The Way We Do Things Around Here

This is the third of three articles on the topic of human capital. The first, Overseeing “Our Greatest Asset”, dealt with the board’s role in Human Capital Management and the second, The Talent-Savvy Board, dealt with Talent Management. In this article we explore the importance of organizational culture.

An organization’s culture can make or break a brilliant strategy and build or damage the careers of experienced executives. A positive culture that aligns well with strategy can produce innovation, growth, leadership, ethical behavior, and customer satisfaction. But a negative or misaligned culture can impede strategic outcomes, erode performance, diminish customer loyalty, and discourage employee engagement.

Yet, despite its importance, corporate culture has only rarely appeared on board agendas. Few boards have spent time overseeing culture with anything like the rigor they’ve applied to compliance, strategy, risk, or CEO succession.

That’s starting to change. Boards are sitting up and taking a more proactive approach to understanding, shaping, and overseeing organizational culture.

Culture as an Asset

I think of corporate culture as “the way we do things around here,” - the norms that guide how people act in any given situation, how decisions get made, and how people are treated. It’s the mix of shared assumptions, values, and beliefs that create an organization’s unique character.

Don’t confuse culture with the aspirational values posted on the break room wall. Instead, culture consists of unwritten rules – rules that everyone knows but can’t necessarily articulate clearly.

In 2017 the National Association of Corporate Directors (NACD) established a Blue Ribbon Commission on Culture as a Corporate Asset. The Commission’s Report defined culture as “the character of a company, what provides meaning to employees and the work they do,” going on to say, “If values are about the ‘what and why’ of an organization, then culture is the ‘how’ - the way in which those values are lived on a day-to-day basis."

While an organization’s culture informs day-to-day actions, it makes itself particularly evident in times of change, uncertainty, or crisis. Maybe that’s why the topic of corporate culture tends to capture public attention in the wake of events like accounting scandals, financial crashes, or reputational disasters.

But corporate culture has a huge upside t00. As one analyst put it, “If led and managed well, culture is the rocket fuel for delivering value to stakeholders.” In other words, the right culture can be a significant organizational asset.

The Board’s Role

Because of its clear connection to corporate success (or failure), the Blue Ribbon Commission argued that oversight of corporate culture should be among the top governance imperatives, for every board, regardless of its size or sector.

“… culture oversight is by definition a key board responsibility, as it is inextricably linked with strategy, CEO/senior leadership selection, assessment and evaluation, and risk oversight – all of which are squarely in the board’s domain.” - Blue Ribbon Commission on Culture as a Corporate Asset

Experts seem to agree these days that boards should be actively engaged in monitoring culture throughout the organization. (See the list of Resources below for just a small sample of recent articles making that argument.)

So, what is keeping boards from jumping on this particular bandwagon? There seem to be a few stumbling blocks in the way, including the lack of a clearly defined governance role, the desire not to interfere with what is clearly management’s job, the difficulty of getting a handle on the organization’s culture from inside the boardroom, and the lack of a framework to start a productive conversation about culture.

I found that Five Ways to Enhance Board Oversight of Culture from the Institute of Corporate Directors Malaysia (ICDM) provides a useful way to help boards get started down the path of overseeing culture. The five suggestions are:

1. Oversee how culture is defined and aligned to strategy.
2. Create accountability for how culture is communicated and lived.
3. Monitor culture metrics to keep a pulse on how culture is evolving.
4. Provide oversight of intentional culture shifts.
5. Challenge the board’s culture.

Let’s dig into each one of these in turn.

Aligning Culture to Strategy

“Culture is not an end in itself; it is a way of enabling the organization to deliver on its strategy.” – Mary Meaney, McKinsey Global Organization Practice

A corporate culture that is inspired by the company’s purpose and aligned to its strategy enables and accelerates that strategy. For instance, a strategy of innovation requires a culture that is entrepreneurial, encourages new ideas, and allows considered risk-taking, whereas a strategy that prioritizes efficiency needs a culture that values formal structure, defined roles, and organization-wide coordination.

Misalignment between culture and strategy poses a major risk. Given its importance, a strategy retreat might be a good time for the board to ask questions that ensure management has defined a culture that actually fits well with the company’s current ambitions.

Questions for the Board to Consider

• How is the culture intentionally defined in the context of strategy?
• How well-aligned is our corporate culture with our strategy?
• What organizational behaviors are required to achieve our strategy?
• How well do we demonstrate those behaviors today?
• How is the culture shifting to align with a change in strategy?

How Culture is Communicated and Lived

“Fundamentally, the board’s role should be … to ensure that the desired culture is reinforced in a steady drumbeat of messages, policies, processes, systems, and behaviors in the boardroom and across the organization.” - Blue Ribbon Commission

Every organization has some kind of system that guides behavior through a combination of processes and practices such as performance management and incentive structures. The board plays a role in supporting this system by aligning executive compensation to the behaviors that the organization needs, and by confirming that management communicates, demonstrates the desired behaviors, and reacts appropriately to breaches of the company’s stated values.

Culture is not static – it evolves over time. In succession planning discussions, boards should explore how processes like talent management, performance evaluation, and executive recruiting are likely to shape the leaders of the future.

Questions for the Board to Consider

• How do we ensure a shared understanding of the culture throughout the organization?
• Where do organizational behaviors open us up to risk?
• How does the organization make it safe for people to do the right thing?
• How do we consider culture in our succession plans?
• How might compensation structure help shape a different culture?

Culture Metrics

“I often find that broad-based culture surveys highlight disconnects between what senior leaders say and what people at other levels in the organization report.” – Mary Meaney

While you might think that organizational culture is a difficult concept to measure and monitor, that is not the case. A quick internet search will find a number of tools available.

One such tool, the Gallup Culture Asset Index for Boards, is described in the article The Board's Role in Sustaining Company Culture. The Gallup tool includes ten simple questions designed to measure employee perceptions of important culture factors such as leadership, integrity, and purpose.

Questions for the Board to Consider

• What metrics could be gathered and monitored as a barometer for cultural fitness?
• How does management’s reporting need to be adjusted to capture data for consideration of culture?
• What do we measure to understand the extent to which desired behaviors are happening?
• What culture models or frameworks could be useful for us to adopt?
• How do we take into account the possible cultural context underlying the achievement of key performance indicators?

Intentional Culture Shifts

“We have seen many great organizations stumble and sometimes even collapse because they had deep cultural issues.” – Mary Meaney

A lack of alignment between existing behaviors and the ideal culture becomes most obvious when making a change to organizational structure or processes.

A new CEO, a merger or acquisition, a strategy shift, digital transformation, regulatory changes, or unethical behavior events are all potential drivers for shifts in an organization’s culture. The board’s role in these cases is to confirm that management has the resources needed to operationalize culture shifts and to oversee the approaches used.

Questions for the Board to Consider

• What is the current culture of the organization?
• What is the difference between our current and ideal corporate culture?
• How well do our organizational structure and practices support our ideal culture?
• What cultural impediments do we face and how will we overcome them?
• When a planned organization change is not going well, what aspects of the culture could be getting in the way?

The Board’s Own Culture

“Culture can’t just be a topic on the board agenda; it’s everything you do … ” - Craig Jackson, Board Director, Paloma Rheem Global

The CEO’s behavior and that of the management team have a huge impact on the organizational culture – far more so than the board. Even so, boards do set the tone at the top. They should be aware of what that tone is and how directors reinforce or undermine it with every board decision.

The board can also demonstrate a commitment to the importance of culture by ensuring they spend time on this important topic, and by evaluating its own composition and dynamics.

Questions for the Board to Consider

• How do we ensure the board embodies and reflects the company’s values?
• How well does our board composition and dynamics support the company’s commitment to fostering a culture of diversity and inclusion?
• How do our boardroom behaviors advance the right tone at the top?
• How thoroughly have we discussed the importance of culture and helped define the desired culture?
• How do we ensure we give enough board attention to culture as a key enabler of strategy?

Your takeaways:

• The organization’s culture can be a significant asset if it’s aligned with strategy.
• Oversight of culture falls squarely in the board’s domain because of its links to strategy, risk, and CEO selection.
• The board’s oversight of corporate culture includes learning about the current culture, how it might differ from the ideal culture, and what plans are in place to support the needed cultural shift.
• Measurement is key – the board should identify and monitor some key culture metrics.
• The board’s own culture sets the tone at the top with every decision it makes.

Resources:

• Boards, talent, and culture. McKinsey & Company. August 2021.
• The Board Imperative: Four ways boards can govern culture to reduce risk. Kris Pederson. EY Center for Board Matters. July 2021.
• Five Ways to Enhance Board Oversight of Culture. Joe Dettman and Stephen Klemash. ICDM. December 2020.
• The Board's Role in Sustaining Company Culture. Judy Warner. Gallup. September 2019.
• Report of the NACD Blue Ribbon Commission on Culture as a Corporate Asset. © 2017. National Association of Corporate Directors.

Thank you.

Scott

Scott Baldwin is a certified corporate director (ICD.D) and co-founder of DirectorPrep.com – an online membership with practical tools for board directors with a growth mindset. 

Originally published May 15, 2022

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