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06 November 2017
Recently, corporate cultures—or, more particularly, serious lapses in same—have emerged as flashpoints at many businesses and even entire industries, often with significant negative press coverage and severe economic consequences. As a result, this new report from the National Association of Corporate Directors, The Report of the NACD Blue Ribbon Commission on Culture as a Corporate Asset, couldn't be more timely. The report suggests that boards would be well-served by paying more attention to oversight of company culture—not just for scandal avoidance, but also "as a way to drive sustained success and long-term value creation." A "healthy culture," the report asserts, can serve as "a competitive differentiator." The report includes a Toolkit with sample documents, questions and other useful materials.
The report suggests that directors' experience and independence may actually be helpful in picking up on early warning signs that a member of management —who is typically immersed in the culture—may miss. But unfortunately, the report asserts, corporate culture "does not get the level of boardroom attention it deserves until a problem arises." The BRC contends that "this has to change": directors need to take "a proactive, forward-leaning stance on culture oversight." However, "taking a proactive stance with respect to culture oversight does not mean directors have to factor a new, additional set of responsibilities into their already-crowded agendas. Instead, culture should be one facet of existing activities, including the board's own governance and continuous-improvement practices, strategy and risk discussions, CEO selection and evaluation, decisions about rewards and recognition, and shareholder/stakeholder communications."
The report views the concept of "culture" as a "series of assumptions individuals make about the groups in which they participate, visible through artifacts (including public statements, organizational structures, and key processes), stated goals and aspirations, and basic (i.e., taken-for-granted) beliefs." Corporate culture is evidenced by the behavior of all employees at all levels, as well as in interactions with external stakeholders. One insight into company culture comes in response to questions about problem-solving: "In uncertain situations, or when people are under pressure, what do they do instinctively? What decisions and trade-offs do they make? That tells you a lot about a company's culture." Organizational cultures comprise elements such as explicit and implicit rules and norms, ethics policies, incentives, training, processes for decision-making, communication flows and leadership styles. A healthy culture can be a "unifying force" and reinforce "the elements of the strategy and business model in a productive way. Conversely, a dysfunctional culture has the potential to undermine the business model and create significant risk for the company."
The BRC argues that two sets of standards must be clearly identified: "first, the values and behaviors that help the company excel and that are to be encouraged, and second, the behaviors for which there are zero tolerance." To that end, the BRC suggests that the board ask the CEO to create a short narrative of the desired cultural foundations and to explain how the company's incentives, controls and policies support those foundations.
The BRC advocates that healthy cultures should be viewed as corporate assets: studies have shown a positive relationship between strong positive cultures and positive business attributes, such as customer satisfaction, safety and profitability. In addition, social media can increase the speed and impact of scandals on corporate reputations, particularly in light of negative popular perceptions regarding business in general, and many institutional investors and regulators have put corporate culture under a spotlight. In the BRC's view, "board members need to achieve a level of discipline with respect to culture oversight that is comparable to leading practices in the oversight of risk." While there is no one size fits all, the BRC identifies the following as "signifiers of healthy culture in the organization as a whole, and also in the boardroom":
The BRC identified six priorities:
In discussions about financial results, the BRC advises directors to:
"emphasize that the way in which results are achieved is as important as whether or not a given goal is met. The way directors formulate questions during reviews of business results and operating performance sends an important signal: an overly transactional approach to problem-solving or an excessive focus on quantifiable gains and losses (whether in terms of revenue, profits, market share, or other measures) can obscure or diminish the importance of purpose, values, and behaviors. Boards should ask how employees handle situations where goals and objectives are in conflict. How do they make trade-offs in these situations?"
The report recommends that the board "set clear expectations about the due diligence and evidence required," posing questions about whether they are receiving a sufficiently holistic view, adequate unfiltered data and high-quality and reliable data. Data from outside sources, such as outside auditors and engaged third-part reviewers, should be taken into account. Directors should also assess how the company is addressing any issues.
As discussed in this PubCo post, BlackRock' s "Investment Stewardship" priorities for 2017-2018 including human capital management. BlackRock indicates that, as part of its engagement, it seeks "to ensure companies are adopting the sound business practices likely to create an engaged and stable workforce. As part of the engagement, [BlackRock is] interested to know if and how boards oversee and work with management to improve performance in these areas. Such engagement also provides a lens into the company's culture, long-term operational risk management practices and, more broadly, the quality of the board's oversight."
For further information on this topic please contact Cydney Posner at Cooley LLP by telephone (+1 415 693 2000) or email (firstname.lastname@example.org). The Cooley LLP website can be accessed at www.cooley.com.
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