On October 3, 2017, the National Association of Corporate Directors (NACD) published the NACD Blue Ribbon Commission Report on Culture as a Corporate Asset, affirmatively advocating that corporate culture be a part of board room agendas and not just left to management as a soft human resource issue. A company’s culture can have a direct influence on its reputation and, often, performance. In the wake of corporate scandals ranging from sexual misconduct by top executives to incentive plans that entice employees to behave in their own self-interest, leading to CEO shake-ups, government investigations, falling stock prices and consumer backlash, a board should consider culture as part of its company’s risk profile as seriously as it considers its company’s financial and competitive challenges.
The report by NACD, the world’s largest association of corporate directors, brings to the forefront what many management leaders already know — corporate culture matters. The absence of a healthy corporate culture can be a significant liability. Culture is linked to business strategy, selection and turnover of management, reputation and employees and customer satisfaction. In 2015, researchers from Columbia Business School and the Duke Fuqua School of Business released a report after surveying more than 1,400 North American CEOs and CFOs about corporate culture. Overwhelmingly, the respondents agreed that “leadership needs to spend more time to develop the culture.” But what are the actionable steps that leadership, both directors and executives, can take to tackle this key issue?
WHAT IS CULTURE
Culture can be difficult to define, but if values are about the “what” and the “why” of an organization, then culture is the “how” — the way in which those values are lived day to day. The NACD report uses the definition developed by MIT’s Edgar Schein, who characterizes culture as a series of assumptions individuals make about the groups in which they participate. In this model, a group’s culture is visible through its artifacts, goals and aspirations and common beliefs.
CULTURE AS A COMPANY ASSET
Culture should be viewed as an asset, a valuable one, similar to an organization’s human capital, financial resources and intellectual property. Studies show that organizations with highly engaged employees (one indicator of a strong, positive culture) outperform others on customer satisfaction, safety, quality, profitability, productivity and shareholder returns. Companies with weak ethical cultures experience levels of misconduct as much as 10 times higher than those with strong ethical cultures. Despite its proven importance, less than a majority of directors reported to the NACD that their boards assess the cultural alignment of their organizations. Only about half of directors say they have information on the cultural beliefs of employees. Viewing culture through the “asset” lens can help facilitate initial discussions with directors by adding corporate culture to an already crowded board room agenda.
SIGNIFIERS OF A HEALTHY CULTURE
TEN PRACTICAL RECOMMENDATIONS
The NACD report provides 10 recommendations to help boards proactively engage on corporate culture and regularly measure and monitor company-specific values and behaviors.
INSTITUTIONALIZING CULTURAL OVERSIGHT
Talking about culture is a start, but it does not end there. Company leadership should look at how to institutionalize the culture conversation so that assessing management’s efforts on culture is part of the board review every year. Board members need to achieve a level of discipline with respect to culture oversight that is comparable to their practices in the oversight of other risks. In addition, companies need a top-down strategy to demonstrate the culture on an ongoing basis, including finding ways to incentivize employees to act consistently with the corporate culture and ensure long-term strategies for leadership are aligned with the culture. Three steps companies can take to move in this direction are adding culture oversight items to board committee charters (see below), providing disclosure of the company’s cultural oversight process in the proxy statement and adding performance measures tied to culture contributions to the annual review of executives and other employees.
COMMITTEE-LEVEL RESPONSIBILITIES CONNECTED TO CULTURE OVERSIGHT