21 Jun 2019
Why boards must lead on culture
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Boards must take a much more active role in overseeing and assessing an organization’s culture, reports Jonathan Arnold.
In early 2019, the new draft of the UK Corporate Governance Code stated that boards must monitor and assess culture. They must be satisfied that behavior throughout the organization is in line with company values.
So far, so sensible. Surely boards everywhere should take a much more active position on recognizing the crucial role culture plays in the organization, rather than leaving this to the CEO and executive?
Yet understanding and shaping behavior and culture is still a relatively new task for boards. Many boards are struggling to come to terms with what this additional, yet pivotal, responsibility actually means for them. This changing landscape comes at a time of shifting corporate dynamics.
Because culture is not directly measurable, boards now must find ways of assessing it and satisfying themselves that people are behaving in the way expected of them.
“Boards are spending more time on the governance of culture. It is no longer the sole purview of the CEO to set the tone within an organization. Culture is being viewed more holistically by boards in terms of its many elements, how they drive behaviors and define norms within an organization.”
ESG and AI
This shift links to the changing nature of ‘culture’ itself within an organization, which now includes such areas as Environmental, Social and Governance (ESG) and the rapid development of Artificial Intelligence (AI). ESG is a set of standards for a company’s operations that socially conscious investors use to screen potential investments. Environmental criteria consider how a company performs against what might be called its green agenda. Social criteria examine how it manages relationships with employees, suppliers, customers, and communities. Governance deals with leadership, executive pay, audits, internal controls, and shareholder rights.
“ESG, amongst other things, defines the social purpose, an important element of culture. As a result, leading boards are insisting that no strategy is complete without an ESG plan.”
Regarding AI, leading boards insist on clear accountability for the rules and assumptions used in machine learning algorithms relating, for example, to customer experience and employee interactions.
Culture and AI may seem like strange bedfellows but there are clearly defined cultural issues that must be addressed.
Boards must look into the mirror
Of course, when looking at organizational culture overall, boards must be mindful of their own internal culture.
Julia Poltaratskaya, Managing Partner for the Executive Development Practice at Odgers Berndtson in Russia, expresses the situation in stark terms:
“Beware the one bad apple,” she says. “The impact of the personal reputation of board members is extremely important and the misconduct of any of your directors can lead to catastrophic results. The culture and behavior of the board of directors form a culture of behavior for the entire organization.”
Poltaratskaya says “a positive reputation of the company can be immediately ‘killed’ by a change of the board of directors or the arrival of new members of the board of directors who bring ‘toxic’ behavior with them”. She cites the dismissal of Uber founder Travis Kalanick and the issues at Volkswagen leading to Martin Winterkorn’s fall from grace over the emissions scandal.
The impact on reputation and the fallout affecting company culture is hard to overestimate.
“Any appointment of a member of the board of directors of a company imposes obligations on that person, since all the qualities and reputation of the person, both publicly manifested and visible only within the company or in personal life, directly affect the reputation of the company and its fate,” adds Poltaratskaya. In other words, if the culture within the board is poor what hope is there for the rest of the organization?
Recent KPMG report Board Oversight of Corporate Culture was blunt on boards taking culture seriously. “Corporate culture is front and center for companies, shareholders, regulators, employees, and customers. Not surprisingly, the focus tends to be on corporate culture as the culprit, with headlines of sexual harassment, price gouging, shady sales practices, and other wrongdoing. As a result, boards themselves are in the headlines, with an expectation that they need to ‘fix’ broken cultures.
“Given the critical role that corporate culture plays in driving a company’s performance and reputation, for better or, as evidenced by the #MeToo movement, for worse, it is not surprising that boards today are reassessing their approach to oversight of culture. The key question they are asking is: How can we ‘up our game’ and take a more proactive approach to understand, shaping, and assessing corporate culture?”
This has different facets. One CEO declared: “Our board has dedicated agenda sessions on culture quarterly where they review the culture dashboard and the conduct dashboard.”
“When management leaves the room, the directors discuss whether we’re measuring it the right way. Then they give the CEO their view on how they think we are doing.”
Create a ‘culture dashboard’
Peter Montagnon, Associate Director at the Institute of Business Ethics, recently observed boards spend little time looking in detail at the supply chain or customer complaints. “On staffing, they look at survey results, but rarely check sites like Glassdoor, which hosts worker reviews, to see what recently-departed employees say about the organization. Few are the companies that look at morale in the supply chain, but this can tell you a lot about how a company is perceived by key stakeholders and the build-up of unwanted stress, as some supermarkets have learned to their cost.
“All this involves a raft of new work. Rather than adopt a standardized clipboard of indicators, boards may do better to create a ‘culture dashboard’ based on their business’s nature and their main stakeholders’ concerns.”
Action on culture
Ultimately, there are certain things boards can do beyond getting their own culture on an even footing that will help the organization, help the CEO and the executive and help create better conditions for growth and reputation enhancement:
- Understanding why culture is vital to ensuring long-term business success
- Defining exactly what the culture is within the organization and assessing it fairly and accurately
- Making sure that culture helps align company values and purpose with strategy and execution
- Ensuring reward and performance evaluation mechanisms reinforce the right leadership behaviors
- Defining the roles of the audit, compensation, and nominating and governance committees in the oversight of culture
Taking responsibility for understanding and shaping behavior and culture is yet another task for boards that might struggle to cope with a field that needs sensitivity, careful handling and, often, additional outside expertise. But boards must lead on this critical subject if organizations are to prosper. Frankly, it’s too important to be left to any CEO.
This article is from the latest ‘Culture’ edition of the Odgers Berndtson global magazine, OBSERVE.