As both a source of competitive advantage and as a potential risk, culture is a natural component of the boardroom agenda. A poor culture can manifest itself in various ways including #MeToo events, toxic work environments affecting ability to attract and retain talent, and willful and systemic schemes of cheating by dozens, if not hundreds, of employees at all levels of the company resulting in fraudulent activities and reputational disaster. On the other hand, healthy corporate cultures help drive bottom-line results, increase customer satisfaction, and attract top talent at all levels of the organization.
Given the critical role that corporate culture plays in driving a company’s performance and reputation – and as evidenced by the #MeToo movement- boards today are reassessing their approach to oversight of culture. The key question is “how can boards up their game” and take a more proactive approach to understanding, shaping, and assessing corporate culture.
Culture is one of those challenging topics for directors. Directors tend to rely on their “gut” because they don’t think culture is measureable. It can be tough to know what questions to ask. And boards tend to hear from senior management, but not enough from other employee levels, i.e., “mood in the middle” and “buzz at the bottom”.
PwC does an annual survey of Board Directors. Over the past three years, the following are highlights of what have directors been saying about culture:
“Tone in the middle” is just as critical as “tone at the top”
There is a disconnect between how directors assess culture and what approaches they think would be most useful. For instance 2/3 use their gut to assess culture, yet only 1/3 say this is an effective approach. 2/3 also look at employee turnover statistics, yet only 1/3 think this is useful.
Poorly structured compensation plans can drive culture problems- but few are revisiting their plans
Excessive focus on short-term results is particularly problematic
A poll of the meeting participants was taken asking where the responsibility for culture lies on their boards. Most Directors indicated it was a full board responsibility with few indicating it falls into the audit committee charter. The meeting participants had a robust discussion on how to assess whether there is a problem with corporate culture and what information is most helpful. The following summarizes key points discussed:
It is important for board members to have executive sessions (without management present) to have the opportunity to discuss concerns. Executive sessions can be helpful at both the beginning of board sessions and at the end.
Directors should seek multiple inputs from all levels of the organization and be alert for inconsistencies.
Directors should carefully oversee how culture is being managed when companies merge, noting that it can take years to create a good culture.
It was noted that culture doesn’t always get the attention it should when sales are great or financials are good. Many boards fall into the trap of paying attention to culture only when problems arise.
Directors should take note of how management responds to requests from the board, are the right people responding, are subject matter experts from middle or lower management given the opportunity to present to the board, are concerns expressed by Directors ignored or dismissed.
The group concluded that there are quantitative metrics that can be used to evaluate the corporate culture. These metrics should be used in conjunction with a qualitative analysis. Examples include:
Employee engagement survey
Attrition rate of high performers versus total attrition
Employee turnover statistics
Exit interview debriefs
360 degree feedback results for executives
Code of conduct training results
Number of customer complaints/trends
Summary of social media comments
Summary of external press
Customer service/satisfaction survey results
An example of a Directors’ dashboard for culture is included in the slides provided for the session. To summarize, the following steps can be taken by boards to effectively oversee culture:
Clarify where at the board level directors will oversee culture and ensure responsibility is captured in the relevant charter(s)
Ensure the topic is on the agenda regularly and there’s enough time
Get the right information—from both internal and external sources
Consider trends in whistleblower reports that could indicate problems with culture
Keep an eye on incentive structures and question if they appear to be inconsistent with culture
Consider whether the CEO has championed the right culture when evaluating performance and determining
Be vigilant for indications that the actual culture is not aligning with desired culture
Paul DeNicola is a Principal in PwC's Governance Insights Center where he works to extend the firm's leadership in the area of corporate governance. A frequent speaker at forums for directors and governance professionals, Paul also advises boards and executive teams on emerging governance issues. He has twice been named to Directorship Magazine’s list of the 100 most influential people in U.S. corporate governance.
Paul is an Associate Professor at New York University's Stern School of Business where he teaches courses in corporate governance and professional responsibility. He also serves on the board of The Society for Corporate Governance, The New Jersey Chapter of the National Association of Corporate Directors and on the Markets Advisory Council of the Council of Institutional Investors.
Prior to joining PwC, Paul was Director of The Conference Board Governance Center, where he oversaw educational and research initiatives in corporate governance, enterprise risk management and business ethics.
Paul earned his BA and MA degrees in interdisciplinary studies from New York University and completed a PhD in philosophy and communications at the European Graduate School in Saas-Fee Switzerland.
Trish is the Audit Committee Chair for the Federal Home Loan Bank (FHLB) - Office Finance. Previously she was Audit Committee Chair for Pepco Holdings a Fortune 500 electric utility before their sale to Exelon Corporation. Trish is an experienced corporate board member and invaluable resource for helping companies create strategies that deal with the risks that emerge as business re-invents itself in a digital world. With a focus on moving to the emerging global marketplace, she guides the conversation and inspires others to think more broadly about the impact of technology, the importance of building a moral and ethical culture, forming a balanced approach to enterprise and social risk management, and addressing cyber security risks. She is an advisory board member for the Raj and Kamala Gupta Governance Institute and a member of the Board of Directors for the Association of Audit Committee Members, Inc. (AACMI). She also serves as co-chair of the Philadelphia Chapter of the Women Corporate Directors and member of the NJ NACD Board of Directors. Trish, a CPA, holds a PhD in Leadership and Organizational Systems.