Auditing organisational culture and why it’s a challenge worth taking

by | Mar 8, 2024

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As we celebrate International Women’s Day today, it reminds us that the bar is rising for firms needing to prove their good culture to regulators in the finance sector. In this article, Fiona Hathorn, CEO and co-founder of WB Directors explores the role of culture audits, the benefits, challenges and best-practice advice on how to conduct one.

“Culture eats strategy for breakfast” is a famous quote from businessman, Peter Drucker, that has taken on a new poignancy in recent years.

Of course, he didn’t mean that strategy was unimportant – rather that a powerful and empowering culture was a route to organisational success. However, culture has always been a tricky concept, something widely recognised to be key but difficult to define. An intangible asset that very few have attempted to formally measure. Until now. 

 
 

The FRC (Financial Reporting Council) has introduced its 2024 Code that will apply to financial years beginning on or after 1 January 2025, with first reporting in 2026. A key principle of the new code is the shift to “outcomes-based reporting”, which means providing your stakeholders with information on how decisions taken by the board have, and will, impact the company’s strategy, objectives and long-term viability. The code also makes the board more accountable for culture by not only requiring boards to assess and monitor the company’s culture, but to also look at how the desired culture has been embedded. 

These changes reflect the ever-evolving role of company boards. For decades it seems that the duty of boards was to protect financial wealth and maximise profit growth over and above everything else. In the last ten years or so, we have seen ‘governance’ take centre stage, where factors such as board composition, executive pay, good risk management and financial probity have crept up the agenda. More recently, ‘environment’ has dominated the corporate landscape generating huge investment and heavy regulation. Now, against a backdrop of culture-related scandals and headlines that have highlighted the impact of an unhealthy organisational culture – including catastrophic damage to people, reputation and value – we are seeing a new era for boards where culture has been elevated as a top business priority. 

Culture is not a cure 

 
 

I firmly support these changes and hope we see similar requirements expand beyond the financial sector. We recently asked members of our Women on Boards UK network, serving on boards across all sectors, how they felt boards are tackling people and culture. A strong majority (82%) stated that people and culture was a ‘top level’ or ‘significant’ area for their boards. Despite this, 40% stated that the quality of people and culture discussions were ‘weaker’ than other topics and only 27% of board members surveyed said they draw on specialist HR expertise. 

Perhaps the absence of people and culture expertise in the boardroom is a symptom of a bigger issue, which is that many still see culture as just something to tackle when your company’s in trouble. For instance, the majority of companies currently only bring in an auditor if there has been a crisis, but culture isn’t something you can fix – and certainly not quickly. A positive culture is something you will get after you’ve put new processes, structures, training and policies in place to tackle tough business challenges like reworking an outdated strategy or investing in your future leaders. A strong and healthy culture evolves as you do the important work. 

Diversity matters 

 
 

In the context of culture, diversity matters. People from diverse backgrounds and with diverse viewpoints creates a larger pool of opinions and ideas which in turn can spark creativity and innovation. Furthermore, inclusive work environments allow and encourage 

people to be themselves at work helping people to feel empowered and valued. Shaping the employer brand for attracting and keeping talent, and accelerating innovation are two sure tangible signs of a positive company culture. 

As organisations all over the world mark International Women’s Day, it’s worth reflecting on this year’s theme which asks us to “invest in women” to “accelerate progress”. When it comes to gender diversity initiatives, three consecutive government-backed schemes have pushed the proportion of women holding boardroom roles across FTSE 350 companies from 9.5% in 2011 to 40.2% in 2023. WB Directors has been measuring gender diversity in the FTSE All-Share firms below the top 350 listed companies and has seen numbers improve from 48% of firms not achieving a target of 33% women on boards in 2021 to 16% in 2023. 

 
 

While this is positive progress, it’s striking to note that the FTSE Women Leaders Review has set a goal for 40% female representation. In addition they, and the Financial Conduct Authority, have outlined that one of the four most influential roles should be held by a woman – these roles are CEO, CFO, SID or Chair. 19% FTSE 100 do not meet these targets, rising to 36% FTSE 250, 41% FTSE All-Share ex350 and 73% among Alternative Investment Market (AIM) listed companies are yet to reach this goal. 

If we consider diversity beyond gender, we recently analysed over 1,000 listed companies and found that only eighty-one (2.3%) executive members across almost 4,800 executive board seats hold positions outside of CEO, CFO or Company Secretary. Within this small group are just three People officers. 

As we face tougher scrutiny on culture, boards need to actively consider the information and data driving their discussion. Regular culture audits are one way to embed this in the board cycle, but should not replace closer working with executives responsible for and with expertise in culture in order to drive measurable action. The importance of having a consistent and constant focus on culture, rather than waiting for a crisis, cannot be underestimated. 

 
 

Invest now in your people, start establishing and embedding your purpose and values, don’t turn your back on bad behaviour and put diversity, equity and inclusion at the heart of your business strategy. A healthy corporate culture will follow, and one that will endure in times of stress and change and lead to long-term success.

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