VIRTUALLY every element of business activity is subject to being measured. Along with the obvious profit and loss and share price metrics, there are also ways of judging attitudes to diversity and corporate social responsibility.

Yet, one of the critical elements of a business - corporate culture - cannot be measured so easily. It is one of the first things that new employees need to learn, and it controls almost every element of the company's activities and operations.

But finance professionals have still to come up with an effective way of measuring corporate culture - which is worrying since one of the key mantras of the profession is that "you can't manage what you don't measure".

It might be tough to actually capture culture since it is a moving target - but the more information that you have on the issue, the better.

In order to gain a better understanding of cultural pressures, the Association of Chartered Certified Accountants (ACCA) recently undertook research into corporate behaviour and looked at what leads organisations to behave in certain ways, and what leads to dysfunctional behaviour that can cause things such as banking scandals, hospitals failing to care for patients or large-scale industrial accidents.

Its report Culture and Channelling Corporate Behaviour concluded that organisations have to make a series of trade-offs to decide the type of culture that they want to encourage in their teams. It also says that corporate boards and executive teams must also be able to look critically at how they set the tone for their employees.

For example, the report found that bankers were motivated by financial incentives for short-term success while the inappropriate use of measures was a major factor in the unnecessary deaths and suffering of patients in hospitals where quality of care took second place to proxy measures such as waiting times.

Boards face having to make trade-offs, including whether they want their organisation to be risk seeking or risk averse, innovative or controlled, have a short-term or long-term approach, and whether the organisation is open to hearing about mistakes and to what degree constructive challenge is encouraged.

Once a board is clear about the culture and behaviour that it wants, it needs to assess where the organisation is and, importantly what employees think. While consultation is critical, it is also vital that corporate culture is shaped and driven by the board or the C-Suite.

For example, further research commissioned by ACCA and the Institute of Management Accountants (IMA) showed that attitudes that prevent employees from raising questions about perceived risks and threats to an organisation can only be changed if board members lead by example and become more sceptical and challenging.

The report A Risk Challenge Culture by Paul L Walker, William G Shenkir and Thomas L Barton looks at the need for organisations to develop and implement effective risk oversight in the wake of the 2008 financial crisis, which exposed serious weaknesses in risk management. It said that even some organisations that claim to have a robust risk governance structure have one in name only - the directors are not as actively engaged in risk oversight as they need to be. They often lack adequate training in risk issues and may receive unduly optimistic risk reporting.

In the wake of a risk debacle, a typical question is: "Where was the board while this was happening?" The report called for the development of a risk challenge culture which encourages, requires and rewards inquiries that challenge existing conditions.

The report says: "When a subordinate is afraid to ask senior management about perceived risks, that is not a challenge culture. When a board member is satisfied with the CEO's facile answer to a serious risk issue, that is not a challenge culture. When board members 'rubber stamp' management's critical actions without serious debate, they have not enhanced a challenge culture."


Drawing on discussions from the ACCA/IMA Accountants for Business Global Forum and insight from roundtables held in Dubai, London and New York, the report acknowledged that it is very difficult for a board member or manager to question critically policies or decisions when their organisation is earning outsized profits or enjoying unprecedented growth - and where there are bonuses at stake.

ACCA believes that it is critical that the board and executive team set the tone for the rest of the organisation. This includes encouraging and rewarding those who raise concerns about behaviour and priorities, rather than those who take unnecessary risks or who act only in the short-term interests of the organisation.

All too often, decision makers talk about wishing that they had the benefit of hindsight. But scepticism and a culture in which people are actively encouraged and rewarded for challenging decisions can be highly effective in ensuring that organisations take the right course, and must be actively promoted.

It is also vital for organisations to develop a risk challenge culture, which provides employees with the opportunity to defy existing conditions. But our report showed that this culture is impossible to achieve if employees are not encouraged, required and rewarded by management when challenging a negative corporate culture.

The report suggests that there should be a different sort of culture surrounding risk management - one in which dissent and a questioning mindset are welcomed, expected and rewarded. It also identifies a number of areas critical to the design and implementation of a risk challenge culture.

It says that the board members and the C-suite must approach their risk oversight responsibilities with a "questioning mind" and make "critical assessments" of the effectiveness of an organisation's risk management process. In order to avoid being a risk to itself, the board should reflect diversity in skills and experiences, and be knowledgeable about Enterprise Risk Management.

The board and committees, the C-suite and risk-owning operating management are responsible for leading and sustaining a viable risk challenge culture. The board and CEO sets the tone from the top regarding the openness expected in risk discussions.

The board must receive key risk information on a timely basis. It is essential to recognise that cognitive biases in decision making - where people think differently about issues - exist. They should be recorded with mechanisms put in place to minimise their impact.

People need to be aware of the signs that a risk culture is lacking and in need of remediation. These include: weak risk leadership, poor risk transparency and rewarding inappropriate risk-taking.

It is critical that organisations begin the process of establishing formal risk appetites and risk tolerances, communicating them to all levels, and updating when necessary.

Setting strategy - without performing a thorough risk analysis - has often led to massive value destruction. It is the board's responsibility to ensure that this linkage is strong and evaluated often.

As recent history has shown, faulty, unbalanced incentive plans can lead to misguided, excessive or even ruinous risk-taking. Incentives should be carefully constructed to induce behaviours that are appropriately aligned with strategy and risk appetite/tolerance.

In conclusion, boards need to be clear about the kind of culture that they want and what kind of behaviours they wish to encourage or discourage. Boards need to question how the tone is set out and conveyed through the organisation, and satisfy themselves that the information that they are receiving from around the organisation is fair, balanced and sufficient.

Finally, there needs to be a whistle-blowing or "speak up" system in place that staff know they can use without fear or retribution, which will enable boards to ensure that they get the true picture and are therefore in a position to launch a cultural revolution which benefits the business and its stakeholders.