For the first time, we have seen a direct connection between cultural oversight and director liability in Wells Fargo’s acquisition of Norwest Bank. Management and the board learned a hard lesson when the aggressive culture of Norwest spread through the new organization. The Fed’s Feb. 2018 cease-and-desist order with Wells Fargo not only limits the bank’s growth but may also result in the replacement of four board members. Culture is a product of people, their individual backgrounds and their fit within an organization.
This raises a question for boards as to how they will think about overseeing company culture. At a time when governance groups and stakeholders are increasingly urging companies to take clear public stances on Environmental, Social and Governance (ESG) programs, it’s imperative that management clearly articulates both the current culture and the desired culture, as well as how the company’s culture fits into its long-term strategy.
Boards are now actively considering how to report on ESG issues, as well as how to keenly monitor and implement culture. Directors want to see management programs that reflect the desired culture, including strategy, risk management, ethics and compliance, performance evaluation, succession planning and compensation.
Culture is considered by many as a “soft” subject that cannot be easily measured by concrete metrics. However, there are several tools available to directors to evaluate what is going on amongst the people within the company. These include using Glassdoor to monitor the buzz at the bottom and to get a sense of the mood at the middle layer of the company. The goal for directors is to ensure that they match the desired “tone at the top.”
There are many telltale signs of a bad culture to look out for. According to Harvard Business Review, long hours are likely to backfire and lead to negative sentiments amongst employees and their employers. If your team’s morale is lacking, it may be time to re-evaluate work hours and whether the goals people are required to meet are realistic. According to research from the Boston Consulting Group, appreciation for your work is “the most important single job element for all people.” If employees do not feel valued or that their work is important, they will seek that fulfillment elsewhere.
Boards should get to know the foundational members of the company, including non-C-Suite executives, through location visits, presentations to the board and social gatherings such as pre/ post-meeting lunches or dinners. These personal interactions in a non-boardroom setting provide the board with a sense of the real culture of the company.
The results of employee, customer and supplier surveys should be shared with the board. It can also be very beneficial to invite HR into the boardroom to share insights. Boards typically have a full agenda at every meeting and adding another report to review may not be well received. However, that culture must be represented, just as finance, legal and operations are, in order for the board to fully get a strong sense of the organization’s culture. Generally, the head of HR can present the board with regular updates on company morale, programs and problems, as well as provide additional background info to the metrics typically shared with board members.
Another important way directors can gain a deeper understanding of the culture at every level of the organization is to hold board meetings at operating facilities in diverse geographies. This gives directors a more thorough understanding of how the company operates and allows for socialization with employees at every level of the organization.
Using the phrase “cultural fit” when hiring can sometimes result in groupthink, with everyone defaulting to the common wisdom. Instead, consciously creating a culture where ideas and topics can be debated in a healthy and respectful way leads to better decision-making.
Another important component of creating a strong and dynamic culture is how the board engages with corporate/social responsibility. ESG is now a key topic for discussion, review and action.
Funds that take ESG into consideration when allocating capital have already spent more than $1 trillion to date—and more of them are becoming activist investors. As a result, large companies, including Amazon, JPMorgan and BP, have fielded questions at their annual meetings about topics ranging from gender diversity to addressing climate risks to the use of artificial intelligence.
Part of creating a strong and robust company culture will depend on how boards and executives respond to their ever-growing set of constituencies and whether they are proactive with new ESG and cultural demands or are reactive and behind the curve.
Boards may want to consider actively engaging on these topics. Investors, employees and customers will likely reward and recognize companies who are able to clearly articulate their values and culture.