How can corporate culture be measured?

With poor corporate culture perceived to be a business risk in itself, what should companies be doing to mitigate that risk and ensure they have the right culture in place?

GoodCorporation asked L’Oreal’s Senior Vice President & Chief Ethics Officer, Emmanuel Lulin to explore the value, strategic importance and practicalities of measuring corporate culture at a business ethics debate with leading UK corporates. The discussion is summarised below.

The challenge of ethics versus compliance has often been debated, but with innovation moving so fast, regulation is often lagging behind. This should bring ethics to the fore, as organisations cannot always rely on whether or not they have the legal right to do something.

Currently, too little is published about the ethics and cultural integrity of an organisation, despite calls from the investor community for more information on culture to be made available. Some investors perceive culture to be a real indicator of long-term business sustainability, but few investors and few companies seem to be trying to measure and report on it.

The Role of Investors

For many investors, it was suggested that a second set of accounts containing an assessment of long-term viability and cultural indicators might be as, if not more, useful than traditional financial reporting. This could include performance against softer metrices being incorporated into executive remuneration packages. But how could these ‘alternative accounts’ be developed and what would be the measure of culture used?

Culture indicators

There is currently no established indicator of culture, but a myriad of factors that contribute to a healthy and ethical corporate culture. In the absence of an established mechanism, the key for corporates is to identify the indicators that will provide a meaningful and accurate assessment of their organisational culture and agree how to monitor this over time.

This needs to be led from the top, but with input from across the organisation, including a variety of stakeholders.

The majority of participants felt they measured culture in some form and a number of cultural indicators were explored:

• Speak-up: do people feel free to speak up without fear? How is this done, measured and reported? Does this vary by department, country or location?
• Employee engagement surveys: make sure the right questions are asked and the responses analysed, there is a real risk that these surveys become routine or a tick-box exercise and are not used to respond to cultural problems. Test that the responses are accurate and consider supplementing with focus groups or external audit. Cross referencing the results with other metrics e.g. speak-up data, can be a good way of getting a more accurate picture.
• Recruitment: does your organisation recruit “good people”? How do you test that they will embrace the culture you are trying to establish? How do HR/talent management teams embrace this?
• Reporting on bullying, harassment and discrimination: the number of complaints made, investigated and substantiated, together with the details of any sanctions imposed, should be recorded and reported. In a healthy corporate culture such behaviours will not be tolerated, and it is important to demonstrate that this is the case.
• Measurement against values or ethical principles: businesses need to assess how this can be done and what KPIs should be used.
• Implementing the code of conduct: include stats on training and how the company ensures that the code is followed. What sanctions are in place and implemented for breaches of the code? Does this apply across all levels of the organisation? Are there any double standards? Does the company protect powerful people?
• Business expenses management and Gifts & Hospitality registers: How this process is managed and monitored can provide good evidence of whether the right behaviours are properly embedded.
• Stakeholder feedback: canvas the views of other stakeholders to gain an understanding of their perception of how the organisation operates – suppliers and customers can shed a good deal of light. Customer net promoter scores could be a useful indicator of internal culture.
• Staff retention and tenure: Do the right people stay in their jobs for the right reasons? Are there any senior people who are beyond challenge? Can authority be questioned? Are any individuals beyond sanction?

Detailed analysis

To assess and understand culture properly, organisations need to take a holistic approach, analysing the output from all these indicators to identify whether or not there are any signs of cultural weakness or failings. An action plan should then be put together to strengthen and improve culture.  Reviewing performance against the same set of metrics will enable the business to monitor progress over time, demonstrating a commitment to building and embedding a strong corporate culture.

Businesses should also consider how this exercise is reported on, be it internally to employees, just to the board or externally as part of the annual report. Internal transparency can be extremely powerful in driving change, so it is vital to report findings openly within the organisation.

To be most effective, however, this must be seen as more than a problem-spotting exercise. Establishing a strong corporate culture adds value and is of strategic importance. A healthy culture can deliver better sales/contracts, improve the recruitment and retention of more talent, deliver greater shareholder value and so improve access to investment.

While it is vital that this information be collected and reported at board level, the board must be seen to engage with the findings and demand that the organisation improves. Establishing a strong culture should be seen as non-negotiable at board level. Boards need to consider the results of these measures and be sure to engage with what needs to be done to address any weak areas of culture.

The root cause of poor culture is often when a strong charismatic leader can persuade good people to do bad things. Establishing the right behaviours is therefore vital to any healthy corporate culture. Linking desired behaviours to personal development plans and remuneration can be an effective way of avoiding the more damaging sales-driven incentives that have led to malpractice in the past.

The GoodCorporation View

Poor corporate culture is described by the Financial Reporting Council (FRC) as a business risk in itself. So ensuring that the right culture is in place should be a core focus of the board, yet few regularly take responsibility for reviewing or assessing corporate culture. In its recent consultation on the UK Corporate Governance Code, the FRC states that boards should seek assurances of the health of their company’s culture by taking the temperature on a regular basis. GoodCorporation’s white paper Measuring Ethical Culture, explores this in more detail. It identifies the key drivers of a healthy, ethical culture and expands on our own Ethical Culture Healthcheck. This healthcheck looks at measuring corporate culture and proposes a ‘net ethical culture’ score, measuring a company’s culture against the average of the national workforce as a whole.