Culture Considerations To Help Boards Manage Risk

Boards can govern culture and enhance risk management in several ways, including recognizing that culture should evolve.

The Covid-19 pandemic emphasized the importance of risk management to board members, with 87% of boards saying that market disruptions are becoming more frequent, both from the pandemic and as an accelerator of risks that were already omnipresent. Similarly, 83% of board directors believe that disruptions are becoming more impactful.

Despite this, the EY Center for Board Matters’ Global Board Risk Survey shows that 84% of board directors around the world do not believe that their organizations have a highly effective risk management strategy. Part of this can be attributed to the fact that corporate culture is consistently overlooked as a vital component of company success. Today, 27% of boards never, or rarely, discuss the culture needed to support the organization’s strategy, but, when a culture is aligned with a business’s strategy and is supported by top leadership, it leads to value creation. In fact, 80% of boards of organizations that lead on risk management discuss the metrics needed to assess talent and culture risks. Boards can govern culture and enhance risk management in several ways, including recognizing that culture should evolve, communicating culture, asking their management team to measure progress and discussing culture at the board level.

Aligning corporate culture to strategy and identifying where to evolve

A corporate culture that is inspired by a company’s purpose and is aligned to its strategy enables and accelerates that strategy. What’s more, culture influences how an organization identifies risk, what types of risks it accepts and how it manages risk. When misaligned, businesses lose out on opportunities to create value and increase their chances for risk. But culture isn’t a one-and-done conversation.

As organizations transform, they must also evolve culture. This was apparent in the past year when companies began to work virtually and subsequently adopted new methods of virtual employee engagement.

The Global Board Risk Survey found that leading boards spend more time discussing how management teams define corporate culture in the context of the organization’s strategy. They recognize that management must articulate the organization’s desired culture and work to align current and desired cultures.

Communicating and reinforcing culture

Communication and meaningful demonstrations on how culture will be lived throughout the organization are critical to effectively shifting corporate culture. It is the board’s responsibility to validate that executives adequately articulate company culture across the entire business and confirm that there are clear linkages between incentives and desired culture behaviors to encourage widespread adoption of company culture. For example, the board should evaluate how culture is communicated to new employees during onboarding and how leadership reacts to breaches of the company’s values.

According to our recent survey, boards that spend more time discussing how to incentivize behavior that aligns to the organization’s desired culture are more likely to lead in risk management. These discussions, however, should not be left in the boardroom. With stakeholders paying close attention to culture, it is important that organizations communicate externally about their culture and related incentives.

Measuring and monitoring culture progress

Only half of the board members surveyed are confident in the reporting they receive from management on culture and conduct-related risks. For enhanced reporting on culture and insight into behavioral trends in the workplace, boards should ensure that organizations are using both direct and indirect culture metrics, such as employee pulse surveys, employee onboarding and exit interviews, and customer surveys, which can be helpful in gauging employee satisfaction in company culture. Additionally, boards can work closely with executives like the chief human resources officer and chief diversity officer since both can be a strategic resource to disseminating and evaluating data related to culture risks.

Discussing culture at the board level

Our Global Board Risk Survey indicates that most boards are prioritizing issues other than culture, which is a major misstep in creating an effective risk management approach. The alignment of culture to the company’s strategy is critical to successful strategy execution, and boards should be regularly assessing such alignment during their reviews of strategy.

When thinking through any new strategy or decision, boards should determine whether it reinforces or undermines the desired culture. Additionally, boards should evaluate their own composition and culture since they play an important role in setting the tone for the rest of the company.

The last year has proven the importance of a well-planned risk management strategy. Especially as companies move to a distributed workforce, organizations and boards must take deliberate action when it comes to company culture. By aligning and evolving corporate culture, communicating, measuring progress and discussing culture continually, boards can provide enhanced culture oversight for successful risk management.

The views expressed are those of the author and do not necessarily represent the views of Ernst & Young LLP or any other member firm of the global EY organization.