The Evolving Role of Organisational Culture in Good Governance

Leaders everywhere are facing a business landscape that is changing at an unprecedented rate. In this new environment, it is the organisations capable of continually and seamlessly adapting to change that will succeed and be the champions of tomorrow.

But continuous, smart adaptability cannot be achieved through strategy alone. Nor can it be effectively managed through top-down direction from senior management at every turn. It requires a kind of organisational ‘instinct’, in which the whole organisation is ready to move with you, pulling together against shared goals, values, and ways of working.

This unity of purpose and effort, in a nutshell, is culture. Culture is the living, breathing cohesive force that helps everyone move forward and adapt together, in the face of continual change, to realise an organisation’s vision.

Mr. Peter Drucker uttered his famous dictum, ‘Culture eats strategy for breakfast’ in 2006. It’s become a truism in business. But the real truth of it has been driven home time and time again, ever since, putting a spotlight on culture’s central role in business success or failure.

The global financial crisis of 2008 revealed in stark terms how the wrong risk culture can seriously undermine good governance, with far-reaching consequences for lenders, customers, and the wider economy. Then in 2020, COVID triggered a transformation in the workplace, facing employers with significant new challenges in recruiting, retaining, and engaging employees, especially young entrants, including Generation Z, who are prioritising flexible workplace arrangements and cultures focused on well-being.

In the face of new competitive pressures, mergers and acquisitions have become an increasingly important business strategy. But a majority fail to meet objectives, a significant portion due to cultural incompatibility. Clearly, there is a need to conduct effective ‘culture due diligence’ to help ensure deals can realise their expected value.

Digital transformation is a critical priority for businesses across sectors. But implementing new digital strategies is not just about technology. It requires new, digitally-oriented mindsets among employees - new individual and collective approaches to problem-solving - to effectively adopt a new digital culture.

Finally, the global sustainability agenda is requiring deep shifts in attitudes and behaviours. Organisations must understand and prioritise the concerns of a range of stakeholders and build environmental and social sustainability for the long term. Doing this requires a shift in culture from the top down.

For all these reasons, C-Suite executives are increasingly identifying organisational culture as a strategic business priority. In a 2021 study by a leading global recruitment firm, more than 80 percent of CEOs said that they had focused on culture as a key priority over the prior three years.

However, most leaders are finding it hard to ‘crack the culture code’, to know how to effectively measure, manage, and transform their organisational cultures. This requires a shift in culture, from the top down.

The Role of Boards on Culture

So, what should be the role of boards in helping organisations meet the culture challenge?

Culture plays a central role in matters core to good governance: shaping vision and values, executing strategy, and building and maintaining reputation with stakeholders. It would therefore seem that boards, as an organisation’s central governance body, must play a strategic role in shaping culture and overseeing the culture programmes of executive management.

To date, however, there has been relatively little discussion about the role of culture in good governance and how boards can provide leadership on this key success factor. Is culture on the agenda of board meetings or reflected in its committee structure? Is executive management being held accountable for aligning culture with vision and strategy? Do boards have the right tools to assess culture performance?

But boards should take note: in at least one jurisdiction, regulators have clearly established board responsibility for company culture. The Financial Reporting Council of the UK regulates auditors, accountants, and actuaries and sets standards of corporate governance and reporting. In 2018, it issued an updated Corporate Governance Code, which includes, for the first time, a clause specifically requiring the boards of all UK-listed companies to “establish the company’s purpose, values, and strategy and satisfy itself that these and its culture are aligned”. It’s only a matter of time before regulators elsewhere turn their eyes to culture.

Partnership: IOD and Culturelytics

With this challenge and opportunity in mind, in May of this year, IOD launched a three-year partnership with Culturelytics, a data analytics company that uses AI to help leaders measure and manage culture. The partnership is designed to better understand the evolving role of culture in corporate governance, build awareness of this emerging topic, and promote good practice by boards.

The first step in this collaboration is a joint research report, recently launched at the IOD’s 2023 Global Convention in London, titled ‘The Role of Boards in Managing Organisational Culture’. The report offers new insights on the current perceptions of board members in India with regard to the governance of culture in their organisations. This research will be expanded in 2024 to understand the current practices of C-Suite executive leaders in managing organisational culture. Then, based on the research outcomes, Culturelytics and the IOD will collaborate in 2025 to develop a practical framework for good practice in the area of culture and governance and to support and facilitate the work of boards in this area.

The Culture Gap and Opportunity

Our research for the report shed some new and very interesting light on the evolving attitudes of board members about their role in organisational culture.

On one hand, all respondents agreed that culture is a critical success factor for their organisations. And nearly all agree that the board should play a leading role in ensuring the right culture is created and sustained. But while a small number are actively addressing it, there is still not a clear, common understanding of how to perform this oversight role. In other words, there is a clear gap between intent and action in culture. Our research also illuminated several possible reasons for this gap and how this challenge might be addressed.

Definition and Scope: There is still not a commonly held understanding of what is meant by ‘culture’. Some are focused on workplace inclusion, others on ethics, or ESG, or building cultures of trust and transparency. One respondent defined culture more broadly as the collective mindset, attitudes, and behaviours in an organisation - a definition that might be the basis for more effective action on culture.

Measurement: Boards, like management, are not yet confident they have the right inputs to accurately assess their cultures. Many IOD members who participated in our study expressed the desire for more scientific culture assessment tools that offer more accurate, actionable data on culture and its financial impact to help them lead more effective culture transformation programmes.

Globalisation: The globalisation of Indian business is also prompting new approaches to organisational culture, with a greater focus on innovation, continuous learning, and trust, as well as greater transparency and diversity on boards themselves. At the same time, given India’s unique cultural diversity, Indian business leaders have significant expertise to offer the world on the management of cultural complexity.

Culture will be a key challenge for the boards of the future everywhere. And I believe that India and the IOD have an opportunity to lead a global dialogue on this subject, forging a new, common approach to culture and good governance that will set a global example.

The Way Forward: Culture, the next ESG

Our initial joint research reveals that boards in India are seeking ways to address culture more intentionally as part of their governance responsibilities. Yet this is clearly an emerging field, in which further research, new measurement tools, and practical guidelines could help put culture more squarely on the agenda.

There was consensus that board members want to do more and better on culture but don’t know how to do it. Nearly all agreed, some strongly, that a clear framework and practical, business-oriented guidelines would be invaluable. I therefore look forward to the partners’ joint work to develop this framework.

I believe that, for corporate boards and the businesses they lead, organisational culture will be the next ESG. Twenty years ago, ESG was a fringe concern; today, we cannot imagine good governance without it. On culture, we are just beginning to understand its importance, but it will evolve into an essential and measurable element of good governance. And just as with ESG, demand from stakeholders to address culture in fact presents a rich, untapped business opportunity to build the resilient, competitive, future-ready businesses of tomorrow.

About Culturelytics

Culture is at the heart of business performance. But to manage it you need to measure it. Combining the power of AI with the latest behavioural science, Culturelytics has created the world’s leading culture analytics platform for business. We provide leaders with measurable, actional data on culture and its financial impact, helping organisations to make culture a powerful enabler for their success.

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Is culture on the agenda of board meetings or reflected in its committee structure? Is executive management being held accountable for aligning culture with vision and strategy?