Linking Culture and Risk - Insights from the Strategic Culture Framework

July 19, 2018 Caterina Bulgarella, Culture and Ethics Architect, Independent Influencer

 

 

Whether it's about price gouging, corruption, fixing the books, or sexual harassment, the costs of a toxic culture are always steep. Companies' reputations are at risk, executive careers could go down in flame and shame, and the narratives around business are becoming more opaque with each new story of corporate misconduct becoming public. 

One scandal after another, the evidence is mounting: when culture goes bad, the whole system suffers from a giant blind spot.

Today's leaders can neither just assume that they are immune to the consequences of a toxic culture, nor can they think that these risks are not theirs. The odds of becoming the next Wells Fargo, Volkswagen, or Miramax are scarily increasing for all institutions. In fact, it is becoming impossible to effectively manage an organization without the right culture frames and tools.

This is why SAI Global introduced the Strategic Culture Framework (SCF), a strategic tool that allows organizations to assess and manage ethical risk. The SCF highlights the two culture coordinates that produce the highest level of risk in an organization. These are the delegation of ethical dilemmas, which is how and whether the organization introduces conflicting priorities that force people to face up to difficult ethical tradeoffs, and ethical capacity. 

In the companion post to this topic, I reviewed the link between business and ethics, and how the link seemingly deteriorated over time. 

To better understand how the framework helps assess and manage ethical risk, let's consider a real case study: the Deepwater Horizon debacle in 2010 and BP's culture leading to it.

We know that prior to the disaster in the Gulf of Mexico, there was a marked gap between BP's touted values and what the organization actually valued, namely aggressive growth and risk-taking. BP was winning sustainability awards and checking all the boxes in terms of creating the right internal governance structures, but its culture fueled ethical dilemmas. Committees, not business leaders, were put in charge of ethics; people worked under pressure, including pressure to comply, affecting their ability to engage in sound reasoning.

Though some key stakeholders spoke out, senior leadership exercised their influence in a way that drowned discordant feedback. If evaluated in the abstract, BP's exposure to risk was considerable. That risk was untenable if looked at in the context of what the Deepwater Horizon's stakes truly entailed. But in the absence of frames and tools that could help look at the pattern of events taking place in more strategic terms, BP misread all the key warning signs.

We know how the story ended: 11 deaths, a host of harmful environmental consequences for the Gulf of Mexico and a $65 billion price tag for BP. 

BP would have scored low on the two SCF's culture axes, showing dangerous flaws consistent with a profile of systemic risk. To be clear, the two culture dimensions highlighted in the framework, Delegation of Ethical Dilemmas and Ethical Capacity, are both critical to understand the intensity and type of risk an organization faces. The more dilemmas in the organization, the more pressure people are likely to face, translating to higher ethical risk. Moreover, the types of dilemmas internal stakeholders must routinely address (around safety, innovation, and process) shed light on the nature of the risk and how it may play out. 

 

The level of Ethical Capacity in an organization is indicative of whether or not the risk ensuing from conflicting priorities will lead to a bad outcome.

In an organization where Ethical Ownership is low, we can expect that people will be more likely to give in if they feel under pressure, thinking that it's not their responsibility to challenge how things are done. Similarly, if Ethical Reasoning is not strong, employees will likely be biased in the face of ethical challenges, discounting important factors or ignoring key pieces of information. And if Ethical Voice is feeble, people may be unwilling to speak out, which will cause risk to escalate. 

The profile of an organization along the SCF's two axes is critical in establishing the maturity of the organization's culture and the risk that culture creates. A culture is mature when the organization works hard to address and contain dilemmas on the one hand, while creating ethical capacity on the other. A culture is immature when the opposite is true. In between mature and immature cultures, there are two types that pose uniquely different challenges: ambivalent cultures and righteous cultures. 

In an ambivalent culture, there typically are adequate conditions for Ethical Capacity. People are encouraged to own ethical challenges: they are trained effectively, their reasoning is engaged, tough issues are discussed openly, and there is awareness about what works and what doesn't. However, the culture is ambivalent because the organization does not stave off unnecessary dilemmas. Such organizations, for example, might nurture a culture of infinite 'ands.' Be profitable and efficient and high quality and safe and of high integrity. Companies that fall into this category may have mature ethics and compliance learning programs, but that doesn't mean they have a mature culture.

By contrast, organizations with a righteous culture go to great lengths to articulate clear and strong priorities, but they don't do as good a job when it comes to Ethical Capacity. Righteous cultures are somewhat cultish. Their risk arises not from pressure and lack of clarity, but from acquiescence and lack of adaptability. 

Risk is lowest in mature cultures because these organizations do a great job in avoiding unnecessary dilemmas and in preparing their people to address ethical challenges. Risk is highest in immature cultures because these organizations let dilemmas proliferate, and they fail to nurture ethical capacity. Righteous organizations face more risk than mature organizations but less risk than immature ones. They have clear priorities, but they do not adequately prepare employees to deal with situations that deviate from the script. For this reason, the amount of risk a righteous organization faces will very much depend upon the environment and business in which it operates.

Ambivalent organizations do their homework when it comes to ethical capacity, but they let dilemmas flourish. As a result, they face moderately high risk. Ambivalent cultures may be born from a desire to do it all, which creates a dangerous form of motivated blindness. This is why these organizations are more intent on mitigating the negative consequences of ethical risk than on curbing that risk to begin with.

 


To learn more about the relationship between risk and culture, and help identify what kind of culture may exist in your organization, listen to our podcast with Tom Fox and download a copy of the Strategic Culture Framework. Our hour-long conversation is available as five short episodes, which you can access on iTunes. 

 To download the full report, click here.
 


Guest post by Caterina Bulgarella

Caterina Bulgarella is a highly experienced leader with 15 years of advisory work in the field of culture, ethics, leadership development, and human capital metrics. Caterina holds a Ph.D. in Organizational Psychology, and M.A.s in Personnel Psychology and Industrial/Organizational Psychology from New York University (NYU) and is currently serving as an adjunct professor in the Industrial/Organizational Psychology Master Program at New York University, where she teaches graduate courses in organizational behavior. 

 

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