When we talk to boards about corporate culture, they quickly acknowledge its importance, but worry about what is in scope and where to draw the line between governance oversight and management. While some boards are reluctant to proceed since there is no legislation or regulation to guide their oversight; many innovative boards have developed a variety of approaches for providing effective oversight.
The absence of a U.S. governmental mandate created a vacuum that has been filled by institutional investors. The so-called “Big Three” – BlackRock, Vanguard and State Street Global Advisors – believe culture and human capital management (“HCM”) both pose financial risk to investors and drive long-term value creation: they, therefore, expect directors to be prepared to communicate their oversight practices and processes to investors, whether indirectly through securities disclosures or directly during engagements.
Companies themselves are increasingly seeing culture as a competitive differentiator for attracting and retaining key workers. There is growing awareness among directors that corporate culture directly impacts operations, the potential success of transformation programs, the integration of acquired companies and thus, financial performance.
Boards have traditionally looked at HCM through the lens of executive compensation and CEO succession planning. The growing focus on oversight of broader human resource issues (for example, the attraction and retention of top talent, the gender pay gap, sexual harassment) is somewhat newer, therefore boards’ scope of oversight is less well defined.
So how far should board members go in their oversight of corporate culture? Here are five ideas already being implemented by active boards:
First, determine how the board will engage on the topic. As with other issues, directors must be careful not to cross the line between oversight and management.
Although the full board should maintain oversight responsibilities for the organization’s culture, it is also important to pursue specific and deeper oversight at committee level. Corporate culture touches responsibilities covered by nominating and governance, audit, and compensation committees. Directors need to pick one to lead on the topic on the board’s behalf.
Secondly, ensure management can clearly articulate both the current culture, the desired culture and why evolving the culture is critical to success in delivering the longer-term strategy. Directors will want to assure themselves that management has aligned all key programs in the company to reflect the desired culture, including strategy and risk management, ethics and compliance, internal audit plans, performance evaluation, succession planning and compensation.
Thirdly, understand what metrics to focus on and the ways to get an independent view of company culture. Our research has found more than 30 credible metrics that a board may consider when evaluating culture and HCM. The board may want to ask management to develop a dashboard of the most meaningful data and analytics linked to the company’s culture and business strategy.
However, directors who want to truly understand organizational culture need to go beyond board discussions. Connecting with employees during site visits, spending time with customers, participating in investor days and reviewing of review sites, like Glassdoor, can all provide directors with insights and help them to ask the right questions.
The board should have a working knowledge of the company’s D&I strategy when assessing culture and should also strive for diversity in its own ranks. A more diverse board can identify strategic blind spots and encourage a positive corporate culture by challenging management to consider D&I throughout the organization.
Site visits are particularly helpful. In most companies, management willingly offers such opportunities to directors. However, the chair or lead independent director should work with the CEO to provide a cadence and process to this practice, while also making it a part of the onboarding of new directors.
Fourthly, assess if management has adequate crisis management plans to deal with a culture-related crisis such as #metoo.
Finally, consider supplementing the board’s existing skills and experiences with deeper expertise. Keep an open mind about whether such skills can best be found among business leaders or whether current or former heads of human resources could be an interesting, and relatively diverse, pool to consider.
