WHAT IS CULTURE:
Before we can begin to advance the concept of managing people-related risk, and culture risk more broadly within an organization, we need to define what we mean when we use the term “culture”. A simple definition of culture is the social behavior, values and norms found within a group. This definition highlights that culture is rooted in the concept of behavior, and more specifically in collective behavior.
Most large enterprises organize their human resources in a hierarchy. Executives at the top of the organization establish goals for the organization, then push those goals down through the hierarchy. This design enables large enterprises to effectively organize their people so they can focus on the important strategic imperatives of the organization’s shared goals, and by doing this concentrate their collective efforts on achieving these goals.
Achieving shared goals is enabled by collective effort. In high-performance organizations such as the military, professional sports teams, and many enterprises, the ability of the individual to de-prioritize his or her own interests to favor the interests of the collective is a key component of success. Rogue, self-interested behavior is shunned. To be part of the team, self-interest is subordinated for the good of the team.
However, hierarchies present a unique challenge. In large hierarchical organizations, there is often a large number of nodes between those at the top of the organization and those who are ultimately executing the activities required to achieve the goals.
To ensure control, organizations establish values and norms that are similarly pushed down the hierarchy; these values and norms are designed to act as a governor. Organizations aspire to achieve their goals, but only within the constraints of the values and norms that are established. The objective is to achieve goals without violating values.
Culture acts as both as an enabler and a constraint. One can think of this as a simple optimization problem: the objective is to achieve collective strategic goals (such as maximizing risk-adjusted returns) subject to not violating collective values.
The duality of this problem enables us to think of the problem in reverse: to achieve the highest standard of ethics and responsibility subject to achieving collective strategic goals. Framing the problem in the second way illustrates the reality that is often in play. Goals and values can often be in conflict — in other words, there is often a trade-off between optimizing collective goals and collective values. A strong, healthy culture is one that creates a balance between organizational goals, and organizational values and norms.
In order to ensure that the desired balance is achieved, one must fundamentally have the ability to measure and monitor both sides of this ledger.