Boards Wake Up to Company Culture - What?
Last week I read a very interesting article in the Wall Street Journal. They previewed a National Association of Corporate Directors blue ribbon commission report proclaiming that corporate cultures matter in business. WHAT? You would think that was obvious. So why has it taken so long for corporate boards to notice? Having a high-performance culture isn’t new! Maybe boards of directors just don’t understand what culture means. Culture is a set of shared assumptions about how to think, feel and act. Culture is the way work gets done. Culture is the sum total of behaviors, beliefs and decisions that leadership exhibits to create a positive and conducive business environment that allows positive implementation of the company strategy.
The report about to be released, is based on a 34-member commission that examined the role and impact of corporate culture on business and the corporate environment. The WSJ article said that boards are starting to scrutinize cultures of companies they serve because a bad culture can damage a company’s reputation, results and recruitment. Yet few boards currently have an explicit focus or formalized approach to culture oversight.
The panel was comprised of independent directors, recruiters and consultants. The panel’s recommendation apparently covers 10 steps, which include regular measurement of corporate culture, using combination of factors such as chief executive performance reviews, the scope of power held by risk management officers and others. The panel also suggests crackdowns on incentive pay plans that might weaken the culture. The panel spokesperson, Ms. Gayle, who is an independent director of Coca-Cola and Colgate-Palmolive said, “oversight of corporate culture should be among the top governance imperatives for every board. A strong culture is a powerful source of competitive advantage while companies with poor cultures see far higher levels of misconduct”. The article went on to explain that many companies such as Whirlpool, Citigroup and CACI International have formed board level culture committees to mitigate and monitor the risks of a poor culture to ensure its workers feel comfortable with their company’s behavior through regular communications and surveys.
Inward has been promoting the idea of culture as a core business process just like mission, vision and values for over 15 years. Corporate culture, coupled with a tight corporate strategy are the keys to open the doors of success and competitive advantage.
Research studies show that companies with a strong corporate culture have greater confidence in the future and have a stronger sense of purpose. They have more engaged employees 73% vs 23%, are more optimistic about long term potential to outperform the competition 79% vs 47%, confident the company will grow this year 82% vs 48% and encourages employees to innovate 80% vs 35%.
Just look at the problems that Uber and Wells Fargo are grappling with these days. Their problems are largely blamed on culture flaws. Uber, for instance, is grappling with scandals, government probes and shareholder litigation. A shareholder lawsuit, filed late September this year, called Uber’s corporate culture, “A toxic hotbed,” threatening its business. Wells Fargo admitted culture problems following a sales practices scandal that erupted a year ago. It is alleged that the bank employees opened customer accounts using fictitious or unauthorized information to meet lofty sales goals. In both these cases, the CEOs were either forced to resign or abruptly quit.
It is doesn’t stop there. What about BP, Volkswagen and United Airlines? All these companies lost significant market share and the loss of customer confidence, which has impacted their equity. This is direct result of NOT having a culture and a business environment that was conducive to positive behavior and doing “the right thing”. Would corporate board governance oversight committees, made a difference? I’m not so sure, especially if the Board of Directors are focused on shareholder value, rather than mitigation of risk or brand equity. A healthy culture serves as a unifying force for organizations and reinforces the elements of the strategy in a productive way. Culture is and has always been a valuable asset and should be treated that way. Frankly, I am quite surprised that the National Association of Corporate Director are just now getting around to look at culture in a serious manner.
In Inward’s opinion, it all starts with “CULTURAL CLARITY”. The board of directors, the leadership team and the CEO need to establish “clarity” on the foundational elements of vision, mission, values. Then they must articulate the cultural environment that drives behaviors, beliefs and decisions that take place within the company. They should state what behavior is acceptable and encouraged and what behavior will not be tolerated. Once the culture is clarified and behaviors identified, it must be communicated across the entire company globally. If communicated effectively, then the right cultural behaviors will become natural way of doing business and part of the company’s DNA.
Over the next couple weeks. I plan to review and examine the NACD blue ribbon commission report and provide my interpretation, observations and “my own” recommendations. I welcome their in-depth look and prescription for doing something about creating an effective culture. Stay tuned.