That’s the worry that keeps directors up at night, says Briscoe. “It’s the part that always scares you. What’s really happening in the organization? You see what you can see—but how much are you seeing?”
That anxiety is shared by board members who know that what they witness in the boardroom might not be an accurate representation of the mood in the middle or “the buzz at the bottom,” says Paula Loop, leader of the governance insights center at PwC. “When you start to expand and go underneath the layers, that’s when you really get into the company’s culture. That’s when you find out if you have a systemic issue or an isolated incident.”
Cassel recommends walking the company floors, listening to hallway conversations, grabbing lunch in the employee cafeteria and sitting in on a sales or marketing meeting. Many boards also take meetings on the road in order to combine them with customer-related events. “There’s really nothing better than having a board meeting in proximity either to a specific location or to a customer site and having [customers] come in to talk about their experience with the company,” says Shoshana Vernick, managing director of private equity firm Sterling Partners, who sits on various boards of portfolio companies.
A little undercover work never hurts. Since becoming a director of Walgreens Boots Alliance in 2012, Babiak has independently visited more than 400 of their stores. “I don’t say, ‘I’m a board member, pay attention to me.’ I walk in, I’m in my jeans and I ask for some obscure product that I know they carry… [then] I may casually ask, ‘How long have you worked here, do you like it?’ It’s amazing what you learn about the company when you are anonymous.”
It’s critical that directors, each of whom need to be making similar kinds of observations on culture, meet to compare notes, without the CEO, says Marzec. “Because, if the only time you spend with other directors is in the boardroom with the CEO, that’s trouble.”
Do the numbers add up?
That’s not just a question for the balance sheet. Boards have to see if available data lines up with the company’s stated values and the reports they’re getting in the boardroom. Data from employee satisfaction surveys, onboarding interviews, exit interviews and review sites like Glassdoor can all be resources for vetting how a company is living up to its stated values and cultural mission.
As they say, what isn’t measured won’t be managed—at least, not well. If management can’t produce the necessary data, then boards have to question whether the company is being proactive about culture. Tivity Health closely monitors its Glassdoor ratings and recently began using TINYpulse, an employee engagement tool, to stay on top of how employees are feeling about the company. “We have these venues in place to make sure we’re not just sitting back and patting ourselves on the back because we haven’t had a lawsuit,” says Tramuto. “A lot of CEOs I talk to will say, ‘My culture is fine because we haven’t had a lawsuit.’ That’s like saying my 98-year-old grandmother drives very well because she hasn’t had an accident. Meantime she’s going through stop signs and traffic signals.” Boards should also be skeptical if the company is blowing its nearest competitor out of the water. That might sound like cause for celebration, but it could also be a red flag, says Babiak, who notes that Wells Fargo’s soaring new account numbers might have been a helpful tip that things weren’t quite kosher. “If one company is significantly outperforming the market, your question ought to be, ‘Why?’ There may be perfectly good reasons for it and when there are, that’s wonderful, but if there aren’t, boards should be challenging it, as should investors. It’s very rare that one company has all the smart people.”
How well are we managing human capital?
#MeToo scandals have forced boards to think about the quantitative risks involved in human capital mismanagement. And changing ideas about the value culture delivers also come into play. A recent EY report found that intangible assets, such as culture, talent and the ability to be innovative, accounted for an average of 52 percent of a company’s market value. The lesson for directors? Creating value in our intellectual capital-driven world requires a fundamental understanding of a company’s unique human capital assets, just as understanding physical assets was critical in the ’70s and ’80s.
The focus on boards’ ability to better link human capital management and strategy is being driven in part by top-performing companies realizing that a toxic culture can make it difficult to retain high-value workers. For example, in December, Tesla added Kathleen WilsonThompson, executive vice president and global chief human resources officer for Walgreens Boots Alliance, to its board of directors. In addition to adding an independent voice to Tesla’s board, Wilson-Thompson was brought on to help the maker of electric cars deal with employee allegations of unfair workloads and an unsafe work environment.
CEO Elon Musk’s January announcement that Tesla is cutting its full-time workforce by 7 percent, which led to a nearly 13 percent decline in share price, also underscores the need for companies to correctly determine the type and size workforce they need to sustain their individual business model.
