Senior Management Sets the “Tone at the Top”

As a generalization, our culture tends to respect individualism and prioritize the valuable contributions that each person can make to an organization or society. This “democratic” view of culture, for all its merits, must be balanced with an insight formulated by the audit profession: Tone at the Top.

Tone at the top, in the context of establishing an effective control environment within a business, is best explained by COSO, an organization founded by several professional finance and accounting organizations to provide thought leadership on risk management, internal controls, and fraud prevention. COSO’s Internal Control — Integrated Framework Executive Summary states:

The control environment is the set of standards, processes, and structures that provide the basis for carrying out internal control across the organization. The board of directors and senior management establish the tone at the top regarding the importance of internal control including expected standards of conduct. Management reinforces expectations at the various levels of the organization. The control environment comprises the integrity and ethical values of the organization; the parameters enabling the board of directors to carry out its governance oversight responsibilities; the organizational structure and assignment of authority and responsibility; the process for attracting, developing, and retaining competent individuals; and the rigor around performance measures, incentives, and rewards to drive accountability for performance. The resulting control environment has a pervasive impact on the overall system of internal control (emphasis added).

The best example I saw of “tone at the top” was at a business in which the owners had invested significant effort toward intentionally creating a culture of integrity and value creation. This “tone at the top” was not imposed upon the enterprise and its subsidiaries. Rather, the culture of the organization reflected the vision, values, and ethics that senior management believed and practiced. These leaders understood “tone at the top” and effectively took the lead to guide their organization to success in the marketplace.

What steps did this organization take? There were many facets of the tone at the top and how it was manifested throughout the organization down to the lowest level, but here are just a few that come to mind:

  • A clear vision and mission statement, which defined the organization for its customers, employees, partners, investors, and other stakeholders
  • A principles-based approach toward leadership within the organization
  • A minimalist approach toward detailed rules
  • An emphasis on hiring people who would “fit” well into the organization’s culture based on character and skill
  • Leadership by clarity of articulation and example by senior management

This deliberate approach to “tone at the top” creates an effective control environment, as compared to a disjointed or even nonexistent plan for establishing organizational culture. Whether senior management acknowledges or ignores the concept of “tone at the top,” the reality is inescapable. Employees hear what senior managers say and, more importantly, see what senior managers do. The example senior managers set, both by formal policies and procedures as well as by daily conduct, sets a tone — whether positive or negative.

Although each individual can play a valuable role within an organization, senior management first and foremost must take its responsibility seriously to nurture a culture of integrity, discipline, and effectiveness. Done properly, the established “tone at the top” can propel an organization on a trajectory toward achieving its goals and objectives.

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