Internal auditors are unsettled by the management of corporate culture in their organisations, according to a new report.

A huge proportion of senior internal audit executives polled by the Chartered Institute of Internal Auditors (CIIA) support tightened corporate governance guidelines, while others reveal their boards fail to ask them about the state of culture in their companies.

The CIIA survey reveals nearly two-thirds (65.7%) of internal audit chiefs believe the governance code should be “further strengthened” to underline directors’ duties to “promote, monitor and assess” corporate culture.

Over half (52.4%) say their board or audit committees have failed to ask for reports on culture, inclusion, equality and diversity initiatives. Almost a quarter of boards (23.2%) have failed to say what kind of culture they believe should be nurtured in their organisations.

Governance guidlines

Culture frequently emerges as a hot topic for boards. A survey by Board Agenda found that two-thirds either fall short of giving corporate culture significant attention, or fail to include it in their formal risk management processes.

Corporate scandals are often underpinned by corporate culture fault lines with many cropping up in recent years including BHS, Carillion, Greensill and Patisserie Valerie. Perhaps the most startling example came from mining giant Rio Tinto last month, when it released a report revealing the company had a culture marred by sexual harassment, bullying and racism.

Governance guidelines have not been silent on the question of culture. The UK Corporate Governance Code, revised in 2018, says: “The board should assess and monitor culture” and should ensure that “purpose, values and strategy” and culture are “aligned”.

That may be easier said than done. The survey results point to a divergence between many boards who ignore the finer points of culture management and internal auditors who view it as an integral part of their responsibilities.

John Wood, chief executive of the CIIA, says it is clear some managers failed to consider the risk involved in stewarding culture appropriately. As the pandemic pushes companies into hybrid working, Wood believes establishing, maintaining and monitoring culture is ever more important.

“With organisations adopting new working models in a post-Covid world, now is the time for boards to get a grip on corporate culture, including seeking assurance from their internal audit functions,” he says.

Internal audit has ‘vital role’ in culture

Wood’s view find support from Sir Jon Thompson, head of UK governance watchdog the Financial Reporting Council (FRC), who says boards should start taking culture more seriously.

Meanwhile, he says, the governance code already underlines board responsibility for culture.

“As the audit regulator we want to see progress accelerated in this area. Internal audit has a vital role to play in providing assurance and reports to the board that the culture is healthy,” he says.

Thompson’s remarks come alongside sombre warnings from the CIIA’s report.

“An unhealthy culture can have a significant adverse impact on an organisation’s long-term sustainability,” it says. “Indeed, many major corporate collapses can be attributed to organisations that had unhealthy or ‘rotten’ corporate culture, often fuelled by misconduct, the wrong tone from the top, and the mismanagement of risk.”

Vyla Rollins, director of the Leadership Institute at London Business School, says the public is now attuned to culture and how it is created by corporate leaders. “It is becoming increasingly clear to the ‘person on the street’ that the dramatic examples of governance breaches are driven by the mindsets, behaviours and beliefs of the boardroom and C-suite.”

These make for a compelling set of warnings. Executives have been warned.