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The Globe and Mail

Why risk management must include corporate culture

In large corporations, CEOs often say: "Our most important assets go up and down the elevator every day." The same can be said for the most significant liabilities. People are our biggest assets, but also our biggest potential liabilities.

Yet, after the global financial crisis, one area of risk management that has seemingly eluded control, but certainly not accountability, is corporate culture.

To many, Wells Fargo was top of the class for corporate culture. It survived the global financial crisis with very little financial or reputational damage. Yet something went horribly wrong.

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Wells Fargo's relentless focus on cross-selling (measured by the number of products sold to an individual customer), and its intense application of metrics to drive results produced an "achieve your goal at any cost" culture. This crossed-wiring of incentives and culture became a ticking time bomb that detonated when certain individuals began to fabricate accounts to achieve their sales targets.

The financial sector is by no means alone when it comes to managing people-related risk. Since allegations of sexual harassment were made at Uber in February, 2017, a continuous stream of similar allegations have come to light against an ever-growing list of companies, including NBC, Nickelodeon and Amazon.

A simple definition of culture is the social behaviour, values and norms found within a group. This definition highlights that culture is rooted in the concept of behaviour and, more specifically, in collective behaviour.

Most large enterprises organize their human resources in a hierarchy. Executives at the top establish goals for the organization, then push those goals down through the hierarchy. 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. The objective is to achieve goals without violating values. Culture acts as both an enabler and a constraint.

In the world of the risk management of everything, the board of directors, the chief executive and the executive team are held accountable for culture risk. Yet, a culture can often develop a secret life of its own – often because of a lack of effective tools for managing culture risk proactively and holistically.

However, as a recently published paper from the Global Risk Institute illustrates, new tools are becoming available that can help uncover secret subcultures and detect environments that are not as healthy as they could be. These techniques, such as the application of language-psychology science, can enable organizations to diagnose problem areas by understanding their influence over employee psychology before they manifest into problematic behaviour. For example, by combining psychology and linguistics with data science and machine learning, organizations can develop the ability to predict behaviour based on changes in employees' psychological state evidenced by altered use of language in their work.

Applying language-psychology science to culture-risk management potentially provides a holistic view of culture risk by looking at psychological health at the aggregate level. Such an aggregate view provides insights into the atmosphere, health, emotions and cohesion of employees. Results can also be bench-marked against those of other institutions to provide a relative measure.

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By highlighting places where the psychology differs from organizational or industry norms, or where significant changes to psychology occur over time, areas of concern can be flagged for investigation.

These areas of concern may show psychological differences from the organization as a whole, or differences from established norms based on departments, roles, geographies or any other structural groupings.

When a team shows significant negative variance from established norms with respect to stress, for example, the whole organization may suffer. On the more sinister side, specific changes to other psychological attributes, such as risk-taking tendencies within a team, can be indicative of an environment that may be fertile for insider-threat-type behaviour. Identifying these psychological changes can provide an organization with an early-warning system to prevent culture risks from taking root.

Recent sexual-harassment issues at numerous organizations and other examples of errant behaviour are a wake-up call for virtually every large corporation to recognize its exposure. Stakeholders will no longer tolerate attributing internal people issues to "bad luck."

The world of the risk management of everything is a world of accountability. Fortunately, powerful tools are emerging that enable large institutions to maximize the value of their human assets while proactively minimizing the risk of their human liabilities.

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