There is a buzz in the air about renovating corporate culture in the name of innovation. Directors hear the changing desires of their stakeholders, and are developing a greater understanding of their business’s role for society at large. That buzz guided a recent roundtable discussion in Miami at NACD’s Leading Minds of Governance event.
A panel of governance experts and directors discussed recent trends in corporate governance with a full room of directors (fuller remarks from the panel will follow in the March/April 2018 issue of NACD Directorship magazine). Panelists included:
John Borneman, managing director, Semler Brossy Consulting Group LLC
Stuart R. Levine, nominating and governance committee chair and audit committee member, Broadridge Financial Solutions
Kathleen Misunas, director, Boingo Wireless and Tech Data Corp.; principal, Essential Ideas
Michael Stevenson, partner, BDO USA LLP
Peter P. Tomczak, partner, Baker McKenzie LLP
Highlights from their answers to select questions from directors in the audience follow. Comments have been edited for length.
To Build an Innovative Culture, Start with Hiring
I work in a heavily regulated industry. We’re in a very steady environment, but our industry is changing rapidly in all directions. Helping shift that culture is essential, so I’d love to hear your differing perspectives.
Misunas: I think it starts with the people you hire—and you need the buy-in from your senior staff. The people that are hired help you move in the right direction.
Levine: One of the criteria for hiring should be intellectual curiosity. If you’re hiring people at any level, including on the board, if those people do not express intellectual curiosity, I think you’ve got a problem on your hands. In the boardroom, consider sharing content that stimulates discussions around technology or governance trends. By discussing strategic material, it encourages excellent outcomes.
Misunas: Right. This absolutely should cascade down through the organization. The C-suite alone shouldn’t be concerned with curiosity. The next level should be doing the same thing with their staff, and so on.
Tomczak: When you consider innovation strategy, what does innovation mean to your board? Do you mean bringing in new ideas from outside your industry? If you’re hiring the same 20-year industry veterans, you’re probably going to get the same 20-year-old strategy. I’ve also found that tying individual economic incentives to strategy outcomes is useful, and it’s hard. There’s no right answer to the compensation question and innovation.
Borneman: I’ll add that innovation should be on the CEO’s scorecard. Is it one of the top priorities that you want to hold her accountable to for the organization? You can say it’s important, but if it’s not on the scorecard, you’re merely talking about innovation. There’s no accountability. It doesn’t have to be tied to compensation—to put dollars on it gets tough. But we can find innovation measures in some kind of meaningful, quantifiable way.
Stevenson: I think that when some boards assess themselves, when they probe their expertise, they find that because of the complexity of transactions (for example, in financial instruments and other changes associated with this current business environment), audit committees are finding themselves ill-equipped to handle changes happening in their organizations. As you take a fresh look at your board, understand the other situations that they have been involved with will arm them for change. That’s a critical point to know about members of this committee. Boards that are refreshing [their composition] with this understanding are also the easiest to work with from an audit perspective.
Don’t Miss the ESG Bus
How do we translate ESG into something with real business meaning that management can be held accountable for to deliver results?
Levine: Approaching the governance standpoint, regardless of the business you’re in, we’re all trying to anticipate client and customer needs. If you don’t have people of diverse backgrounds on your board, you risk not understanding the people who are buying your products and services. If you’re looking to deploy capital, and you look around and don’t have representatives on your board of the populations you’re serving, I don’t know how you develop the right strategy.
Misunas: I don’t walk into a business anymore where this is not a topic of conversation. Boards and executives are peeling back the onion to see where their companies stand, and where they should be, on environmental issues. ESG is top of mind for millennials. They speak up about real environmental issues. As a result, companies can look at their distribution lines, for instance. What are our transportation means? What are those contracted companies doing to protect the environment? Could we switch out business partners for a company that is more responsive to these issues?
If there’s no penalty for not doing anything, you’re omitting ESG from culture. I’m not saying you should give an extra reward for doing something, but should there not be some penalty other than getting left off the bus?
Borneman: The penalty is the impact on your business, your employee population, and getting kicked off the bus. It’s not about your bonus. It’s not about compensation. It’s about a longer perspective on business.
Now is the time for boards to take culture risk seriously and begin to find ways to understand it in advance of a toxic culture truly damaging an organization. The recent examples of bankruptcy at The Weinstein Company and the rapid loss of $2 billion in market cap at Wynn Resorts only serve to underscore the close connection between leadership and culture and toxic leadership and toxic culture with reverberations and repercussions not only on shareholders but stakeholders of all types.
In this second part of this blog series addressing culture oversight, I suggest three practical tools for boards to exercise proactive oversight on culture issues to enhance discussions that may already be in process. Embedded in these tools are the top ten questions the board should ask management about culture, as well as some of the key dashboard metrics a board should consider getting.
Tool One: Arming the Board With the Right Information From the Right Members of the Management Team
Your chief ethics and compliance officer (CECO) and another executive (perhaps the chief learning, human resources or talent officer) are all good resources to report to the board from time to time and regularly on issues of culture. Indeed, an empowered CECO may be the best bet as she should be reporting to the board (or a committee thereof) on a quarterly basis anyway. His or her dashboard of ethics and compliance metrics should also include some of the key culture metrics described in tool two, below.
Moreover, the board or appropriate committee (audit, risk, compliance, regulatory affairs) should have regular executive sessions with the CECO and perhaps develop more informal methods of regular communication such as a phone call check-in between the CECO and the chair of the audit committee, for example, something I have done in my executive career and to great benefit of the organization.
When a company of a certain size, maturity, and complexity does not have an executive of the appropriate stature taking care of culture issues, it may indicate that the CEO doesn’t think culture is that important. Moreover, if there is an executive who should be thinking about culture issues proactively but is not or is not allowed the ability and resources to do this (for example, budget for a culture survey), that presents another potentially serious culture red flag. Last, other red flags may emerge when senior executives are not able to provide the arguably correct answers to the top ten culture questions the board should ask (listed below).
The Top Ten Culture Questions the Board Should Ask:
For the CEO: What does culture mean to you, and what is the importance of culture to you personally as the leader of the company? How would you, as the CEO, characterize the culture of the organization? Is it healthy, improving, ailing, or under serious stress?
Does the company have an explicit culture program in place and, if so, what does it consist of? Is it intertwined and integrated with the company’s mission, vision, values, and strategy?
If there is no current culture program in place, what is management’s plan to deploy one? What is the plan’s timing, budget, leadership, and details?
How do you measure culture at the company?
How do you keep management at the highest and middle levels accountable on culture issues?
Is there a member of senior management or the c-suite with an explicit remit to manage corporate culture?
Does the company’s performance management program and incentive structure incorporate cultural considerations and metrics? If so, how? If not, what is the plan to incorporate such considerations?
What are the top culture issues at the company today (good, bad, or ugly)?
When there are difficult culture issues (the bad and ugly kind), how does management handle them?
Is management aware of investor, employee, customer, and other stakeholder concerns or perspectives regarding corporate culture? Has there been any stakeholder reach-out on this issue?
Tool Two: The Customized Culture Dashboard
The company’s board should be reviewing a customized dashboard that is updated regularly. Such a dashboard should be unique to each organization but should include many of the following qualitative and quantitative considerations and metrics.
Ethics and Compliance (E&C) Metrics
E&C risk assessments – key data, key topics
Helpline or hotline trends and key issues
Training and communications trends and topics
Pulse surveys on ethics and compliance program
Investigations – type, process, and outcome
Periodic internal and external evaluations of the effectiveness of the E&C program
Employee and Culture Survey Metrics
Culture climate metrics geared at workplace issues including supervisory relationships
E&C program benchmarking against peers
Human Resources Data
Performance management results (with financial and non-financial metrics, as well as environmental, social, and governance metrics, included)
360 leadership assessments or the like
Tool Three: Benchmark Your Company’s Cultureand be Prepared to Intervene
Understand where your organization fits in the spectrum of workplace culture. An example of useful benchmarking may involve using the Ethics Research Center’s Global Business Ethics Survey. Get a culture survey done. Slice and dice it, and work to understand its results. Ask management about the culture climate, the temperature and how it is reflected at different divisions, business units, and more. Do your company’s culture surveys have consequences or are they merely window dressing? If the latter, why do them? If the former, what are the actual concrete consequences? Do “golden boys/girls” who are abusive get counseled, disciplined, or terminated when infractions occur? Or are they ignored or merely slapped on the wrist for things that get others fired?
If and when a culture issue threatens to suffuse the wellbeing of an organization and its leadership, the board must be prepared to intervene in a crisis—before or after it unfolds. The board’s keeping its finger on the cultural pulse and temperature of the company is vitally important to the long-term viability and sustainable profitability of a company.
With Gloom Also Comes the Promise of Light
With all the doom and gloom that toxic workplace culture issues raise, I would also underscore a hopeful note to boards and executives struggling to deal with the organizational cultural issues so clearly brought to the fore in 2017. Unlike the regulatory responses to the excesses of 2002 (Sarbanes Oxley) and 2008 (Dodd-Frank), I would suggest that the appropriate response to cultural issues that are emerging is not new regulation but self-regulation, a voluntary upping of the corporate cultural ante by elevating the importance of ethics, compliance, and risk management within organizations, powered and driven by a strong culture of accountability and “walk the talk” from the top. This entails a voluntary, value-creation mindset at the executive and governance levels of an organization that aligns a strong and resilient culture with sustainable profitability and that likewise recognizes that a toxic culture will in the short and long run lead to value and reputational erosion and possibly destruction.
Thankfully, there are positive tales to be inspired by. A case in point: Microsoft Corp. Under its relatively new CEO, Satya Nadella, who recently wrote a book on the company’s culture, has instigated culture change there that by all accounts has had dramatic and beneficial impacts on all stakeholders, internally (employees) and externally (customers) alike. Nadella’s moves have also benefitted shareholders. When he became CEO in 2014, the share price was around $35; today, Microsoft’s share price is at $92.
With all the negative news, 2018 represents a rare opportunity for management and boards to understand, acknowledge, and tackle workplace cultural issues head on and in a more systematic and conscientious way. Culture is the fabric of an organization and that fabric can either be healthy and sustainable, able to contribute to the development of resilience and creation of value, or brittle, weak, and toxic, leading to financial and reputational vulnerability, value erosion, or even ruin. It is the direct responsibility of leaders—both management and board—to make the right choices on workplace culture.
Dr. Andrea Bonime-Blanc is founder and CEO of GEC Risk Advisory, a strategic governance, risk and ethics advisor, board member, and former senior executive at Bertelsmann, Verint, and PSEG. She is author of numerous books including The Reputation Risk Handbook (2014) and co-author of The Artificial Intelligence Imperative (April 2018). She serves as Independent Ethics Advisor to the Financial Oversight and Management Board for Puerto Rico, start-up mentor at Plug & Play Tech Center, life member at the Council on Foreign Relations and is faculty at the NACD, NYU, IEB and Glasgow Caledonian University. She tweets as @GlobalEthicist. All thoughts shared here are her own. This blog series borrows in part from her forthcoming book with Routledge/Greenleaf (2019), Gloom to Boom: How Leaders Transform Risk into Resilience and Value.
Our mission at the National Association of Corporate Directors (NACD) includes continuous learning for directors. In pursuit of that mission our staff also seek out the most exciting events across the country to learn more about the disruptions that will impact members’ boards. I caught up with Erin Essenmacher, NACD’s chief programming officer, after her appearance at SXSW to discuss takeaways from the conference and how corporate directors can continue the conversation on technology disruption.
Erin moderated a panel, in partnership with KITE, titled “Innovation: the Board Director’s Cut,” featuring leadership representatives from Spredfast, OurOffice, and Capital Expert Services. The panel discussed the strategies directors should take in order to best manage technology disruptions at their companies. Highlights from our conversation follow. Katie Swafford: What led your panel to discuss technology disruption? What do you see at NACD—or among NACD’s members—that surfaced this particular topic for the panel?
Erin Essenmacher: Across the spectrum of industries, companies are being disrupted because they are not focused on how new technologies, paired with shifting trends, are completely changing business models. My first major takeaway from the panel was the need to focus on disruption. I don’t even like to say technology disruption, because I think that makes the issue sound too small and prescribed, which it is not. While technology is a big driver of disruption, so are issues like social and demographic shifts and other market-shaping forces as they intersect with technology. Disruption is a huge challenge to navigate for boards at companies of all sizes. We are reaching the point where the swift changes are blurring the lines between industries, and directors should be raising questions with managers about what is on the horizon for their companies, and if their companies are thinking sufficiently about the big picture and the nature and impact of those changes.
In terms of the discussion here at SXSW, the panel was really focused a lot more on flipping the script. A lot of the folks in the audience were on the boards of early-stage companies, and the panel really looked at how boards can add value to companies of all sizes. The panelists brought many perspectives—some are involved on the inside of early-stage companies, some are making investments in start-ups, and they all serve as directors at companies of various sizes, so it was a really interesting discussion.
Swafford:Are there specific skills gaps that NACD has seen when it comes to handling technology disruption or innovation?
Essenmacher: I would say the biggest skill gap is very low tech, but critically important: a sense of curiosity and a willingness to be a continuous learner. When you get to the top of your career and you’re on a board, you’re extremely seasoned and experienced. You’re an expert in many things that relate to the company business model or to the industry you serve, and it’s easy for that expertise to make you complacent. When you have a business environment like ours where things are changing so quickly, I think the most successful boards are the ones that acknowledge that disruption is happening. Most importantly, they acknowledge that because the environment is new, they will not have all of the answers. They are willing to get serious about what’s happening, they are willing to get curious about the gaps in their own knowledge, and they are willing to challenge the management team to evaluate the existing assumptions and expectations of the company culture and business model.
Swafford: Is there an ideal board composition that’s best able to navigate disruption? Is there a leading practice when it comes to board composition?
Essenmacher: I wouldn’t say that there’s an ideal board composition, because every company is different. Composition is going to vary widely depending on industry, company size, and many other factors. An overarching leading practice is to continually consider the board’s composition compared to your long-term strategy as a company. It’s not just about bringing in people that have the latest and greatest technology expertise. There is a critical role on any board for business judgment and experience. We need all of that in our boards. Once you start to dig into how you can think differently about your business model in the face of disruption, you can start to think differently about your board composition. It’s also not just about defaulting to a former CEO or CFO. Boards need to think critically about how diversity of experience, perspective, and expertise can help elevate their strategic discussions to map to where consumers and the market are headed.
Swafford: Where do you foresee some of the topics that came up in the panel flowing over into the Global Board Leaders’ Summit? I would think diversity, board composition, and growth, among other topics, will really flow into the conversations you will be having at Summit.
Essenmacher: We need to challenge ourselves to learn about new trends from the ground-level up. Our panel here at SXSW discussed topics that are important for board members to engage in, so how can we extend this conversation? At the NACD 2018 Global Board Leaders’ Summit we will be hosting the third annual “Dancing with the Start-ups” pitch competition. This event allows us, as board members, to hear what the leaders of start-ups are creating from the ground level—how they are using technology, how they are leveraging or setting trends, and how their ingenuity is disrupting the industry of the company on whose board you might serve. Yes, it’s a fun format and very exciting, but there is also a lot of great content. I think of it as a “meet the disruptors” session. It’s really an opportunity for directors to see the earliest stages of the next iteration of products, services, and trends that are disrupting their industry.
Our Summit theme this year is transformation. The theme provides a wonderful opportunity to keep engaging in this conversation on disruption, but to also look at disruption through a proactive lens. How can we take what we know about the shifting business landscape and leverage it for strategic advantage? On the risk side, we will learn from people who are experts on the important issues of technology and privacy, enabling us to delve into what those issues mean for public trust. We will discuss how new regulations are shifting what disruption means, including the European Union’s General Data Protection Regulation (GDPR). I believe this shift in how companies market their products and how business models are changing is creating an opportunity for large and small companies to learn from each other.
There will be a lot of opportunity to discuss disruption at the 2018 Global Board Leaders’ Summit happening September 29 through October 2 in Washington, DC. Don’t miss out on our early bird pricing through March 31 to save on registration.