Board members are increasingly being asked to get more involved in the oversight of corporate strategy, governance advisors are urging boards to pay more attention to culture.
Recently in America, the National Association of Corporate Directors' blue-ribbon commission published its latest report, Culture as a Corporate Asset. The report encourages boards to embrace oversight of company culture as a strategic move to create sustainable, long-term value.
The report, a collaboration of more than 30 board directors and governance professionals, provides detailed analysis of why culture has emerged as a larger contributor to the overall success of public companies, while offering advice on how boards can take steps to improve their culture, in the boardroom and throughout the entire organization.
Do directors have a good read on the culture at the organisations they oversee? Turns out, many do not.
From a New Zealand perspective, following Fletcher Building’s challenges around a healthy corporate culture. Boards should have this as a critical element in monitoring the execution of the corporate strategy and CEO’s performance.
The actions of the CEO and challenges around perceived effective governance had a real business impact. Therefore, as directors they need to bring more clarity and rigor to their discussions with management about culture.
I wonder what percentage of New Zealand directors of listed companies have an understanding of “the collective behaviours, norms, and values at the front lines of their organizations, among their rank-and-file employees.” According to the research in the United States, only 50 percent of American company directors do.
The study’s authors outlined best practices for cultural oversight.
Here are their 10 recommendations:
- The board, the CEO, and senior management must establish clarity on the
foundational elements of values and culture—where consistent behaviour is expected across the entire organization, regardless of geography or operating unit—and develop concrete incentives, policies, and controls to support the desired culture.
- Directors and company leaders should take a forward-looking, proactive approach to culture oversight in order to achieve a level of discipline that is comparable to leading practices in the management and oversight of risk.
- Because of its significant interdependencies with strategy and risk, active monitoring of the organization’s culture is a full-board responsibility, with specific oversight activities housed in committees as appropriate. The nominating and governance committee should ensure that board policy documents and committee charters clearly delineate the allocation of such responsibilities and explain how culture oversight is embedded into the ongoing work of the board.
- Directors should review the culture of the whole board and its key committees on a regular basis, both formally (via the evaluation process) and informally (by making time for reflective conversation in executive sessions). The results of these reviews should inform board composition, succession planning—especially for leadership roles on the board—and continuous improvement efforts in board operating processes.
- Directors should assess whether the chief legal officer/general counsel and other officers in key risk-management, compliance, and internal-control roles are well positioned within management and in relationship to the board to support an appropriate culture.
- Culture should be integrated into the board’s ongoing discussions with management about strategy, risk, and performance. How results are achieved is as important as whether or not a given goal is met.
- Boards should set the expectation with management that regular assessments of culture will include both qualitative and quantitative information and incorporate data from sources outside the organization.
- Directors should make culture an explicit criterion in the selection and evaluation of the CEO, and set the expectation that the CEO and senior leaders do the same in their own leadership development and succession-planning activities.
- Boards and compensation committees should review the company’s recognition and reward systems (including incentive compensation as well as promotion decisions and other nonfinancial rewards) to ensure that they reinforce the desired culture and avoid unintended outcomes that could undermine culture.
- Shareholder communications should include a description of how the board carries out its responsibility for overseeing and actively monitoring the company’s culture.
I’m sure boards in New Zealand will find the report essential reading.
Henri Eliot is founder and CEO of Board Dynamics.
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