While I am not sure that it should be a radical idea, the following concept seems radical to some: internal organizational culture and external environmental, social, and governance (ESG) matters are, and should be, intimately and inextricably interconnected. They’re two sides of the same coin. I believe that it is not only time for boards to get cracking on internal culture governance, but that it is also a core part of good modern governance for directors to know the key ESG and corporate responsibility issues relevant to their companies. By tying the two together, boards can proactively and carefully oversee management’s efforts to act on these often siloed, disparate, or even ignored and untreated parts of a more resilient organization.
#MeToo, #TimesUp, and #NeverAgain
In the first and second installments in this series, I discussed these movements, context around them for corporate governance, and what directors might do to best oversee these risks. It has grown apparent that these movements also are related. So, what do the #MeToo, #TimesUp, and #NeverAgain movements have in common? Beyond simply being hashtags, they are movements that emerged in reaction to perceived and real decades of troubling policies, behaviors, and practices in both the private and public sectors. They represent both external stakeholders’ reactions as well as potential reputation risk and attendant financial losses to companies and their leaders (including boards).
These movements also represent a singularly contemporary phenomenon which both management and the board should proactively respond to: the intricate and deepening interrelationship of internal corporate culture and external ESG and stakeholder issue management. These two aspects of running a business have been long ignored or sidelined as not important to a business, but they are now emerging and, arguably, merging before our eyes. It is the job of management and the board to understand, manage, and oversee these governance imperatives effectively.
A company’s treatment of external stakeholders is a mirror of its culture. The following four cases offer stark examples of the two extremes of how companies treat their stakeholders.
The Weinstein Company The toxic culture spread by its CEO and founder Harvey Weinstein was ignored, supported, tolerated, and proactively encouraged by its executives and board for many years. Take a look at this “Frontline” documentary to understand the full extent of the actions that led to the bankruptcy of this Hollywood film powerhouse. This case illustrates the intertwining of toxic culture on the inside with no sense of corporate responsibility. It also demonstrates disrespect for outside stakeholders such as established and aspiring actresses and other key third parties.
Wynn Resorts The news out of this company affords another example of a long-standing toxic culture initiated and vitiated by the CEO and apparently supported or ignored by his handpicked board. Key stakeholders such as employees and third parties were adversely affected. Now the ex-wife of the deposed CEO and chair is leading the charge to create positive change at both management and board levels with an aggressive plan to cleanse and grow a healthy culture from the boardroom down into the organization.
In both of these cases it’s likely that neither board ever asked the CEO or management questions about internal culture or exercised oversight of ESG and stakeholder issues. It would not be surprising in both cases to learn that the board actively or passively ignored culture and responsibility issues while focusing exclusively on the financial bottom line.
Merck & Co. The pharmaceutical company has for decades had a succession of great CEOs who have led the company to financial success while building a strong culture of integrity and social responsibility. Witness the crisis management of the complicated Vioxx case by former CEO Ray Gilmartin who voluntarily withdrew the medication, in contrast to Merck’s competitor with equivalent challenged medications. The explanation? Merck did not want to adversely affect their most important stakeholders: customers and patients. Current Merck CEO, Ken Frazier, continues their long-standing tradition of having both a strong internal culture and being a leader on cutting-edge ESG issues externally.
Starbucks A company with leadership that for years was known for having an enlightened corporate culture and for proactively managing its corporate social responsibility (CSR) initiatives may weather its current Philadelphia store racial incident better than most because of this close interrelationship. Starbucks’ ingrained, demonstrated care for its stakeholders were like muscle memory, allowing their management team to respond in lockstep with their lived values. How else does a company’s reputation survive this kind of incident and go further than probably any other company would by shutting down 8000 stores country-wide for a day for implicit bias training?
Second, boards must get much more involved in overseeing and ensuring that management has the right ESG and stakeholder relations program in place. The right program will embrace the interests of important stakeholders like customers, regulators, the media, suppliers, and current and future employees, among others.
And third, any discussion at the board level of culture or ESG should connect the two topics. Culture is part of ESG, and ESG is part of culture.
Crises that are not well managed can mean the difference between value creation and value destruction. Organizations need to forge a culture that is consistent both on the inside and the outside. When something critical happens, an organization that has forged a robust and resilient culture on the inside is more likely to weather the storm than a company that has paid little or no attention to laying a sound culture of values. Indeed, such enlightened companies may even have a reputation and value creation advantage, as I have discussed at length in my book The Reputation Risk Handbook: Surviving and Thriving in the Age of Hyper-Transparency.
Seven Critical Questions the Board Should Ask Management
As boards wrap their minds around the oversight of internal and external culture, they should consider asking the CEO and management the following critical questions:
Does the leadership (CEO/C-Suite) ever discuss culture?
If so, is it only culture talk (nice speeches, pretty pictures, glad-handing) or does it include culture walk (budgets, resources, reports)?
Is there at least one high level executive who has “culture” explicitly included in his or her portfolio of responsibilities? If not, why not?
Is there at least one high level executive who is in charge of managing ESG issues that are critical and important to the mission, vision, values and strategy of the company? If not, why not?
Have ESG issues been identified as core and critical to the wellbeing of shareholders and key stakeholders (employees, customers, regulators)?
When there has been a crisis involving ESG issues (e.g., a chemical spill, an allegation of executive harassment, an accusation of corruption) what is the track record of the company in handling that crisis? Were they prepared or did they manage the crisis by the seat of their pants?
Is there an effective integration of key roles on ESG issues between human resources, legal, ethics and compliance, risk, public relations, and others that are relevant? Or is the management of such issues siloed, fly-by-night, or otherwise non-existent?
The answers to these and additional questions will lead to a holistic look at the culture of the organization, and will allow the board to understand what buttons need to be pushed to help the organization attain consistency, synchronicity, viability, transparency, and value in the marketplace.
The way a company treats its external stakeholders starts with its internal culture. And the internal culture of an organization starts and ends with leadership. The greatest responsibility of the board at the end of the day is to hold the CEO and the executive team responsible and accountable for all aspects of strategy—not just financial results.
#TimesUp for boards that are ignorant, negligent, or oblivious to these central issues.
Dr. Andrea Bonime-Blanc is founder and CEO of GEC Risk Advisory, a strategic governance, risk, cyber 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 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 (Spain) and IAE Business School (Argentina). 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. All opinions expressed here are her own.
Two NACD panels recently tackled issues surrounding sexual harassment in the corporate setting, and how directors should act and react to issues that could have profoundly negative impacts on company reputation and workforce satisfaction.
Key takeaways for directors ranged from careful CEO hiring to board composition. The following concepts could be readily applied to your own board’s conversation about overseeing this risk.
Aggregate Data to Spot Problems Before They Happen. Given that the board is ultimately responsible for overseeing company culture (including a culture that tolerates sexual harassment), the board should work to mitigate risks rather than taking up sexual harassment issues once a problem has surfaced, according to Michael Aiello, chair of the corporate department at Weil, Gostshal & Manges LLP. Lucy Fato, executive vice president and general counsel for American International Group (AIG), stated that boards should aggregate information to get the full picture, including:
Internal audit findings related to culture;
Employee relations/human resources reporting, including hiring trends, turnover statistics, and reports from exit interviews;
Hotline reporting, including whether there are too many or too few complaints; and
Company legal settlements and insurance payouts.
Board members should also probe whether the company’s investigative processes are fair and thorough.
Go the Extra Mile in CEO Hiring. In light of the board’s primary role of hiring and firing the CEO, along with the fact that fallout from CEO misconduct can significantly impact shareholder value, a board should take steps to ensure that its candidate of choice does not have a history of sexual misconduct or even tolerance for a culture in which harassment is an open secret. According to Sabina Menschel, president and chief operating officer at Nardello & Co., to really know who you are hiring into the corner office, conduct an investigation that includes public records, social media, and supplemented standard reference checks. With regard to CEO hiring, Fato stressed, “Ethics, integrity, and how you carry yourself as a public figure should be a factor in whether you can lead the brand.”
Risk Starts at the Top. The CEO and senior management are not alone in the potential spotlight of the #MeToo movement. Board members also must be vetted fully, and once in place, board members should receive code of conduct training, just as employees do, said Fato. In addition, the board should pick one corporate policy per year on which to do a deep dive as part of its oversight duties. Tabletop crisis preparedness exercises also should be conducted.
Superstar? Irrelevant. A board may face a difficult choice if a superstar CEO is found to have violated the company’s code of conduct, fearing that a dismissal could impact short-term shareholder value. According to Brenda Gaines, director, Tenet Healthcare, Southern Co. Gas, and NACD, superstar status is always irrelevant when investigating misconduct. She suggests that the board should take action to remove an offending CEO and then have a separate conversation about revenue and valuation implications. She added that the company must be clear about its culture and key principles, and should have zero tolerance for misconduct, applied to everyone in the company equally. “Board members have to keep each other honest,” she said.
Expand the Company’s Enterprise Risk Management (ERM) Framework. Sexual harassment should be a part of each company’s ERM framework, given that fallout from a misstep can be quite severe, emphasized Fato. Also, when doing employee surveys, ask specifically about harassment issues. To do so demonstrates that the company cares about these issues, said Menschel. Also, in terms of monitoring potential issues with long-tenured employees or even board members, consider updating background checks at regular intervals, stressed Fato.
Diverse Boards Matter. The #MeToo movement will have an impact on the boardroom, as well as on investor relations, according to Renee Glover, director, Fannie Mae, Enterprise Community Partners, and NACD Atlanta. Indeed, large shareholders are asking about diversity on the board, and they may request sexual harassment policies and pay equity measures. Gaines emphasized the clear-cut nature of the need for more diverse boards. “Diversity is good business,” she said, “and we are nowhere near where we should be. We need more gender diversity and more people of color on boards. Don’t miss this in the search for skill sets.”
Find an Ally. Rochelle Campbell, manager for board recruitment services at NACD, says that she encourages boards to have at least two diverse members on the board, as such boards tend to be more successful. For women and people of color who are new to a board, they can play an important role in discussions about sexual harassment and equal pay for equal work. When asked for practical advice for new board members, Gaines shared best-practice approaches to oversight of misconduct:
Get the facts right.
Take the emotion away.
Look for an ally on the board.
Glover summed up the issue: “We can do better. And when we do, we can get on with realizing the deeper value that a diverse board can deliver.”
Kimberly Simpson is an NACD regional director, providing strategic support to NACD chapters in the Capital Area, Atlanta, Florida, the Carolinas, North Texas and the Research Triangle. Simpson, a former general counsel, was a U.S. Marshall Memorial Fellow to Europe in 2005.
It seems recently that one can’t escape reading stories about poor leadership gone wrong. It’s time for action from the boardroom, and it’s no longer good enough to ask unstructured questions about a company’s helpline. Nor is good enough to rely on one’s own experience, instinct, and blind spots in the boardroom to hold management accountable for a healthy culture.
Trust-but-verify culture might be a good way for boards to move forward. While it is critically important to have trust in the CEO, blind trust can only lead to blind alleys where bad cultures can fester and become toxic. The board needs to be equipped with a way to periodically and in a customized and simultaneously adaptable manner understand the company’s culture.
The need for directors of companies to get under the skin of the culture of their organization has never been greater—or more necessary and daunting. Witness the many culture disasters we have recently seen from Uber, Wells Fargo & Co., The Weinstein Co., and Wynn Resorts. Over the past 25 years as a corporate executive, advisor, and board member, I have witnessed and advised on responses to similar instances of culture gone wrong—the good, the bad, the ugly, and, in one or two cases, the uglier. And I have also seen what a good culture can do to propel a company to greater reputational and financial heights (and returns).
It is important to share some of the tools, lessons learned, and insights on how the board can peel back the layers of the culture onion to begin to understand what is going on inside their companies, above and beyond the surface that boards are usually privy to. We start with a look at what happened in 2017 to understand the workplace culture maelstrom that the #MeToo moment has ushered in and crystallized.
A Year in Culture Dysfunction
2017 was a year filled with tales of organizational culture gone wrong. We learned about negative and destructive behaviors in the workplace, mostly perpetrated by powerful leaders, causing serious human, economic, and reputational costs for people and organizations. The toxic workplace cultures extended from the pinnacles of political power to the front lines of manufacturing facilities.
Powered by the ubiquity and raw reach of social media, the #MeToo story quickly became universal—told first by the more glamorous denizens of Hollywood and then extending to the most vulnerable hotel, restaurant, and factory floor workers. All of them were victims of a toxic workplace culture of abuse of power, shame, and lies. Worse still, many victims are submitting to terrible work conditions, are sidelined from needed jobs, or are permanently derailed from pursuing desirable careers and professional passions.
Time magazine’s choice for the 2017 Person of the Year, the “Silence Breakers,” said it all. Though sparked by the Weinstein exposé, the #MeToo story represents the culmination of decades of pent-up workplace silence, lies, cover-ups, manipulation and anger. The overwhelming impact of the #MeToo phenomenon can only be explained by the explosion and maturation of social media, which has led to the amplification and acceleration of reputation risks tied to workplace culture.
Why 2017 Stands Out
Two other relatively recent periods of corporate cultural moments, if we can call them that, come to mind: 2002 and 2008. The downfall of Enron, WorldCom, and others resulted in an uproar about financial accountability and the adoption of Sarbanes–Oxley in 2002. Nearly six years later, we witnessed the downfall of financial giants Lehman Brothers Holdings and Bear Stearns Cos., leading to the humiliation of the U.S. financial sector in general for the massive mortgage and derivative-related scandals, leading to social awakenings such as Occupy Wall Street and the adoption of the Dodd-Frank Act.
While these two watershed moments were important, 2017 was arguably the most momentous year yet for matters of corporate culture. In both the 2002 and 2008 cases, the cultural issue revolved around financial malfeasance. The cultural issue of 2017 is qualitatively different. Challenges are being made against toxic personal behaviors in the workplace perpetrated mainly by leaders against their subordinates, and those actions demand a qualitatively different approach to oversight that is more proactive and requires the ability to look behind the numbers and the dashboards.
By 2017 we had also arrived at the convergence of two other significant developments not fully present or developed before:
the rise of the importance to business of environmental, social and governance (ESG) issues (especially in the US, as Europe has long focused on ESG); and
the acceleration and amplified impact of reputation risk associated with ESG risk (which includes workplace cultural issues) because of the age of social media and hyper-transparency.
Companies can no longer reactively manage their reputation in this hyper-transparent environment. Companies have to earn it proactively and watchfully, and getting to the bottom of the culture of their organization is of paramount importance for the C-suite and board.
In this era, the excuse that only shareholders matter no longer holds. Boards and management are responsible to all of their stakeholders for ESG results as well (shareholders, employees, customers, and beyond), which include proactively maintaining and nurturing a healthy workplace culture. In the age of hyper-transparency, it does not pay to turn a blind eye or to wait for a crisis to hit. The rapid-fire downfall of not only Harvey Weinstein but of his entire company, including its damaged board and board members, is the cautionary tale of the day.
On the positive side, there is plenty of evidence that while a toxic culture destroys value, a strong and resilient culture fully championed and embodied by the very top of the organization (read: CEOs and directors) can and will add long-term sustainable value to the company’s reputation and financial bottom line. Such values protect the organization from the crises that will inevitably come and add bottom line financial value, as the famous Johnson & Johnson Tylenol case first demonstrated.
Is our Current Culture Moment Fleeting or Momentous?
We are certainly witnessing a cultural moment. The real question is this: will this moment pass with no more than a whimper, or will it become momentous?
The 2017 stories have definitely awakened awareness at the very top of corporate leadership—at least for now. In one day in December at two major governance gatherings sponsored by NACD in New York City—at Leading Minds of Governance and the NACD Director 100 Gala—this author witnessed how the #MeToo movement was top of mind for directors in general and dominated discussions both public and private throughout that day. Energized directors and experts who were present underscored the importance of action in this moment for the boardroom, and how this topic must be addressed in the long term as part of the board’s responsibility.
Thus, I would argue that this moment is not a fleeting one. The importance of this moment cannot be over-emphasized. It’s one that will be captured by responsible leaders and boards. Indeed, this is a unique time for leaders to step up to their responsibility for creating and owning a healthy workplace culture and for boards to acknowledge and embrace their responsibility: exercising proactive oversight of—and holding management accountable for—creating and maintaining a healthy workplace culture.
The Culturally Attuned Board
The culturally attuned board is one that is organized to understand the company in depth and to leverage that understanding for the success of all its stakeholders. What does that mean in real terms? It means, first, that the board has the tools necessary to understand what the culture really is—to peel that onion to get to the heart of what the tone is not only at the top (in the C-Suite), but also at the grass roots—including among entry-level employees. Second, it means that the board is aware of the red flags that might tip them off to a culture issue or problem. And third, it means that the board does not rest on its laurels but makes the culture conversation a permanent fixture of its work with the CEO, C-suite, and employees generally.
The next blog in this series will describe three specific tools that boards should implement, as well as the ten questions the board should ask to dig deeper and what should be on the board’s culture dashboard.
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 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.