Operational risks: cultivating a healthy culture

New research from the Chartered Institute of Internal Auditors (CIIA) has revealed that boards are not taking culture seriously.

The failure to tackle this subject comes despite the visible impact a culture crisis can have on reputation, public trust and damage to long-term sustainability, the CIIA suggests in a hard-hitting report: ‘Cultivating a healthy culture: Why internal audit and boards must take corporate culture more seriously in a post-Covid world’.

The report also features insights by London Business School’s (LBS) Leadership Institute, and is based on a survey of over one hundred senior internal audit executives from the private, public, and third sectors across the UK and Ireland.

As the introduction makes clear, an unhealthy or sub-optimal culture has wide ranging impacts: at its worst it is a critical risk to the attainment of the organisation’s aims and objectives and the sustainability of the organisation in the longer term.

These facts, it suggests, have been widely recognised in the internal audit profession for over a decade now and are repeatedly highlighted by a wide range of events we see in the media, regulators’ commentary, and the analysis of the root cause of company collapses.  Given this background, the report adds, the need for internal audit engagement is clear. Culture is a risk and is fundamental to the success of every organisation.

Key findings:

  • Over half (52.4%) of senior internal audit executives have not been asked by the board or audit committee to provide reports on corporate culture or equality, diversity and inclusion initiatives
  • Around a quarter (23.2%) said their board has not established and articulated what culture it wants, despite this being fundamental to the effective leadership, resilience, and governance of an organisation
  • 7% believe the Financial Reporting Council should act by further strengthening the UK Corporate Governance Code in regard to corporate culture, putting greater emphasis on the responsibility of company directors to promote, monitor, and assess the culture, and, if required, seek assurance that management has taken corrective action.

According to the report, with organisations facing significant challenges in attracting and retaining talent, it has never been more important for boards to ensure they focus on cultivating and embedding a healthy corporate culture. This includes ensuring workplaces are more equal, diverse, and inclusive to boost productivity and enhance employee well-being.

Leading risks

The survey also found that the top three risks that have the biggest impact on the corporate culture are: human resources, talent management, and recruitment and retention risk (64.5%); inclusion, equality, and diversity risk (34.1%); health, safety and staff wellbeing (31.6%).

However, the research highlights the risk of a post-COVID-19 organisational culture crisis, exacerbated by a lack of leadership from the top, that now needs to be urgently addressed by boards. With large swathes of the workforce being forced to work remotely for much of the last two years, and the move towards ‘hybrid’ working in the longer term, many organisations are grappling with how to promote, embed and sustain their culture going forwards.

The report urges boards to be pro-active and use their internal audit function to provide assurance when it comes to corporate culture, and where necessary recommend management take corrective action to address cultural erosion and decay.

C-suite mindset
Vyla Rollins, executive director of the LBS Leadership Institute said: “It is clear the dramatic examples of governance breaches we are currently witnessing are facilitated by the mindsets, behaviours, and beliefs of those in the boardroom and C-Suite.”

She added “Boards of directors, executives and non-executives alike, are ultimately responsible for overseeing the development of healthy corporate cultures, and feigning a lack of understanding of how to do this is no longer acceptable. The insights, practices, case studies, success stories, and recommendations showcased in this research report will make it even more difficult for boards to say to stakeholders and regulators that they have no control or influence over the cultivation of culture in their organisations.”

John Wood, CEO of the CIIA noted: “Recent culture-related scandals have unfortunately shone a spotlight on the impacts associated with an unhealthy organisational culture – including catastrophic damage to reputation, public trust, and value.

“Yet as our research demonstrates those at the top do not appear to be taking the risks associated with corporate culture seriously. Urgent action is now required by leaders across all sectors to cultivate a healthy corporate culture to protect reputation and long-term sustainability. With organisations adopting new working models in a post-Covid world, now is the time for boards to get a grip on corporate culture, including seeking assurance from their internal audit functions.”

Read the full report: ‘Cultivating a healthy culture: Why boards and internal audit must take corporate culture more seriously in a post-Covid world’.

The survey found that the top three risks that have the biggest impact on the corporate culture are: human resources, talent management, and recruitment and retention risk (64.5%); inclusion, equality, and diversity risk (34.1%); health, safety and staff wellbeing (31.6%).

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