True leadership demands pro-activity—anticipating, planning, and actively steering an organization toward its desired goals. This distinction becomes particularly relevant when addressing organizational culture.
In this article we explore the findings of a recent Auditboard report raising important issues related to organizational culture. It also calls for internal auditors to take proactive steps in managing culture-related issues.
While culture profoundly influences an organization's values and behaviours, a critical question that was not asked is:
Should the audit function be responsible for improving and assuring culture?
Let's take a look...
2023 Organizational Culture and Ethics Report
This report highlights the prevalence of organizational failures due to a troubled culture and emphasizes the importance of assessing and improving organizational culture.
The report mentions that many organizations (4 in 5) are not effectively monitoring their culture, which can lead to significant problems. The role of internal audit in assessing and providing assurance on culture is discussed, with the report presenting insights from a survey of internal audit leaders.
The challenges in this regard include executive behaviour as a critical indicator, a lack of understanding about culture's aspects and risks, reluctance to tackle culture, and a lack of prioritization of culture assessment.
The report calls on internal auditors to take proactive steps in addressing culture-related issues and provides guidance and tools to do so effectively.
Key findings from the report include:
Organizational Failures: The report highlights that numerous organizations worldwide have experienced significant failures due to troubled cultures. Examples include Enron, WorldCom, Volkswagen, Carillion, WireCard, Theranos, and FTX.
Culture's Vital Role: A troubled culture lacking the right tone at the top and a constructive environment is identified as a common factor in these failures. Such a culture can hinder an organization from achieving its strategic goals and objectives in an ethical and healthy manner, while also undervaluing key stakeholders.
Devastating Impacts: These failures have had severe consequences, affecting various stakeholders such as employees, investors, customers, suppliers, and communities. Trust in capital markets is eroded, jobs and retirement savings are lost, reputations are damaged, and long-term sustainable success is compromised.
Culture Risk Indicators: The report highlights that executive behaviour is a major indicator of culture risk. Poor tone at the top, profit-at-any-cost mentality, poor communication, and unethical/illegal conduct are identified as key risk indicators.
Culture Assessment Gap: Despite increased attention and scrutiny, many organizations are still not assessing their culture effectively. A significant number of senior internal audit executives have not been asked by the board or audit committee to provide reports on culture,
Reluctance to Address Culture: A significant percentage of organizations do not formally audit or assess culture, and some employ piecemeal, ad-hoc approaches or limited assessment methods. This reluctance to address culture may lead to significant problems.
Lack of Understanding: Many organizations do not fully understand the various aspects of culture, including its benefits, risks, key elements, drivers, and principles of a healthy culture. They may focus on the benefits while overlooking critical risks.
Importance of Culture Monitoring: The report emphasizes that organizations cannot manage their culture without monitoring it. Boards and executives need to assess the health of their culture continuously and ensure it aligns with expectations.
Priority of Culture Assessment: Despite the impact of culture on organizational success, many organizations do not prioritize culture assessment. They may underestimate the risks or face resource constraints.
The Right Assessment – The Wrong Conclusion?
The report raises important issues concerning organizational culture and the impact that culture can have on mission success or rather mission failure. Undoubtedly, culture is a critical factor in staying between the lines and ahead of risks.
The report extends an invitation to those in audit roles, urging them to break free from passivity and seize the opportunity to guide organizations in recognizing the urgent and far-reaching impact of culture. However, the report does not raise (but it should) the question of whether the audit function should be the driver of culture improvement and assurance.
The problem is that the audit function typically operates as a reactive rather than a proactive force. It also lacks the inherent managerial accountability that would allow it to drive cultural change effectively, which even if it did, would undermine the role of those who should rightfully lead this effort.
Culture emerges as a consequence of actions and serves to reinforce the values associated with those actions. Relying on management reviews, post-incident investigations, and audits reinforces a reactive approach the very thing that the report asks internal audit to change.
This reactive behaviour focused on past events is not true leadership, but rather a form of management. It aligns with internal regulation (loop 1) focused on making course corrections and corrective actions, perpetuating a cycle of reactivity not pro-activity.
True leadership, on the other hand, centres on pro-activity, involving the anticipation, planning, and action required to make substantial progress towards desired outcomes. This forward-looking approach is evident in setting goals, conducting management pre-views, pre-investigations, pre-mortems, capability assessments, as examples. Such practices align with internal regulation (loop 2) focused on operational governance, steering, and establishing the capabilities needed for mission success, representing a more strategic and forward-thinking approach to shaping organizational culture.
In essence, managers manage loop 1 (stay on course) and leaders look after loop 2 (set the right course). To shape culture you need to steer from the front not from the back.
The bottom line is this: leaders (those with managerial accountability) need to lead not manage. While audit can be responsible for aspects of this effort, they cannot be the ones to lead cultural change.
