Why culture is an issue for the board

When I was a strategic planner at BHP we had a saying ‘culture beats strategy every time’. Defeatist? Sarcastic? Probably.

True? Definitely!

Working in modern boardrooms I get to see, almost every day, the impact that culture can have on strategy. Yet there are still many boards who see culture as a management issue rather than falling within the duties of the directors. Adopting this view triggers risks such as underachievement of strategy, loss of productivity and profitability and erosion of trust. These can easily outweigh all the efforts of the board in compliance and leadership. They can destroy the value of the enterprise and subvert its purpose.

Regulatory and Expert Guidance

The Australian Stock Exchange Corporate Governance Principles state that “The board of a listed entity should lead by example when it comes to acting ethically and responsibly and should specifically charge management with the responsibility for creating a culture within the entity that promotes ethical and responsible behaviour.” (Principle 3 – Act ethically and responsibly).

Unfortunately, boards cannot ‘specifically charge management’ with something unless directors know exactly what that thing is and can explain the boundaries of acceptable performance quite precisely.

The UK Financial Reporting Council goes a step further with its statement that “It is the board’s role to determine the purpose of the company and ensure that the company’s values, strategy and business model are aligned to it. Directors should not wait for a crisis before they focus on company culture.” Their 2016 report on Corporate Culture and the Role of Boards is still relevant and helpful to boards looking to impact company culture.

The NACD put forward the view that “Healthy corporate cultures help drive bottom-line results, increase customer satisfaction, and attract top talent at all levels of the organization.”

Managing Culture - A good practice guide was published in November 2017 by the Institute of Internal Auditors Australia (IIAA), the Governance Institute of Australia, the Ethics Centre, and Chartered Accountants Australia New Zealand (CAANZ).

The Australian Securities and Investments Commission (ASIC) has stated that it will include culture in its risk-based surveillance reviews; these will focus on remuneration, conflicts of interest, complaints handling, and treatment of whistleblowers.

 Compliance drives mass interest

The threat of enforced compliance has driven many boards to start gathering and reviewing culture measures. This is admirable although it misses the point that culture, like strategy, must be uniquely aligned to the organisation, its aims, its strengths, it weaknesses, its competitive strategy and position, and its stakeholders. Additionally, many boards are unconvinced that the data they are getting is the data they need to make effective decisions on culture.

Board Leadership in Corporate Culture: European Report 2017, conducted by Board Agenda in association with professional services firm Mazars, and business school INSEAD, gathered the views of 435 board members across Europe. Only 5% of respondents could say they were “very confident” with the data at their disposal. Almost 30% said that they were “reasonably satisfied” with their data. But 65% admitted that, while their data was “reasonable”, they were also aware of gaps, or they did not have much data at all and were “unclear on the alignment between the desired and actual cultures.”

A common problem for boards when facing new regulation is that the regulators are clear on the outcomes but less able to add value by equal clarity on how these can be achieved. This is exacerbated by the common perception of culture as a ‘soft’ issue that resists hard measures and firm targets. Companies that are measuring and reporting culural KPIs focus on issues such as levels of sick leave, net promoter scores, exit interview data, whistleblower data, traditional engagement and culture surveys, and timeliness of breech or exception reports. Some companies are hiring psychologists to conduct reviews.

Need for practical actions and measures

To upend the common perception of culture as a soft issue, NACD convened directors and governance professionals to develop practical guidance that directors can use to enhance their culture-oversight practices. The resultant publication, The Report of the NACD Blue Ribbon Commission on Culture as a Corporate Asset, makes ten recommendations on culture oversight and offers associated action steps and tools for directors. 

As a start a board can, and arguably should, describe the desired culture in clear and precise terms including acceptable responses to expected situations. For example, the board of Bounty Mining set out the following ‘headline policy’ guidelines:

• No Injuries - health, safety and mental
• Profitability – to invest in people and plant
• Longevity – sustainable business, new projects
• Customer satisfaction – all external customers
• Compliance in all aspects

These five simple headline statements can be backed up by targets and actions to achieve desired performance levels.

Appropriate delegations

As the ASX made clear; culture must be effectively passed from the board – which sets the tone – to management, and especially to the CEO. Delegating authority only works if the employees have the skills, mind-sets, and information access to use the authority effectively. Setting out what matters are for executive decion-making and what is retained for the board is a first step; a delegations policy setting out the power delegated to each level of senior management is another. Providing education and helping executives to understand why as well as what things are delegated to them and how those things will be measured and reported is a second step. Rewarding appropriate behaviour is the necessary third step for embedding culture.

The old cliché about what gets measured and what gets done applies; what gets rewarded will get done first and delegations must be backed with incentives, even if these are sometimes criticised as being ‘soft’ or ‘just part of doing the job’. Determining what levels of performance are required, what measures will prove they have been achieved, and what rewards be attained by the CEO and senior executives when measures reach or exceed targets is within the purview of the board and its remuneration committee.

Too many boards resile from setting incentives based on culture measures because they fear these will be subjective. Designing hard KPIs is a task that may require effort and/or expert help.

The role of the CEO

Before designing KPI's it is important for the board to understand the role of the CEO in establishing and maintaining the desired culture.

Steven Bowman of Conscious Governance wrote an excellent white paper which set out five key aspects of the CEO's role in culture:

1. Describe the desired culture
2. Lead with questions
3. Consciously Model the Way: Mindset, Behavior, Symbols and Processes
4. Promote a common vision, and
5. Foster collaboration & build spirited teams.

The five activities could form the basis for the board's own role, as well as that of the CEO; that would allow the board and CEO to unite their focus on strategy and develop a common language to discussing their initiatives.

Governance by wandering about

Of course, there is more to boardroom leadership than what is practised in the boardroom. Good boards don’t just rely on indicators to tell them that the culture is strategically right: They get out and observe it firsthand.

This requires a tactful blend of steady adherence to the desired standards and clear understanding of the chain of command and when not to meddle in management issues. Board visits to operating sites, meetings with key customers or clients, interactions with suppliers of capital, labour or materials, all are good vantage points for an alert director to ascertain how employees behave in the real world when confronted by real business issues. The trick is to observe and then translate the observation into a strategic level board insight or a specific request to be passed down the management chain of command.

Mistakes easily made

Good boards make mistakes all the time! They are out at the edge of good performance pushing for even better performance and trying new processes, policies and ideas to refine and extend their company’s strategic advantage. If your board as attempted to set culture standards and encountered problems they are ahead of many other boards that still haven’t experimented with culture. Learning from mistakes is sometimes painful; learning from other people’s mistakes is slightly less so.

Board Agenda issued a helpful report into Twelve Mistakes Boards Make About Culture which may help your board to avoid the more common pitfalls.

First mover advantage

As regulators start to develop their own measures for setting and enforcing cultural norms there is a clear advantage for boards who can get ahead of this trend and demonstrate leadership in setting a culture that is strategically effective as well as meeting the lowest common denominator of regulatory acceptability. Companies with strong cultures that support their strategic aims will outperform those with weak or unaligned cultures.

Where does your board sit on the performance curve for culture leadership? What have you found t work and where are you still struggling? I would love to know and be honoured to help.

About the author:

Julie Garland-McLellan is a corporate governance and board adviser. She is also a public speaker in demand for courses, seminars and conferences, combining personal anecdotes, humour, world-class expertise and extensive experience as a director to engage, stimulate and educate.

As the author of many books and training materials for company directors, Julie is an acknowledged expert on resolving a wide range of complex governance issues. Her newsletter 'The Director's Dilemma' reaches readers in 33 countries. Get your copy free at https://www.directorsdilemma.com/