The reason we still don't understand culture risk

Cultural and reputational risks are increasingly common for enterprises today. As companies across various sectors suffer reputational damage from toxic behavior or unethical decisions, more executives are recognizing culture as a contributor to the bottom line. While this growing awareness is encouraging, many executives remain uncertain about how to improve company culture. According to Deloitte’s Human Capital Trends Report, 82% of executives believe culture can be a competitive advantage, yet only 12% feel they are fostering the "right culture."

How is it possible that only 12% believe they’re driving the right culture? Part of the issue is that the processes executives and board members use often fail to provide the necessary signals. Despite the importance of information in managing cultural risk, especially in today’s media-driven environment, 65% of CEOs and 62% of board members admit they lack a process to identify potential culture risks. This leaves companies vulnerable to consequences like consumer backlash and high turnover rates.

How can there be such a lack of process for identifying potential culture risks? The uncertainty about whether companies are cultivating the "right" culture stems from reliance on self-reporting and the moral character of leadership to gauge organizational culture and reduce risk. Research in organizational psychology suggests that these approaches alone are insufficient.

Many companies utilize surveys and self-reporting mechanisms to manage cultural risks. According to organizational change leader Tatyana Mamut, these self-enforcing systems should not depend solely on good intentions. She recommends that leaders engage directly with employees to assess whether they sense any growing risks and use surveys to evaluate these risks. While these techniques are important for fostering a healthy culture, they rely heavily on the presence of good intentions. When toxic behaviors exist, particularly among leadership, these methods are less effective.

Some companies turn to moral character as a solution for organizational risk. Chuck Saia, CEO of Deloitte Risk and Financial Advisory, emphasizes that management must have the courage to ask tough questions. While this focus on moral character addresses a key issue in toxic environments—acknowledging that culture risk often arises from leadership decisions—it still assumes that good intentions will maintain a positive culture.

Research indicates that good intentions rarely lead to positive outcomes. A study by corporate philosopher Roger Steare reveals that executives and board members are more prone to narcissistic behaviors than any other group in a company. This supports the idea that when culture deteriorates, those in leadership positions are often the least likely to provide the necessary information.

Self-reporting can help improve certain aspects of corporate culture, and moral character can combat a toxic work environment. However, without signals that hold individuals accountable at all levels of the organization, both mechanisms risk remaining ineffective, leaving the organization vulnerable.

What kind of information are you relying on to protect your culture? Are you depending on industry definitions and self-reported data from your workforce, or are you tapping into the signals that can help create the right culture when it matters most?