How boards effectively govern culture

January 2018 | SPOTLIGHT | BOARDROOM INTELLIGENCE

Financier Worldwide Magazine

January 2018 Issue

Culture creates a unique footprint in every organisation. It can be a strategic differentiator, enabling a company to achieve superior returns and be a ‘great place to work’. Conversely, the absence of a healthy culture can be a liability. The news is littered with many companies that have adversely impacted their brands and shareholder returns due to unhealthy cultures and an inappropriate tone at the top. Until culture leads an organisation down the wrong path, it is often hard to pinpoint as a problem. It takes careful and purposeful attention by management and keen oversight by the board of directors to maintain an environment where a healthy culture can flourish and become a strategic asset.

So what is culture? Management theorist Peter Drucker defined culture as “assumptions that shape any organisation’s behaviour, dictate its decisions about what to do and what not to do, and define what the organisation considers meaningful results”. Organisational culture drives what a company and its management team consider essential to manage and measure, and the decisions they make about what they will and will not do to achieve those objectives. It is how corporate value statements translate into actions.

How can corporate directors recognise the red flags of an unhealthy culture? How do we effectively govern culture given our oversight (as opposed to management) role? In our recent Blue Ribbon Commission Report on culture as a corporate asset, the Commissioners set forth 10 recommendations of how boards should effectively govern culture. Below are several of the Commission’s recommendations and insights about the board’s governance process in assessing culture.

“The board, the CEO, and senior management need to establish clarity on the foundational elements of values and culture – where consistent behaviour is expected across the entire organisation regardless of geography or operating unit – and develop concrete incentives, policies and controls to support the desired culture.”

Culture must start at, and continue to come from, the top and cascade throughout the entire organisation. This consistency of culture and transparency across corporate locations is particularly important for a board to observe. This can be achieved by visiting different operating sites and holding board meetings there, if possible. Although cultural differences are expected around the globe, the board should assess if those differences are instead attributable to a different tone at the top or the way that tone is being interpreted throughout the organisation (the tone at the bottom). The board should look for consistency in the interpretation of the company’s mission and values, overall strategic focus and risk tolerance. The board should also look for the alignment of the messaging coming from the top of the organisation, as well as the accountability and measurement of management for maintaining a healthy culture in the various locations. How is culture learned or shared in the organisation? Is there training to address cultural aspects? A possible red flag for the board of directors to look for might be whether there is an excessive focus on consensus or collegiality leading to ‘go-along to get-along’ behaviour.

“Directors and company leaders should take a forward-looking, proactive approach to culture oversight in order to achieve a level of discipline that is comparable to leading practices in the management and oversight of risk.”

The board should ask questions of management to identify what metrics and key performance indicators in the enterprise risk management process should logically be applied to culture and conduct measurement. The board should be transparent about the type and frequency of information they require to make this determination. Using both leading and lagging indicators can provide the necessary information for the board of directors to engage in a meaningful discussion of culture. A board-level cultural dashboard might be used to explain the factors which represent cultural strengths and those that pose challenges. This dashboard can be informed by surveys, such as an employee culture survey, employee-engagement survey or customer survey to gauge trends and to identify and discuss any red flags. It is important for the board to dig deeper to understand how results are achieved and not just be satisfied that goals are met.

“Directors should review the culture of the whole board and its key committees on a regular basis, both formally (via the evaluation process) and informally (by making time for reflective conversation in executive sessions). The results of this review should inform board composition, succession planning – especially for leadership roles on the board – and continuous improvement efforts in board operation processes.”

Culture should be a key focus when interviewing potential board members to determine how the culture of the board may change (positively or negatively) by the addition of a potential board member. This aspect should be discussed actively by the board, and all views should be carefully considered. From the prospective director’s perspective, he or she should look for actual evidence of culture in the company and boardroom, not just listen to the narrative. Some things to look for would be whether the directors respect each other and value an informed discussion of diverse views. Does the board both support and challenge management, where appropriate? The board’s evaluation process is a best practice in board governance; using that process to evaluate the cultural aspects, as well as having a process where individual board members can discuss their evaluations with the chairman or lead director, is an invaluable part of the oversight process.

“Directors should make culture an explicit criterion in the selection and evaluation of the CEO, and set the expectation that the CEO and senior leaders do the same in their leadership development and succession-planning activities.”

The board should observe the chief executive and the management team in different settings, both formal and informal, often to observe the cultural dynamics among the management team and with employees. Is there teamwork, trust, mutual respect and accountability? Has management created a ‘tone at the top’ that promotes a culture of compliance and ethical behaviour? How do leaders at all levels across the company build and sustain a culture of integrity? How are unethical behaviours dealt with? What is the tolerance for receiving bad news? An informative exercise for the board on the aspect of culture is to ask the chief executive and his or her direct subordinates to present to the board about their teams, succession planning, leadership development, strengths and weaknesses and areas of focus on an annual basis. This process not only informs the board about the depth of talent in the organisation but also about the cultural dynamics and how consistently those aspects appear within the teams.

“Boards and compensation committees should review the company’s recognition and reward systems (including incentive compensation as well as promotion decisions and other nonfinancial rewards) to ensure that they reinforce the desired culture and avoid unintended outcomes that could undermine culture.”

Although the board’s primary focus is on the management team, it is essential to have a strong sense of the forms of recognition, both monetary and otherwise, of what motivates employees and drives performance, and how those factors influence culture across the entire organisation. Does the company motivate and reward employees for things such as innovation, corporate citizenship or service excellence? During performance and compensation discussions, the board should look for any red flags, such as whether high performers are allowed to operate outside of established policies and whether behaviours that are not consistent with the company’s stated values and code of conduct are rewarded. Another red flag is when relationships outweigh skills and performance in determining promotions or other recognition to an inappropriate degree.

Culture is a strategic asset of any organisation. It has significant interdependencies with achieving strategy and managing risk. Attention to and improvement of culture should be a continuous, intentional focus of management, with monitoring by the board of directors. The board should communicate with shareholders about how it carries out its responsibility for overseeing and actively monitoring the company’s culture. It is an important distinction that it is not the board’s job to define the right culture for the organisation, but to select a chief executive who can instil a healthy culture in the company that helps it realise its strategic objectives.

Barbara J. Duganier is a director at the National Association of Corporate Directors (NACD).

Barbara J. Duganier

National Association of Corporate Directors (NACD)