Culture: the corporate governance blind spot

Richard F. Chambers at AuditBoard explains why culture is your organisation’s greatest unmanaged asset—and liability

 

A recent study by AuditBoard revealed a significant gap in corporate governance when it comes to cultural risk management. Each line of defence touches culture, but few see themselves as responsible for governing it in an integrated way. In fact, the research found that while 80% of governance, risk, and compliance professionals recognise the importance of culture, there is no single function held responsible for managing it as a strategic asset. This means that organisational culture is a major unmanaged risk in the majority of businesses.

 

This "enterprise blind spot" creates confusion and duplication, which puts those businesses at critical risk. Despite culture’s elevated visibility, most organisations continue to rely on reactive, outdated tools, often using old-school indicators like incident reports or employee surveys to find out how employees feel and what they think. These sources are useful for identifying when things have gone wrong, but they offer little in the way of foresight.

 

However, employee surveys only capture how people felt weeks ago, offering a slow, quarterly snapshot instead of the live data businesses need. With most work happening through digital tools, traditional methods miss the daily friction that fuels burnout, productivity loss, and employees looking elsewhere for work.

 

The study found that only 48% of organisations reported using any form of real-time behavioural indicators, and few had tools in place to support predictive or forward-looking cultural analysis. Without these capabilities, emerging risks often go undetected, and cultural drift is only noticed after it leads to performance, conduct, or reputational failures.

 

Culture is not just an HR issue; it drives every aspect of business performance, from operational efficiency to financial success, alongside risk management. If your employees are unhappy, their productivity is affected, which in turn negatively impacts your customers, and could also result in damaged profit margins and market value, never mind your company’s reputation and long-term customer relations. Organisations that depend on reactive measures like surveys instead of real-time behaviour indicators lack strategic focus, creating significant blind spots and making companies vulnerable to preventable risks.

 

AuditBoard’s Organisational Culture and Ethics Report identifies three main types of risks from this governance gap. Strategic risk, which is when corporate strategy and daily employee behaviour are out of sync. Here, operational risk comes directly from cultural patterns creating departmental silos, and compliance risk arises when a culture does not encourage ethical behaviour and transparent reporting.

 

Strategic risk is when initiatives fail, heralding inconsistent customer experience, and potential employee losses. Operational risk can result in a blame culture or lead to employee burnout, while compliance risk might lead to legal issues, and result in regulatory fines, potentially damaging an enterprise’s reputation.

 

The study also showed that there were distinct regional differences in how the UK, USA and Germany managed cultural risks. In the United Kingdom, a well-established regulatory environment positively influences corporate behaviour, but many organisations face "governance fatigue”. 

 

The UK stands out for its policy-integrated approach, shaped by regulatory frameworks like the Corporate Governance Code. Culture is more likely to be measured, reported, and embedded in governance structures. Standardised culture metrics and board engagement are more common here than in other regions.

 

But maturity comes with trade-offs. UK teams need to modernise legacy frameworks to address new challenges like AI ethics and sustainability.UK businesses have the opportunity to use their strong governance frameworks to develop next-generation culture management strategies.

 

In the US, culture is often in flux, especially around politically sensitive topics like DEI. Organisations report recalibrating DEI initiatives not based on strategic values, but in response to reputational and political risk. Compliance teams struggle with inconsistent executive support, citing a need for stronger integration with senior leadership to influence culture effectively. The result is a reactive posture, one in which culture risk is acknowledged, but not consistently championed or embedded.

 

In Germany, although regulatory frameworks are robust, many organisations fail to effectively track behavioural metrics. Culture in Germany is often framed as an internal transformation issue, tied to performance, alignment, and organisational health. Respondents emphasised culture’s role in achieving strategic goals rather than as a standalone ethical concern.

 

However, this systems-focused approach can overlook behavioural nuances. German respondents were less likely to use informal norms or behavioural indicators in culture assessments, focusing instead on structure and alignment with KPIs. The country’s engineering culture offers a strong base; but businesses need to apply this discipline to their culture management systems to connect technical excellence with behavioural governance.

 

To tackle these issues, the study recommends treating culture as a strategic asset, integrating it into company-wide business measurement metrics. By planning, measuring culture’s return on investment, and reporting it as a key performance indicator, organisations can ensure visible governance structures and accountability for culture outcomes, which will ensure culture is included in enterprise risk frameworks, using real-time data for early warning systems.

 

However, a one-size-fits-all culture risk model will fail to gain traction across diverse regulatory and cultural contexts. What works in the UK’s policy-driven governance landscape may not apply in the US’s politically dynamic environment or Germany’s performance-centric culture model. Technology is essential, along with developing scalable measurement systems that go beyond reactive surveys to continuous monitoring and predictive analytics.

 

The study outlines a three-phase implementation framework. The first phase, foundation building, focuses on conducting a thorough culture risk assessment, pinpointing immediate high-impact areas, and establishing a governance charter. Quick wins include adding culture metrics to existing dashboards and setting up pilot monitoring programs.

 

The second phase, system development, includes investing in infrastructure that enables continuous monitoring. By investing in culture monitoring platforms, companies can enhance their analytics capabilities to provide training to management on identifying and addressing culture risks. This will help close any behavioural knowledge gap.

 

The final phase, integration and optimisation, aims to fully embed culture into enterprise risk management frameworks. Companies should link culture and behavioural metrics to business performance, foster collaboration and tool-sharing, and build joint reporting systems across different teams. By aligning definitions and enabling cross-functional coordination, businesses can turn fragmented signals into coherent insights that they can turn into a competitive advantage.

 

The business case for this strategic approach is strong. Cost avoidance is a major benefit, as a better culture can lead to fewer regulatory fines, less employee turnover, and improved reputation. Strengthening your business’s market resilience is another result to help establish a competitive edge. A healthy culture and a thoughtful approach to culture management lead to attracting and keeping top talent, and greater customer satisfaction. Happy employees are better at customer relations than unhappy teams.

 

A solid Enterprise Culture Management Model is critical for operational success, with oversight at all levels. The board should set up culture committees and include culture metrics in executive performance evaluations. Executive leadership should clearly own culture objectives, possibly through a Chief Culture Officer, and use cross-functional steering committees to coordinate efforts. On the ground, champions of culture in each department can drive engagement across their teams, supported by team-level metrics and training for managers.

 

Success in managing culture can be measured using both leading and lagging indicators. Leading indicators, like pulse survey scores and collaboration network strength, give early warnings and predict future performance. Lagging indicators, such as employee retention rates, customer satisfaction scores, and compliance violation rates, confirm the long-term effects of culture initiatives.

 

The ultimate goal is to demonstrate the connection between cultural investment and business performance, showing a clear return on investment. The research shows that organisational culture is not an intangible "soft" issue but rather a critical enterprise asset that is often poorly managed. Culture risk does not exist in a vacuum. It is shaped by the societies in which businesses operate and the systems by which they are held accountable.

 

Organisations that continue treating culture as a compliance issue, or worse, an afterthought, will be at a significant disadvantage compared to those that approach it with the same seriousness they apply to other aspects of their operations. The key action for business leaders to avoid remaining vulnerable to unseen risks and declining trust is to embed culture into GRC strategy.

 

The question is no longer whether culture impacts performance, but whether a company chooses to manage its influence actively or leave this essential driver of success to chance.

 

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Richard F. Chambers is Senior Internal Audit Advisor at AuditBoard

 

Main image courtesy of iStockPhoto.com and Sakorn Sukkasemsakorn