May 29. 2020

Is the corporate culture in trouble?

Is the corporate culture in trouble?

It seems more and more warning signs are flashing that the corporate culture of many organizations has deteriorated. According to PWC’s latest 2020 Global Economic crime and fraud survey: “Fraud and economic crime rates remain at record highs, impacting more companies in more diverse ways than ever before.”

PWC’s global economic crime and fraud survey 2020

Negative customer reviews as well as former employees’ feedback on platforms like Glassdoor point to an ever-deepening corporate culture problem. It is not only the primary stakeholders: employees, suppliers, etc. but also secondary stakeholders like regulators who start to notice this trend.

As a result, the Institute of Internal Auditors has just published new practice guidance on auditing culture:

IIA’s New Practice Guide on Auditing Culture

Top-down corporate culture audits

Given the above trends, internal audit functions are trying to get a grasp of assessing corporate culture. There is a line of thought to conduct a so-called: top-down audit approach.

As part of a top-down perspective, we can observe two layers in the formation, transformation, and potential erosion of corporate culture.

The first layer shows negative attitudes and or behaviors at the senior management level, that can transpire into various types of abuse or even fraud. Ultimately leading to potentially significant financial, reputational loss along with fines and penalties.

Key indicators of 1st layer corporate culture problems:

  • Control environments’ red flags such as lack of corporate ethics and conduct policy
  • Lack of corporate ombudsman or reporting hotline
  • Senior management is not a key proponent of regular ethics training
  • Bare minimum philosophy and approach to meet regulatory requirements
  • Internal audit and compliance functions are shunned within the organization
  • Management does not lead by example when it comes to corporate ethics and conduct
  • No and/or inadequate identification, monitoring, and reporting of ethics and conduct breaches…

The second layer is an undesirable transformation of corporate culture, which can take place at the mid-management and even lower levels.

Key indicators of the 2nd layer corporate culture problems:

  • Accountability unfairly differed from senior management to middle management
  • Middle management does not see a path to senior management roles
  • Buddy system of referring each other for promotions
  • Suboptimal outsourcing decisions, always going with the biggest brand name, driven by “job insurance”, saving my job at any cost attitude
  • Best in class external job applicants are unfairly passed over without explanation
  • Checking the box recruiting practices i.e. form over substance
  • “Star performers”, who got promoted almost every six months, perceived as politicians
  • Promotions based on contacts vs. merits

A granular audit approach – pattern recognition and mapping

“What pattern recognition are we referring to?”

Actually, we are talking about certain behavioral patterns driven by individual benefit maximization vs. the overall corporate interest.

Please, look out for my upcoming article on corporate culture audits via behavioral pattern recognition.

Finally, given the rapid technological and demographic changes, it is not a surprise that organizations are in constant transition. This immense pressure to evolve challenges the corporate culture, which can lead to an erosion of fundamental corporate values and behaviors.

What corporate culture audits your IA function is doing and/or what audit methodology you are planning to develop?

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#corporateculture #internalaudit #governance #professionaltraining #professionaldevelopment #employeesurveys

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