October 9, 2015
Corporate governance scandals are coming thick and fast this year, with Volkswagen, Petrobras, and numerous financial-industry governance failures prompting much handwringing. These events demonstrate that governance structures and compliance teams are only as strong as the cultures that surround them: Culture eats strategy for breakfast, and moves on to devour process for lunch.
Companies can have state-of-the-art processes and huge compliance teams and still fall victim to ethical lapses that cost billions in lost money and reputation. Compliance teams can only ensure that processes are followed—it is the responsibility of the Board and the C-Suite to set strategy, goals, and incentives, all of which have a profound effect on culture. Resilient organizational cultures do not delegate responsibility for ethics to the compliance team—they embed their values into every decision the company makes.
Focusing on building a resilient corporate culture is an excellent investment but requires deep thought about relationships with stakeholders and the environment, incentives, strategy, and what behavior gets rewarded organizationally. It can be daunting, but a review of common pitfalls can be a good guide to what might go wrong, and how to build genuine resilience.
1. Growth Targets
Corporations exist to make money, to grow revenue and sales and satisfy shareholders. Financial reporting is driven by a quarterly calendar, and budget targets assume growth by default. But an overwhelming focus on growth at all costs can make organizations vulnerable. Volkswagen’s reported push to be number one in diesel meant it created targets it could not fulfill, and an apparently increasing conviction that the ends justify the means.
To build a resilient culture, companies need to focus on how they achieve growth, not just whether they meet targets. This requires actively creating an alternative narrative about the company’s identity and success. Companies with resilient cultures make a long-term commitment to ethics, sustainability, and engagement with all stakeholders across society—not just with investors.
2. Leadership
Leadership is the most critical factor driving organizational culture, as employees mirror leaders’ behavior, which cements cultural norms. Engaged leadership is critical: Boards and executives that are arrogant, complacent, and deliberately disengaged from the front line of business put their companies at risk, far more than “rogue employees” do. Many leaders run authoritarian, command-and-control structures that purposely encourage a lack of transparency—so that they have plausible deniability if problems arise. But leaders of resilient cultures take personal responsibility for oversight, engage employees effectively, and make difficult decisions to protect their teams.
3. Accountability and Complexity
Organizational complexity brings its own challenges. The realities of doing business across time zones, geographies, and product lines have led to a focus on organizational matrices and shared responsibility. This can help build resilience by increasing cooperation and information flows. Resilient cultures complement the benefits of shared responsibility and empowerment with a clear understanding of and responsibility for managing individual risks and reporting problems.
4. Incentives
Pressuring sales teams to meet high sales targets—and rewarding this to the exclusion of behavior or ethics—is a significant causal factor in corruption and fraud. Incentive and reward systems tend to be out of the remit of compliance teams and based on budgets set at the corporate level, which human resources departments then translate into performance-management systems.
Resilient cultures think carefully about incentives and set targets and compensation based on thorough review of market conditions. Resilient cultures also make ethical behavior a key factor in determining executive compensation. However, these strategies will only succeed if the corporate culture allows for an open discussion of ethical challenges.
5. Performance
In many companies, high-performing teams and individuals develop a mystique that shields them from scrutiny and makes them increasingly autonomous and powerful. These teams are often characterized by high in-group loyalty, secrecy, and disproportionate influence. When the basis of success is illegitimate, the presence of these “untouchable” teams in the organization can perpetuate problems and legitimize bad behavior. Resilient cultures have leaders that engage with both high- and low-performing teams and reward good conduct in both.
6. Transparency
Euphemisms to describe fraud and bribery are almost universal across cultures, reflecting a desire to diminish the impact and sense of wrongdoing. Resilient cultures embed explicit conversations around ethics and values into all decisions and understand that language is a powerful tool to drive behavior in organizations. At one resilient company, executives read the company mission statement aloud before any big decision. This simple technique can be surprisingly effective at driving group behavior in the right direction
7. Urgency and Necessity
Companies tend to consider financial results and reporting in fairly short time horizons, which can create a culture of treating compliance processes as pro forma, or ignoring them entirely. Companies that operate in a pervasive narrative of fear and urgency worsen the risk of ethical lapses, and actually don’t save time in the long run. If a company is known to pay bribes, for example, the news will spread in the wider community, increasing the number of bribe requests and delays the company experiences.
Resilient cultures understand that proper oversight and decision-making takes time and that considering the consequences of decisions over the long term is worthwhile. In an era of inequality, social disruption, and unprecedented climate change, it is time to reconsider long-term strategy and decouple it from the quarterly reporting cycle where possible. Resilient cultures understand that inclusive and responsible business is not just the right thing to do, it makes long-term commercial sense.
Resilient cultures take time to build and develop, but the rewards for a company are enormous. Results include engaged and empowered employees, thorough and considered responses to changes in the external environment, enhanced reputation and stakeholder relationships, and inspirational leadership. And, most importantly, the organization becomes truly sustainable.
We will explore various facets of resilience at the BSR Conference 2015: Resilient Business, Resilient World, where Taylor will lead the session "Workforce of the Future: Building a Resilient Corporate Culture."
Let’s talk about how BSR can help you to transform your business and achieve your sustainability goals.