, Microsoft, Google
Continuous improvement
Top area of focus: Ongoing improvement of products, services or processes — often through incremental steps — is the priority for these companies
Investment priorities: Research, benchmarking, employee training on data analysis to recognize root causes/identify solutions, and efficiency-creating expenditures
Key metrics: Key performance indicators related to product and service quality
Organizational traits: Efficiency, experimental (using trial and error to drive improvement)
Examples: Amazon, Apple, Toyota, manufacturing companies
Risk and quality
Top area of focus: A hierarchical culture with many formal rules and processes helps these organizations prioritize quality and avoid risks
Investment priorities: Strong governance structures and controls, mandatory employee training geared toward maximizing quality and minimizing risks
Key metrics: Reputation and credibility scores, compliance-related statistics, key risk indicators
Organizational traits: Commitment to ethical behavior, clear accountability for results, knowledge sharing, transparent reporting and rules compliance
Examples: Professional services firms, financial services firms, private equity firms
Innovative
Top area of focus: Disruptive thinking and a fast-paced culture help these companies develop ideas quickly and get them to market before their competitors
Investment priorities: Funding of experimentation and ideas, collaboration tools
Key metrics: Speed of execution/time-to-market statistics, R&D spending, customer satisfaction scores, percent of sales from new products
Organizational traits: Creative, collaborative, flexible, engaging, welcoming opposing viewpoints, candid, purpose-driven and accepting (and even rewarding) of failure
Examples: Uber, Lyft, Tesla, Apple
Matching processes to culture type
Once organizational leaders determine what type of culture fits their organizational structure, they can evaluate whether their day-to-day processes support and reinforce that culture. The following processes and functions should be evaluated (example questions for evaluation of each process/function are included below):
- Learning and development: What are you doing to aid the development of your employees?
- Technology and process management: How easy is it to request software? Do employees have access to the right technology?
- Rewards and recognition: What are employees rewarded for?
- Performance management: Against what attributes are employees’ performance measured?
- Engagement and communication: How are employees engaging with one another and senior leadership? Is the wording in messages from leadership consistent with the mission?
- Recruiting and onboarding: How are you attracting talent and where are you searching to find people?
- Leadership: How does leadership interact with employees? What is the tone at the top?
- Environment: Does your office have open spaces or cubicles?
Take performance management at a company with an innovative culture, for example. To encourage creativity and risk-taking by employees, the company’s incentives would reward development and speed to market while accepting (and perhaps even rewarding) inventive ideas that ultimately fail.
“The first step is knowing where you’re misaligned and what the misalignment is,” Lentz said. “If you’re misaligned in your performance management, for example, maybe you need to change the employee incentives or the reporting structure of the coaching model.”
Depending on the company culture, though, even the implementation of changes to align with the culture are likely to vary. For example, an innovative company that’s built for speed would be expected to realign its processes to its culture more quickly than a slower-paced company with a risk and quality culture.
Measuring culture
Although culture on its surface appears to be difficult to quantify, a culture assessment can be used to obtain data on how closely an organization’s processes match its culture type.
The assessment can use:
- A cultural dynamics survey: This tool helps determine if the organization is healthy and its culture is aligned with the organizational strategy.
- Data analytics: An examination of employee turnover rates, employee survey feedback and other key metrics that may be customized based on your type of culture can identify gaps and opportunities for improvement.
- Document review: Leadership communications can be examined to see how well language and messaging match the culture type.
- Senior leadership interviews: Discussions with key personnel can enable comparison between leadership’s strategy and the culture experienced by team members.
- Observation and shadowing: Do real-life behaviors reflect the intended culture? Watch and find out.
- Focus groups: Guided sessions on the corporate culture can enable valuable feedback on whether the culture matches the organization’s intentions.
What happens in a mismatch?
A mismatch between an organization’s culture type and its actual culture can cause breakdowns in the three lines of defense that are needed for effective risk management:
- First line of defense: Management. If the internal controls and procedures monitored by management don’t align with the organization’s culture, the entire risk management process may be compromised.
- Second line of defense: ERM/compliance function. The risk management function can’t adequately monitor specific risks if they’re not aligned with culture in the first place.
- Third line of defense: Internal audit. If risks aren’t aligned with culture, internal audit may provide assurance based on a risk management framework that’s flawed.
“If [culture is] dysfunctional, then you have problems with the effectiveness of the whole system of risk management.”
“The culture is the environment in which the first, second and third lines of defense are operating,” said Lane Kimbrough, Senior Director, Enterprise Risk Management for Grant Thornton. “If it’s dysfunctional, then you have problems with the effectiveness of the whole system of risk management. But if it’s dynamic and well-aligned, then these three lines of defense and the whole employee body will be much more effective in how they operate and manage risk.”
An unending opportunity
The most encouraging thing about culture is that there are always opportunities to improve its alignment with an organization’s chosen culture type. Culture also can shift over time as a result of internal or external developments.
For example, the process changes related to the remote work necessitated by the COVID-19 pandemic created challenges in collaboration and creativity that particularly affected companies with innovative cultures. Whether through improved collaboration technology or return-to-office mandates, innovative companies worked hard to overcome these challenges.
The enhanced focus on employees that has resulted from recent talent shortages also has resulted in a greater awareness of culture.
“People care more about culture, and they recognize that culture has a large role in risk management,” Lentz said. “It’s not just the companies that are recognizing it. Regulators and boards of directors are recognizing this as well.”
With this recognition comes a responsibility to determine your culture type and make sure your processes are aligned with it. The best leaders understand that organizational culture is like engine oil.
When properly applied and maintained, the oil keeps all the important parts lubricated to keep an engine running smoothly and a vehicle heading in the right direction. When oil breaks down or deteriorates, you’re going nowhere.
The next step is to realize that a sports car needs a different type of oil than a dump truck, and to make sure you develop the type of culture that fits your organization best.
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