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How Healthy Culture Leads to Good Corporate Governance?

Written by: Ms. Joyce Wong–Risk Consultant

After the global financial crisis, regulators have strongly emphasized on the importance to restore the confidence of shareholders and other stakeholders. In light of this, the Institute of Internal Auditors – Australia in collaboration with the Ethic Centre, Chartered Accountants ANZ and the Governance Institute of Australia have published the “Managing Culture – A Good Practice Guide” (the “Guide”) in December 2017 which focuses on setting and embedding a clear ethical framework of an organization in which employees can function effectively.

In this newsletter, we shall first discuss the definition of corporate culture and the reasons for its importance for an organization. Following that, we shall discuss the roles of different stakeholders on strengthening an organization’s culture which in turn leads to good corporate governance.

What is “corporate culture” and why is it important?
According to the Guide, an organization’s culture is the sum of its shared values, principles and behaviors. Some scholars also defined culture as a set of shared mental assumptions that guide interpretation and action in organizations by defining appropriate behavior for various situations. Another usual and frequently heard definition in workplace is the way we do things or what we expect.

The Board should take culture into account, as it is closely linked to risk management and risk appetite, which may create risks and affect the long-term viability of the organization. The governance framework underpinning a healthy culture will help to achieve the organization’s strategic objectives by clarifying that decision-making is tied to risks and that there is accountability for the exercise of authority.

The Role of the Board
The Guide emphasizes that it is crucial for the Board to establish the ethical foundation and set the tone from the top. The board is expected to make independent judgment in the best interests of the organization. Directors also need to know, and properly assess, the nature of risks faced by the organization.

The Role of the Management
The management is responsible for implementing and monitoring the desired culture as defined and set by the board. For example, the management should ensure that their organization has conducted sufficient training on culture, ethics and due diligence. They should also ensure that relevant programs are executed effectively for staff to allow them understand and apply the ethical framework and relevant codes of conduct.

It is not necessary that the board should be informed of all details about the business operation while the management is expected to run the organization according to the strategies and policies set by the board. However, the board cannot neglect their duties as they also have an ongoing overseeing responsibility.

The Role of the Internal Audit
The Chartered Institute of Internal Auditors in the UK identified a number of important roles of internal audit function. Some important points are listed below:

  • There is a relationship of trust between the audit committee chair and the head of internal audit that allows informal discussion about subjective judgments on culture
  • Internal audit has been given a clear mandate which has been written into the audit charter

The Guide suggests four ways in which internal audit can provide assurance relating to the culture in an organization as follows:

  1. Definition of the desired culture – has it been clearly articulated and communicated?

  2. Embedment – has the desired culture been embedded into every part of the organization?

  3. Monitoring and measurement – how is the board and senior management monitoring the culture?

  4. Actual culture versus the desired state – are behaviors in line with the desired culture, as articulated by the board and senior management?

There is no single approach to build a healthy culture as it always depends on the context in which the organization is operating. However, it is undeniable that culture is one of the crucial factors in determining the performance of an organization and its ability to realize its objectives. Therefore, the board and senior management of the organization should carefully consider and allocate necessary resources for effective implementation and monitoring of an ethical framework.


Source:
Managing Culture – A good practice guide. Chartered Accountants Australia New Zealand, The Ethics Centre, Governance Institute of Australia and Institute of Internal Auditors – Australia. December 2017.


If there are any aspects which we may assist, please do not hesitate to contact:

Principal - Ms. Gloria So
gloria.so@shinewing.hk (Tel. 3583 8517)

SHINEWING Risk Services Limited

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