Hilary Lewis and Richard See Toh explain why building effective organisational behaviour has become a central concern
Cultural issues have a tendency to slip down most boards' agendas despite the intuitive acceptance that maintaining a 'desired' culture is critical to delivering business success. But circumstances are clearly changing, with the increased focus that industry bodies, regulators and public interest groups are placing on the central role of organisational culture.
Regulatory cultural push
The Financial Reporting Council's (FRC) latest updates to its UK Corporate Governance Code, and associated guidance, make clear the increased priority boards must give to building an effective organisational culture. The FRC has stated that during 2015 it will focus on how well boards are doing at assessing this area and will look closely at practices employed by firms to embed good corporate behaviour throughout their organisation.
For insurers, the requirements of Solvency II have underlined the necessity of having an appropriate culture in place. The architecture of Solvency II specifically requires a risk management function that is at the heart of how insurers operate, and companies are required to demonstrate that a well-defined risk management function has been embedded. Underpinning the degree of success to which this is achieved is the culture of the firm.
Carlos Montalvo Rebuelta, executive director at EIOPA, recently expressed his belief that Solvency II "is going to make significant changes in the current risk culture of many insurers", indicating that risk management will need to become a continuous process used throughout the implementation of a firm's overall strategy.
In the UK, the Prudential Regulation Authority issued several consultation papers as it readies itself and the industry for the new Solvency II regime. In particular, CP26/14 - Senior Insurance Managers' Regime has made the following a core responsibility to be assigned to a person holding a controlled function:
- leading the development of the firm's culture and standards;
- embedding the firm's culture and standards in its day-to-day management.
Previously, while the concept of culture had not been ignored by regulators, the emphasis had been more towards oversight rather than making it an explicit area to be addressed. The wider move by regulators to strengthen individual responsibility and accountability for when a firm fails means that members of the board, and senior management, must get to grips with the culture within their organisation.
Why is it so difficult?
Measuring and managing the culture within an organisation can be an enormous task. It is made more complex by the fact that there is not a single culture, but rather an interacting set of subcultures throughout the organisation (Figure 1). These stem from different business functions - for example, the observed differences between the culture of a sales team and an R&D team, or between different business units - such as a customer-facing business unit in Newcastle and a software solutions business unit in New York.
Culture is an emergent property that is not directly observable but is, in part, inferred from the observed behaviours. A common, but ultimately misleading, way of viewing culture by boards and management has been to treat it as something that can be controlled directly through setting some overarching values and the endorsement of certain behaviours.
Instead, the culture that emerges from within a company has been baked in from a combination of past behaviours that have formed patterns of acceptance within the context of existing governance frameworks.
Traditional approaches to assessing the culture that emerges from habitual group behaviours rely on surveying individuals and asking them to essentially self-assess their own behaviours or attitudes. Questions such as: "Do you believe you conform to the principles and values set by your manager?" are presented to survey participants. Such judgmental phrasing, and asking the individual to self-evaluate, is clearly open to bias and manipulation.
Additionally, industry benchmarks can be misleading. A culture is unique to its organisation. It is derived from the blend of activities the organisation places most value on. Even within the same industry, while certain influences are the same for firms - such as regulatory requirements - each firm needs to establish its own benchmark rather than reaching for anything that might currently be put forward as an industry standard.
An alternative approach
Over the past 40 years or so, research has wrestled with the challenge of identifying the features that characterise organisational culture. An approach that has proved successful in determining the emergent properties of culture is based on assessing the organisation against a set of behavioural dimensions. These focus on how organisations respond to key tensions that arise when engaging in different business activities.
Here are some examples of these tensions.
- Do we ensure the standard of our outputs by absolutely following well-designed processes at all times, or do we focus on achieving results in a variety of ways to meet growth aspirations?
- Do we put the well-being and relationships of our people first, or do we prioritise and focus on the accomplishment of their assigned tasks?
Assessing an organisation against a set of dimensions provides a quantitative measure. The methodology described above is deployed by surveying a target set of employees. The survey is designed to ask respondents questions to assess the behaviours observed across different dimensions. The questions are phrased in such a manner to avoid the potential pitfalls of bias and manipulation.
Before deploying this approach, firms can identify an internal cultural profile that they see as appropriate for a given business activity, or area of the business. Traditional benchmarks make comparisons of where the firm sits against its peers according to the extent to which they have items on a list deemed to collectively represent the ingredients of a 'good' culture.
By avoiding that type of flawed, input-based perspective, and instead having a more appropriate outcome-based view of culture, a richer insight is gained, allowing informed recommendations and action plans to be developed that fit with the culture of the firm.
Figure 2 shows how the results can be presented and therefore tracked. Based on firm-wide specific values, the 'ideal' can be mapped (blue) with the current position superimposed (green). Such snapshots can be created for different subcultures that exist - for example, innovation culture, team culture, risk culture, health and safety culture and 'the just' culture. A natural challenge is why we would not want to be at the outer limits for the 'ideal culture' in terms of supportiveness or collaboration. The answer is that this 'ideal' profile has been derived to be consistent with, and best deliver, the organisation's strategic objectives, which varies by business activity.
The board may have determined, and collectively agreed, that in areas where the function of risk management is critical, they do not want collaboration to be so wide-spread that it reduces their ability to react in times of crisis. In other areas, where a culture of innovation is a competitive advantage, the 'ideal' would see the firm encourage as much collaboration as possible.
Measuring culture in action
We briefly outline the insights gained from several examples from firms that have undertaken their cultural profile assessment using this approach.
In shaping the risk culture survey, many organisations like to incorporate language that 'fits' with the organisation and tailor questions to elicit particular insight into perceived values. For example, one firm was concerned about the many different cultures that had arisen from a number of recent acquisitions. Opening up the bonnet on risk culture provided the opportunity for firms to put under the lens wider cultural dynamics and hence put risk culture within the wider organisational context.
Compared with applying a classic 'industry benchmark' approach, companies find the ability to map senior management's view of the future cultural state across different business activities appealing. This is because it provides the information to allow management to establish a meaningful internal profile for the culture the board was seeking to embed.
The analytics from the online survey allowed insurers to identify specific issues and detect areas where the cultural dynamics were close to their ideal profile. Mapping the future benchmark also meant the firms could align senior management's views about what their desired culture actually looked like. For one firm, an area of apparent misalignment was found not to be a material issue affecting risk management performance. Another was able to pinpoint areas requiring prompt attention, despite being perceived to have the right ingredients in a risk culture context.
Armed with a diagnosed culture, they were able to develop a cultural programme tailored to specific business activities and so focus resources on areas of greatest uncertainty, and target those behaviours considered to be outside the values of the organisation.
The challenges of measuring the culture of an organisation are clear. The intuitive benefit of being able to determine the appropriate blend of subcultures that suits the individual company is the first step to ensuring that the desired state has been, or is well on the way to being, embedded within the firm. The regulatory push impelling firms to address culture explicitly is here to stay. Boards must ensure that they, as the individuals directly accountable and responsible for the behaviour of the firm as a whole, can demonstrate their ability to accurately measure, monitor and manage the culture within their organisation rather than simply demonstrating that they have a set of ingredients similar to other companies, which they hope will lead to a good culture.