Coauthored by Rusty O’Kelley III, Andrew Droste, Anthony Goodman and Sarah Oliva.
The three largest institutional investors—BlackRock, Vanguard, and State Street Global Advisors—have made it clear they believe culture and human capital management both pose financial risk and drive long-term value. 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. In parallel, there is growing awareness among board directors that corporate culture directly impacts operations, the potential success of transformation programs, and the integration of acquired companies and thus financial performance.
Data from the Russell Reynolds 2019 Global Board Culture and Director Behaviors Survey showed that board members who self-identified as having the most engaging, professional and productive board cultures discuss corporate culture at more than half of all board meetings, and that they are confident the company culture reflects the desire of the board.
Linking Culture and HCM with Strategy
Boards have traditionally looked at human capital management through the lens of executive compensation and CEO succession planning. Recently, there have been increases in the emphasis on rigor in CEO succession planning and in the demands for earlier planning; we have also seen a greater emphasis on succession planning for other C-suite roles. The growing focus on oversight of broader human resource issues (e.g., the attraction and retention of top talent, the gender pay gap, sexual harassment) is somewhat newer, and thus boards’ notions about what they should be doing, and how, is less well defined.
Relative to other components of strategy, such as customers, financials, and KPIs, culture is harder to define and understand, let alone measure. But, given that culture is a critical enabler of strategy, boards must focus on ensuring it is an integral consideration in management’s approach to executing strategy. The adage that ‘culture eats strategy for breakfast’ is still accurate.
Management must be able to clearly articulate both the current culture and the desired culture and why evolving the culture is critical to success. If that articulation is lacking, the board should work with management to encourage clarity.
That said, some CEOs have not sufficiently emphasized how culture is a key part of their strategy. The pressure of quarterly earnings and lack of tenure can also undermine efforts to lead long-term culture change. Equilar data shows that the median CEO tenure at an S&P 500 company in 2017 was five years, down an entire year compared to the 2013 data. With more tenure in the boardroom than in the C-suite, non-executive directors have to insist that management develops the right corporate culture and the leaders required to support the longer-term sustainability of the company.
Organizing the Board for Ongoing Oversight of Culture
Given the relatively new emphasis on culture oversight by boards, directors will need to determine which issues are within their purview and 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. At larger public companies, however, this specific committee-level oversight of culture issues was often allocated to the nom-gov committee.
Understanding what metrics to focus on and the ways to get an independent view of company culture are critical to success. Research from Russell Reynolds found close to 30 credible metrics that a board may consider when evaluating culture and HCM, including hotline calls; exit interview data; resources expended on training; diversity & inclusion efforts; employee surveys’ customer satisfaction surveys, among others Each of these measures could be further parsed and compared, leading to a substantially greater number of specific metrics.
The board—or a specific board committee—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. For board-level oversight, our panelists emphasized that independent third-party data—for example, social media and employer rating websites—and whistleblower/hotline reports were critical to spotting patterns of problems in the culture.
Understanding Culture Beyond the Metrics
Directors who want to truly understand organizational culture need to go beyond discussion in the boardroom. Site visits, spending time with customers, observations drawn from participation in investor days, and connecting with employees can all provide directors with insights to bring back to the boardroom. Broad categories of enquiry might include the following:
• Site visits. Those might be done through meeting employees, convening small discussion groups with managers, and/or attending town halls. In most companies, management willingly offers such opportunities to directors. However, the chair or lead independent director of the board 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.
• Attendance at investor and customer events. These experiences equip directors with a well-rounded understanding of the interactions between management, employees, investors, and customers. From an oversight perspective, this enables directors to garner first-hand insights about the alignment of internal and external messaging and behavior.
• Knowledge of the company’s D&I Strategy. The board 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. Involvement in employee resource groups (ERGs) can also provide useful insight into culture while enabling board directors to act as valuable role models for particular groups of employees.
Looking ahead, Russell Reynolds is partnering with The Conference Board which has set up a Human Capital Management Working Group consisting of investors, directors and other experts to develop an approach for boards to take to their oversight role. The Working Group will report its findings in 2020. In the meantime, boards would be wise to take some simple steps, like those listed above, to improve their oversight of corporate culture this year.
Cheat Sheet: Top 10 Tips for Board Oversight of Culture
We believe that boards should consider the following initiatives when seeking to elevate the quality of the necessary conversation about oversight of culture and HCM:
1. Establish oversight responsibilities at the board and committee level.
2. Ensure management has a clear understanding of the current culture and has articulated a vision of the desired culture that is required to deliver the longer-term strategy.
3. Request management develop a culture scorecard or dashboard of key metrics to enable the board to monitor key aspects of the culture. Ensure board members have access to employee hotline and engagement survey data that has not been filtered by management and can help identify any problems in the organization.
4. Ensure 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. The board’s compensation committee will also need to make sure its own approach to remuneration is designed to reward desired culture and behaviors.
5. Assess manifestations of the culture beyond the boardroom by reviewing external data derived from social media and through coordinated site visits. Site visits should include informal opportunities for interaction with management and employees at that location.
6. Use the appropriate board committees to seek the views of board advisors who come into close contact with management and employees such as outside counsel, independent audit firm, and other consultants for their insights on the corporate culture.
7. Ask management to develop modules on the company’s purpose, culture and people that can be included in new director onboarding and director education in the boardroom.
8. Ensure there is a crisis management plan that deals with a culture-related crisis such as #metoo.
9. Examine the board’s HR and HCM expertise and recruit accordingly. 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.
10. Identify – via rigorous self-evaluation and periodic independent evaluation – how the board’s own culture and practices either help or hinder the reinforcement of the desired corporate culture.