I. Executive summary
A healthy corporate culture as the core value of the company can help an employer enhance an organization’s financial performance, reputation and sustainability by correctly guiding employees. However, an unsound culture mechanism may result in illegal and unethical behaviours, such as fraud, corruption, bribery, harassment, discrimination and so on. Therefore, a firm not only has to ensure a right tone at the top is set in the working place but also gauge whether and how to implement the culture to the bottom line of a company.
This research summarizes why culture is essential for a company by comparing the performance of companies with and without a healthy culture. Following the instructions, the second section demonstrates the statistics to show the current state of the issue. By explaining what the challenges for a company are to build a strong culture, I will provide recommended corporate policies at the end of the paper.
II. Culture is essential
Introduction
Corporate culture is a philosophy topic, refers to the “beliefs and behaviours that determine how a company’s employees and management interact and handle outside business transactions”, according to Will Kenton (2017). It can be delivered by either implicitly or explicitly. Culture is the core value of the organization, it expresses and indicates how the company treat inside and outside of the firm. From the financial perspective, culture is regarded as an intangible asset, which implied that it is hard to evaluate.
More than 80 percent of the upper management and employees hold an opinion that culture plays a critical role for a company on its way to success (Aguirre, et al., 2013). Furthermore, around 60% participators believe that culture is prioritized than business strategy and operating model (Aguirre, et al., 2013). It is obvious that culture is indispensable and is considered as the foundation of a corporation. Ethical culture requires the board of directors to set the right tone at the top.
Why business leaders should pay more attention to setting the right culture? A healthy corporate culture can enhance a company’s working environment. Generally speaking, a company’s culture exerts a subtle influence on its productivity, profitability, sustainability and reflected in profits, stock prices, client satisfaction, market value and so on. An unethical or absence of corporate culture causes employer-employee relationship disharmony and also seriously affects the financial and non-financial health of the organization. I will explain the importance of developing a robust culture mechanism in greater detail from the individual, organizational and societal perspectives in the next few paragraphs.
• Benefits of a strong ethical culture
First of all, a corporation’s culture influencing employee’s conducts. Employees are prone to act more ethically if the company have clearly identified what are the expectations and the rules and standards. Under the pressure of monitoring and regulation, the probability of misconduct will decrease. An ethical corporate culture also brings values to an employee’s life.
Secondly, the right tone at the top will set a healthy culture, which can help the company decide a business direction. A strong culture can make efforts to both improve business performance and increase cohesiveness. The company will gain a solemn sense of responsibility if it associates its development of business with the development of the world. Moreover, a strong culture will improve financial performance. Specifically speaking, enhancing the employee values has a positive impact on maximizing utilization of resource allocations and developing employee experiences. Therefore, it will result in lower employee turnover, higher employee satisfaction, higher workplace productivity and so on. Shape the corporate culture so that corrupt actions have zero tolerance in the firm, such as fraud, bribery. Ernst & Young issued a report and pointed out that among FTSE 350 companies, 92% of the respondents agreed that investment in culture can help the company enhance their financial performance and more than half of them indicated that the operating profits increased at least ten percent (2016, pg 1). Furthermore, leading by example is a useful way to inspire employees’ enthusiasm and creativity, which plays an important role in deciding the company’s competitiveness. The research found that 94 percent of the executives and 88 percent of employees believed that a clear culture orientation would be a significant competitive advantage, according to Dana Fields Muldrow (2012). In addition, the executive’s value is also conducive to the cohesiveness of the firm. A desired top management moral quality should be which can generate prestige and create a trust relationship between leaders and staffs. It is expected to make the employees enable to gain a strong feeling of belonging, responsibility and thus transformed the sense of mission into loyalty to the employer and the company, resulting in strengthen cohesiveness.
Back to the essence of the culture, ethical culture is the root and provides a guarantee of the firm to survive in the society. According to the Corporate Social Responsibility (CSR) and Environment Social Governance (ESG), the organizations are required to be more social accountable, take stakeholders such as environment, government, regulators, suppliers and so on into consideration when they are making business decisions (Chen, 2018). By making a trade-off between the economic profits and social benefits, companies with a higher focus on social benefits win advantage over the companies which are lack of it in terms of sustainability. A healthy culture not only demand companies deliver quality products and services, but also encourage them to actively participate in the social welfare events in order to fulfill their social obligations and missions. As a result, corporations will definitely establish a positive image and gain respect and reputation.
In sum, employees are impressed with corporate culture, it will definitely affect employees’ conducts and hereby reflected in profitability and brand value of the organization.
• A case of News of the World
The company News of the World (NoW) paid for the failure of unethical corporate culture. News of the World is a historical icon of United Kingdom and is a subsidiary of the News Group. Researching on Wikipedia, this newspaper “concentrated on celebrity-based scoops and populist news” and ended up with its 168 years of history due to the phone-hacking scandal. Back to 2005, the company was plagued with a series of phone hacking scandal. By years of investigation, the shreds of evidence proved that the organization had participated in phone hacking activities during 2005 and 2007 with top management’s awareness and tacit consent. For instance, James Murdoch as the CEO of the News Group, he paid a gargantuan sum to the phone hacking victim to bury the truth; the royal editors such as Clive Goodman hired private investigators to tap phone lines and the senior management was aware and condoned these unethical activities (Wikipedia).
The News of the World is an example as the board of the directors failed to set the right tone at the top. Employees in NoW bear a financial and phycological burden, they are forced to satisfy the immediate interests no matter the way to achieve the goals is ethical or not. Undoubtedly, it’s hard for an employee to conduct ethically in a working environment where their bosses and coworkers failed to do so. As a result, News of the World was suffered a significant reputational and financial damage and deteriorated greatly. Hence, the board of directors should set the correct tone at the top and it’s important to ensure the management team have executed the culture appropriately at all level of the company.
III. Current Status
The increasing corporate crime increasing the need for corporate culture. Addressing the issues currently is extremely important because of its serious impact on the corporation, society and economy.
Corporate culture remains a hot issue based on Deloitte University Press’s annually updated Global Human Capital Trends report. Released in 2015, more than 3,300 worldwide senior executives and HR leaders had participated in a survey to vote on the top ten challenges in a firm. 78 percent of the participators considered that culture and engagement plays a critical role in the company and was prioritized as the top issue. However, the capability gap in this area had been wider, which means that corporations faced more obstacles to building a distinct culture. The capability gap increased to 31 percent, ranked as the second highest and had risen 8% compared to 2014 (Brown, et al., 2015). In 2016, seven thousand leaders formed the sample base and not surprisingly, culture and engagement still listed in the top 10 trends with a percentage of 86% and 85% respectively. The culture was slightly lower than organizational design and leadership, which with a percentage of 92 and 89 respectively (Bersin, et al., 2016). Recently, the trends showed that companies were paying more attention to how to combine culture and engagement together to improve employee experiences. (Bersin, Geller, Wakefield, & Walsh, 2017).
According to PwC, there are “thirty-five percent of all fraud are perpetrated by employees inside the organization” (2018, page 11). Moreover, approximately 70 percent of the Canadian companies have established an ethical and compliance program, while merely 30 percent “make verifying and promoting their employees’ ethical decision-making a top priority” (2018, page 3). On the one hand, it’s obvious that corporate culture arouses wide public concern. On the other hand, they also realized that there were some difficulties to execute culture. In the next part, I’ll explain the potential challenges for a company to build a robust culture mechanism.
IV. What are the challenges
• Difficult to implement
A culture should be easily understood for the board of directors, senior management, and employees as well. However, a majority of the companies lack an accurate and applicable culture. According to Deloitte’s Global Human Capital Trends 2016, only 19 percent of executives believe that their company has the right culture and only 12 percent of the executives consider their companies are driving the “right culture” (Bersin, Galler et al, pg 6). Moreover, there are 28 percent of executives said that they know culture plays a significant role in the company, but they failed to totally understand their culture. The facts prove that hardness of establishing a culture which suits and applicable to the organization.
• Costly and time-consuming
Culture development requires a long-term investment, in other words, it’s costly and time-consuming. For instance, with the reference to the case of Enron, its Code of Conduct proves that the company has prioritized communication, respect, integrity and excellence. However, their executives make no efforts to behave regarding those values (Sims and Brinkmann, 2003). A large reform is the establishment of the Sarbanes-Oxley Act in 2002. Admittedly, the passed law improves the environment of the fulfilling of culture power. Unfortunately, companies spent a large amount of resource and energy on culture development merely meeting the minimum requirements of compliance.
To be ethical means that the company have to establish business ethics program, develop ethical rules and frameworks, train employees, monitor operating activities, that’s no doubt that expenditures will rise. However, an investment in culture is beneficial for a company’s long-term development.
• Hard to assess and evaluate
Culture as an intangible asset is hard to measure and assess. Most of the feedback is based on customers’ and employees’ satisfaction level, for instance, issues reporting to HR and Audit Committee.
According to Dondé, 23 percent of the workers illustrated that their firms give them incentives for the purpose of encouraging employees to abide by the ethical frameworks and standards (2018, page 7). Furthermore, the report pointed out that “the most common incentive in all countries is including ethics in annual appraisals or performance reviews” (Dondé, 2018).
• “Habit of heart” – Culture gap
Alexis de Tocqueville comes up with the term “habit of heart” in the book “Democracy in America” (1835 &1840). It refers to a cultural standardization which people have the “common patterns of thinking, feeling, and acting within a certain group or society” (Palazzo, 2007). According to Palazzo, American companies have more transparency when developing ethics programs compared to German companies (2007, pg 55). For instance, the American corporations have a series of methods to strengthen the culture, such as Code of Ethics, Ethics Committees, hotlines, Ethics Audit and so on. While for the German companies, they lack a willingness of dealing with unethical conducts publicly. The author believes that the reason why German companies have a relatively lower rate of developing business ethics programs is mainly that “lack of a strong legal incentive such as the Federal Sentencing Guidelines in the United States” (Palazzo, 2007). In addition, cross-cultural insensitivity may cause loss to business, especially in large international companies. So, a company must understand a culture and cultural differences.
Therefore, corporate’s culture development also depending on culture climate existing in region and industries.
• Lack of leadership development
The board of directors set the tone at the top and accompany with the upper management to shape the culture. Business leaders are supposed to act as role models in order to guide the employees. Thus, the board members are required to associate culture while making decisions and making succession planning; the senior management are ought to drive the culture and deliver the values to the bottom line of the firm.
• Weak governance
Another reason why the company failed to foster a healthy culture is that of the unsound governance structure. A number of factors may destroy the oversee and guiding function of the board, such as the majority of the board prioritize maximizing profit as the goal; board members lack business knowledge, resulting in unethical culture decision-making; conflict of interests, independent directors sit on the board; neither set a right tone at the top nor establishing rules and standards to signal the senior management and employees.
Based on research among eight European countries, less than thirty percent of the workers in organizations without a robust business ethics programme would like to spoke up the misconducts perpetrated inside the company while there are more than seventy percent would like to spoke up in companies with a comprehensive program (Dondé, 2018).
V. Recommendations
In spite of a number of challenges for a firm to build a sufficient culture, there are still some possible methods to assess and enhance corporate culture. In short, the key to build a build a strong corporate culture are enhanced transparency, increase collective accountability, as well as developing leadership. It’s important to put humanities into business.
Strengthen board’s performance
A strong culture necessitate an effective governance. Two key functions of the board of directors are providing guidance and offering oversight. On the one hand, the guidance role says that it’s the board’s obligation to set the right tone at the top and provide leadership. On the other hand, the oversight role requires the board enhancing internal control for the purposes of monitoring ethics conducts and business transactions.
The main code of the ethics emphasizes the relationship between the company and its stakeholders, not limited to employees, customers, communities, governments, etc. It reflect the organization’s meaning of existence and strategic direction. Therefore, no matter the function, size of the firm, it must have a clearly documented corporate culture to guide workers. It’s business leader’s duty to ensure everyone understand unethical conducts are never allowed in organizations by strengthen the rules through a series of punishment, rewards, audits and control systems.
For the purpose of making ethical regulations to be more effective, it’s necessary to clarify the ideas and policy beliefs of managers and employees in the organization. In order to motivate employees’ individual work performance, nor does it use sales figures to judge competition, instead, educate employees to consider the interests of companies and individuals, as well as suppliers and customers. The needs of society, integrity, courtesy and respect for others are the standards of the company’s business process.
In order to fulfill their duty, the board is supposed to be well-diversified and should consist of qualified directors. Board diversification is not limited by age, gender, tenure, industry experiences, ethnicity, cultural background and so on. A well-diversified board will result in a better understanding of ethical issues from different dimensions and perspectives. A qualified board member means that the director ought to have a sound understanding of business, familiar with the ethical issues and risks as wells as taking the stakeholders into account when making business decisions. Each director who is seating on the board is expected to not only support but also guide the corporate culture with their endeavours.
Some recommendations to strengthen the board’s performance are listed below:
• Documenting the guiding policies, standards, procedures as well as frameworks such as Code of Conducts and Mission statement, ensure the board of directors must have read, understood and signed the what they are expected to conduct within the organization;
• The written policies should be reviewed and approved by the board of directors annually in case they are outdated;
• Ensuring the documents meets legal and industry governing and reporting requirements;
• Monitoring the efficiency and effectiveness of the internal control mechanism, ensuring the auditing function have true independence so as to enhance transparency;
• Designing board-education programs to periodically coaching them to better understand and pay sufficient attention to the ethical and business issues and risks.
Executives should act as moral roles
After the board of the directors setting the tone at the top, now comes to the stage of implementing culture to the all level of the company by the top management. It’s a great leadership challenge to ensure the culture is appropriately executed organizationally, so the firms have to put more focus on leadership development. Since the actions are always louder than the words, it’s a better choice for the upper management to lead by example. Clifton demonstrated that “70% of the variance between lousy, good and great cultures can be found in the knowledge, skills and talent of the team leader” (2017). For instance:
• Developing culture workshops and coaching employees fully understanding the corporate culture and standards; sharing their own experiences in order to shape a trusted environment inside of the company;
• Emphasizing on culture protocols and putting the ethical employees in the position, enhancing the obligations of hiring and supervising employees;
As mentioned above, culture subconsciously exerting moral influence on employees. In other words, culture drives an employee’s behaviours. Business leaders of the company generally have the obligation to act reasonably with regard to creating an ethical atmosphere in the firm. No matter what the management did, it will trickle-down affect employees’ conducts. Succinctly, leadership is emphasized in forming an ethical environment. If the management team is leading by example and appears strong concern with ethics, employees will also follow their bosses’ footprint and hereby creating an ethical working environment together. If the top management shows a perfunctory attitude upon ethics, then the employees are more prone to follow their leaders since they believe that integrity is not the priority within the company. Otherwise,
Reward integrity
Organizations are suggested to apply sufficient tools to evaluate culture. It’s would be strongly recommended for the companies to use the Barrett Values Center’s Cultural Transformation Tools to test the efficiency of culture implementation. The results of the assessment allowing the monitors to “identify the cultural health of the organization and the cultural health of the sub-cultures that exist in different business units, locations, departments and teams” according to Barrett (2017). In short, a useful and suitable tool to assess culture would help the organizations to test the health of the culture and point out what is required to change in order to improve the performance of the employees.
Companies must develop an incentive mechanism:
• Designing a sophisticated remuneration program is one useful tool, which is aiming to encourage employees to conduct more ethically by linking compensation to their performance;
• Designing a robust whistle-blowing program and ensure the whistle-blowers are well protected; for the whistle-blowers, they are deserved to reward for integrity;
Strengthen supervision
As a member of the society, to achieve a comprehensive supervision necessitate three aspects: legal system, social, and itself as well. First of all, promoting moral development can be done through legal supervision so as to improve the authority of morality. A corporate culture is only a soft constraint on employees’ behavior but raising some moral concept into law can result in consensus in society. It can enhance the normative nature of the ethical by restricting the business conducts and in turn to supervise the corporate.
Secondly, the society can provide supervising through social media, legal unions. The exposure of unethical business conducts will arouse both employers and employee’s attention, in turn to rethink their own conducts.
VI. Summary
This study discussed the meaning, importance of the existence of corporate culture and the challenges of implementing it as well as the possible methods on how to enhance it. So far, it’s clearly that corporate culture arouse wide public concern. How to build an efficient and ethical culture mechanism is an on-going issue within the companies around the world. The ethic research include some empirical studies. There will be more studies analyzing the relationship between corporate culture and organizational attitudes and behaviors. The future research should update the statistics cited in the paper and should update how the challenges changed, such as region and industry changes.