This essay is being published from the New York Fed by a guest writer as part of Reforming Culture and Behavior in the Financial Services Industry: Progress, Challenges, and the Next Generation of Leaders. The views of the author are her own and are offered by the New York Fed to contribute to discussions on this topic.
The under-explored topic of cultural risk.
Midway through 2018, the 2014 Merriam-Webster Word of the Year, “Culture,” is getting a bit long in the tooth as a hot topic. To be fair, organizational culture is not a new idea by anyone’s definition. Edgar Schein, arguably the field’s grandfather, first published his “iceberg” model of culture back in the mid-1970s. Since then, the concept has steadily gained traction in management circles. In the 1990s, culture (after eating strategy for breakfast) was seen as the key to unlocking high performance — financial performance, that is. Then we had the financial crisis, and culture (risk culture) became the secret sauce of sustainability, the ticket to ensuring truly effective risk management. And most recently, water cooler talk has shifted again, this time to corporate scandals and the corrupting barrels that breed bad apples: it’s all about ethical culture.
And it’s not all navel-gazing and talk. The spectacular corporate failures and scandals that have focused the world at large on the issue of culture have also captured the imagination of academic researchers and corporate think tanks. Social and cognitive psychologists are on a quest to shed light on why culture seems to exert such power over individual volition, organizational effectiveness, and management of risk. Google’s Project Aristotle found the cultural characteristic of “psychological safety” superseded all other factors in predicting team performance — even the capability and drive of individual team members.
Meanwhile, politicians and regulatory agencies also agree that culture is important. A number of authorities around the world — in Australia, Hong Kong, Singapore, Canada, the UK, Ireland, and elsewhere — have incorporated accountability for culture into corporate governance requirements.
Everyone agrees: organizational culture is important.
With all of this activity and violent agreement that culture is important, you would assume institutions would have the issue nailed by now, or at least would be making serious progress. Unfortunately, 10 years after the financial crisis provided the business case for culture, the never-ending stream of corporate scandals tell a depressing story when it comes to effectively managing culture. From Volkswagen to Uber to Wells Fargo, fresh examples of cultural failure seem to be hitting the press at an increasing pace. And this proof of inertia isn’t contained to high-profile cases either. Closer to home, when was the last time you heard someone talk about the successful cultural change program implemented in their workplace?
Among politicians, commentators, and watchdogs, there is much handwringing over the role of culture in organizational misbehavior, but corporate investment and genuine commitment are less widespread. Google has a Chief Culture Officer — but this factoid is newsworthy only because it’s so unusual. How many CEOs know the difference between culture and climate, versus those that can differentiate between depreciation and amortization? If culture is so important, why is it still such a “black box” topic, outside the domain of general management expertise?
In truth, leaders are dragging their feet on the issue of culture. Kevin Stiroh recently wrote an outstanding Harvard Business Review article on this topic, highlighting some of the market failures that push culture down the list of priorities for leaders. His explanation is an excellent one, but as a psychologist — and from my work talking to many, many leaders about this topic over the years — I think there is another reason. Leaders know culture is powerful — they can see its effect. There may be some economic barriers to putting it at the top of the organizational priority list, but the bigger barrier is that deep down, leaders avoid embracing the issue of culture because they lack confidence in their ability to do anything about it. It seems like an ethereal, complicated subject, where cause and effect are indirect and difficult to influence, and even impossible to prove. You can’t blame people for not getting too invested in a topic when it’s hard to define the problem, success and failure seem unquantifiable, and they lack professional expertise in the area. Culture is constantly in the news as the root cause of corporate downfalls, and leaders are often blamed as the source of cultural ills (“the fish rots from the head”), yet many leaders continue to ignore this critical issue.
As an expert on risk culture, I have been observing this situation for some time now, lamenting the lack of action despite the clearly burning platform. But recently it struck me: I think we’re all approaching this issue of culture from the wrong angle.
The highly visible examples of cultural malaise have framed our thinking on culture around illness and intervention, rather than health and prevention. Unconsciously, the discourse on corporate culture is one of reactivity and helplessness, rather than proactivity and engagement. Instead of waiting until the symptoms of serious illness are clear to assess culture, perhaps we should focus on assessing cultural risk as a business-as-usual practice. This idea is based on several premises:
1. Cultural risk is inherent to all businesses at various points in time. Culture is a dynamic phenomenon which develops as the result of factors within the internal and external environment. At any point in time, certain factors may arise that create pressure on behavioral norms within an organization — that is, present cultural risk. Acquisitions, geographical expansion, management turnover, or cost imperatives can all increase the likelihood of cultural issues arising. That isn’t the fault of leaders, it’s simply an outcome of situational variables.
2. Cultural risk can be managed. If cultural risk is identified early, it offers the opportunity to manage it strategically, by eliminating the factor, or mitigating its impact. For example, hyper-growth may be desirable, but ignoring the cultural risk attached would be reckless when steps could be taken to mitigate it. Steps could include strengthening awareness of unconscious biases that can arise in such environments and taking specific action to guard against them.
3. Cultural challenges are not necessarily a leadership failure. Approaching culture as a risk type focuses attention on the fact that under certain conditions, the likelihood and impact of cultural challenges can be immense, and not easy to mitigate. The factors that drive cultural risk are diverse, and managing them often requires a range of levers, many outside the bounds of personal leadership influence. The nature and scale of this task should not be underestimated.
What would it cost, and what would we gain by shifting our focus away from the judgment of culture, and toward assessment of cultural risk? For such a strategy to take hold, we would need to let go of the moral judging so frequently attached to the topic of culture. The idea that behavioral norms of frontline staff may develop due to a complex system of internal and external pressures is difficult to reconcile with popular opinion that poor culture is the result of unethical, negligent leaders. But maintaining this view (a form of fundamental attribution error) is attractive for the same reason that victim-blaming occurs: it helps us to feel that others’ disasters are the result of their own poor choices, rather than difficult circumstances that anyone would struggle with. Such an interpretation gives us a comforting sense of control to counter the fear that such conditions could precipitate our downfall as well.
However, much would be gained from reframing our perspective on culture toward one of inherent risk. Such an approach would:
- Provide a strategy for prioritizing resources to genuinely diagnose and tackle high-risk cultural issues;
- Create a proactive mindset toward culture, with a focus on predicting and preventing cultural issues from developing, rather than trying to unwind issues that have already taken hold; and
- Decrease defensiveness from leaders when symptoms of cultural ill-health emerge, providing a more constructive platform for effective action.
Without a doubt, leaders must demonstrate accountability for the culture that develops within their institutions. However, if the moralistic discourse on culture diminished, then this slight shift in focus — from judging culture, to assessing cultural risk — may hold the key to more open dialogue and less inertia when it comes to the challenge of cultural ill-health.
This article was originally published by the New York Fed on Medium.
The views expressed in this article are those of the contributing authors and do not necessarily reflect the position of the New York Fed or the Federal Reserve System.