There’s no shortage of theories as to what exactly comprises culture. It’s both the tone at the top and the mood in the middle. It’s about workplace diversity and how employers manage their people. It’s a measure of how well the workforce is complying with codes of conduct, but it’s also the ability to embrace failure and color outside the lines. It is that je ne sais quoi that gives companies a competitive edge not only in the consumer and B2B markets they serve, but in the hotly contested talent pool.
On the flip side, poorly executed culture can expose companies to shareholdervalue-killing risks, such as #MeToo lawsuits, embarrassing ethics violations and brand decay. For those directors who haven’t quite bought into the connection between good culture and sustainable, long-term value—or the risks a company incurs by ignoring culture—a reckoning may soon be on the way. “The board is the keeper of the tone at the top,” says Beverley Briscoe, lead chairman for industrial auctioneer Ritchie Bros. “They create it, they live it, they are responsible for it.”
Still, when it comes to drilling down to the specifics on culture, things get murkier—a lot murkier. “There’s definitely a lot more discussion about culture, but it’s kind of a soft topic because, what do people really mean by ‘culture’?” says Robert Marzec, independent vice chair of CUNA Mutual Group.
“One of the board’s key responsibilities is oversight of corporate risk,” says Betty Huber, co-head, environmental, social and corporate governance group for global law firm Davis Polk & Wardwell. Directors, she says, should be ready to articulate to investors the company’s culture and how it aligns with and furthers the company’s long-term strategy and values, “not next year, not in five years, but this year.”
Adopting best practices now can help you get a handle on culture and focus on the metrics that will show you, even with a limited view from the boardroom, where the culture might be off track. “The best way to think about culture is it’s a set of values as they are expressed in behaviors. Values can be hard to measure because they’re more amorphous, but behaviors are not. Behaviors are concrete and they can be measured,” says Harvard Business School professor Gary Pisano. Here are six key questions boards should be asking themselves—before investors do.
Do we have real transparency?
Whether you’re a CEO or a board member, bad news has a frustrating tendency to travel very slowly, if it ever makes it to the top, says Ravi Saligram, CEO of Ritchie Bros. and board member at household products manufacturer Church & Dwight. “And then you have so many layers that embellish it that, by the time it gets to you, it’s really doctored.”
Even well-intentioned CEOs, in an effort to manage communications, sometimes limit the scope of board presentations from outside the C-Suite or quietly discourage direct employeedirector contact. That’s why directors can’t afford to be passive. “As a board member, it’s very easy to sit in the boardroom and just take what comes to you from management,” says Jan Babiak, who sits on the boards of Walgreens Boots Alliance, Bank of Montreal and Euromoney Institutional Investor. “I personally believe our job is to go beyond that. We need to be engaging with members of management absent the CEO and other senior executives, supported by the confident encouragement of the CEO.”
Donato Tramuto, CEO of Tivity Health, is also a believer in that, adding that if the CEO has nothing to hide, transparency should not be threatening. “It was quite a shock to the board when I said, ‘I want you to have an executive session with my team without me,’” he says. “But there’s nothing in this organization that, quite frankly, the board should not be aware of.”
Marzec expects to hear regularly from middle managers in addition to C-Suite members. Then he is careful to observe the presentations and watch for evidence of problems. “First, are they even allowed to give those? Are they very rehearsed or can they go off script? If they are asked a question, are they scared to answer it when the CEO is present?” He adds that meetings with middle management can be easier to have at the committee level rather than with the full board. “As chair of the audit committee, I like to have an executive session alone with internal audit, external audit, with the tax director.” Ideally, the committees will also have more informal lunches set up to meet and mingle with middle management. “That gives you a comfort level that people are not only capable, but will speak up if they think there is an issue,” he says.
Are we getting out of the boardroom?
There’s an obvious limit to how much directors can get in the boardroom, where “you’ll get whatever management wants you to hear,” says Jim Cassel, an investment banker who focuses on mid-market companies.