Cultural or soft risk could be a huge threat to organizational success, if businesses do not govern, lead and manage it, says Richard Finn
Culture in all its gory variants has been the most common diagnosis for organizational failure in the past five years. A short-term culture was to blame for the behaviour of investment bankers in the US and the UK; London’s Metropolitan Police is accused of a culture of racism; the UK’s Mid Staffordshire
hospital had an “uncaring” culture resulting in avoidable deaths and, in the not-too-distant past, a culture of greed was the cause of Enron’s failure.
The Economist Intelligence Unit has recently published a report A Crisis of Culture; the UK Parliamentary Committee on Banking Standards has published a report criticising the culture of banks and recommending changes; and the Salz Report into the problems at Barclays highlighted culture as a major factor in its reputational demise.
Soft risk is the current zeitgeist
The costs are staggering if soft risk is not managed. In the US, banks have, so far, been fined $100bn since 2008; 189,000 jobs have been lost in the City of London since 2008; the bill for PPI mis-selling continues to rise and household names like Lehman have completely disappeared.
And yet in recent research carried out with chairmen and non-executive directors (NED) of organizations in the City of London, it was found that very few boards had culture on their agenda and soft risks were rarely part of their risk registers. If soft risk was being managed at all, it had been delegated to the HR department. How and why have so many organizations been asleep at the wheel? Maybe because it is “only” soft risk?
Soft risk becomes significant when culture becomes misaligned with organizational purpose. It is the result of poor governance by boards, myopic leadership in the C Suite and a lack of empowerment of line managers to manage poor behaviour. The costs become explicit in a number of different ways (see figure 1).
And soft risk does not stop with the organization. The culture of an organization’s ecosystem needs to have its collective soft risk managed as well: outsourced customer interfaces, for example, in the auto industry, and contracted out call centres can, through poor customer service, seriously impact the reputation of the producer.
Hard risk management is in the hands of accountants for financial risk and compliance for compiling and acting on a risk register. With some exceptions, such as regretted turnover and employee engagement, it is rare for soft risks to be tracked in a risk register.
However, the platelets of organizational power and control are shifting. The management accountants have included human, social and relationship factors in their new integrated reporting recommendations, which are currently out for consultation. The risk profession has published two reports, Roads to Ruin and Roads to Resilience, which recommend the inclusion of people and cultural issues into a new risk radar.
I predict that the HR profession will not be far behind in trying to colonize this business critical area of organizational risk.
How can organizations mitigate soft risk?
Soft risk is sourced in misalignment. It becomes a cost when the link between organizational purpose and the behaviour of employees or contributors in the service value chain become disconnected.
If organizations want to manage soft risk effectively, they will need to govern it in the same way as any other critical business issue: giving decision rights and accountabilities to a range of interested parties to measure and manage it effectively.
- Boards need to assure themselves that culture and behaviour are creating value for the declared purpose of the organization. They should consider having a NED on the board who understands soft risk and they may need to create a new sub-committee to govern it on their behalf. In addition, board members and senior executives will need to set the tone for behaviour from the top.
- The CEO must ensure that soft risk is measured and tracked and that appropriate executive action is taken.
- Line managers should be empowered and competent to address bad behaviour.
- Finance, risk, compliance, HR and supply chain managers will need to create multi- disciplinary teams to identify and address soft risk.
Soft risk is potentially a huge threat to organizational success. If organizations do not govern, lead and manage it, they will risk going the way of the many other organizations that have allowed misaligned cultures to derail their purpose.
● Richard Finn is managing director of Richard Finn Ltd, an educator at Duke Corporate Education and chairman at Kent Music