Corporate Culture and the Board

Posted in Reporting, Brand on 27 October 2015 By Kay Kayachith, Reporting Consultant

Corporate culture is emerging as an important topic for boards in light of the Volkswagen scandal and the rash of suicides on Wall Street lately.

These events seem to have crystallized a larger need for change. Like Mephistopheles clipping at the heels of executives, the relentless need to meet forecasts and deliver results, can push management towards unethical behaviour and the eventuality of a corporate crisis. How can the board help prevent these crises from happening? What is the board’s role in creating the right culture?

The influence of culture

Imagine a drop of blue ink dispersing in a glass of clear water. Like that drop of blue ink, corporate culture and in particular, the influence of its CEO, spreads throughout the company in a myriad of ways, seen and unseen, from processes they put in place to the values they themselves carry as internal barometers of moral guidance. Culture plays an important role in how a company functions and is embedded throughout the ranks. Although a company’s culture can be a nebulous concept, every company has an ingrained one and it permeates and impacts every part of the company from how a phone is answered in reception through to the company’s implementation of strategy and compliance.

This is part of the reason why the Financial Reporting Council (FRC) has embarked on a project that will be assessing how culture can play a more prominent role in the board’s oversight and why the UK’s Senior Managers Regime has required “improved evidence of oversight to show that reasonable steps have been taken to prevent, stop, or remedy breaches of ethics and culture”, according to a recent EY Audit Committee Summit.

How the board can shape corporate culture

• The CEO. The CEO plays a big part in what kind of culture gets rooted throughout the ranks. Take for instance Volkswagen, who had a CEO with a reputation for such an obsessive focus on measurement that many are attributing to its current crisis. He put in place a system where failure was not an option and by doing so, may have forced management to cheat in order to meet unrealistic expectations. The system the CEO puts in place is also regenerative and self-selective, whether good or bad, so whatever culture is put in place will continually self-perpetuate. Like begets like. Thus, by selecting the CEO, the board selects the culture it wants to promote in the company.
• Linking executive compensation to culture. The board can use the power of its purse to influence behaviour. Perhaps compensation can be tied to key cultural issues throughout the company, much in the same way that it is tied to strategic objectives. Perhaps there could be key metrics or targets the board can use to gauge things like cooperation within teams, customer loyalty, cross-selling outcomes, employee engagement and retention, and other indicators of company culture. The board can help foster the kind of culture that it wants by putting in place a system by which executives are held more accountable for group collaboration and communication between leaders, managers, and other key players in the divisions.
• Integrated reporting. As more companies move to integrated annual reports, corporate culture issues, much in the same vein as sustainability issues, should become measurable goals that are reported to the company’s stakeholders and for which the company is held accountable. Through integrated reporting, more companies are now including “softer” KPIs linking to people and social performance. Thus, it would seem natural to include a more in-depth discussion and measurement of a company’s corporate culture as well since it also touches so many aspects of the company’s long-term financial health and sustainability.
• A culture team. If there is a sustainability team, why would a culture team not also exist that could sit within the realms of human resources and people analytics space? Perhaps the board could create a sort of “culture matrix” that it can use to assess and monitor company culture. The board could build a process for monitoring specific culture indicators that examines things like employee survey results, employee hotline calls, management performance appraisals and data from specific culture areas such as customer relations and compliance.

The right culture is vital

As Warren Buffet once said, “Chains of habit are too light to be felt until they are too heavy to be broken”. Whether a company’s culture has evolved organically over time or transformed due to an acquisition or merger, it does need to be monitored and changed if it is not working. There needs to be systems put in place to overcome complacency and overhaul a culture that the board feels is undesirable. Corporate culture needs to transcend the CEO and the entire executive management team, meaning that if the culture in place is not the right one, then it is up to the board to establish the right one even if that means starting with a clean slate. 

After all, it is the board’s responsibility to act as the conscience of the company and steer it in the direction it needs to go in order to prosper. As nebulous a concept as culture can be, it is unmistakably the oil that keeps the corporate machine running, and if the oil dries up or is controlled by a faulty valve, then the engine will fail and the company will stop functioning as it should.