“Tone at the top,” a phrase that’s bandied about a lot these days, tends to surface any time a scandal arises. When something goes bump in the night, the tone of the top tier of management—i.e., the CEO and his or her chief lieutenants—suddenly comes under scrutiny. As a long-time corporate executive and member of numerous boards, I would submit that we ought to examine the leadership style and tone set not only by the management team, but also by the board.
Wisdom has it that when it comes to long-term performance, culture beats strategy. I happen to agree, which raises the question, “Are we spending enough time on tone at the top at the board level?”
Below I reflect on some of what it takes for a board to practice oversight with a guiding tone of continuous improvement.
What Does Tone Mean for the Board?
Originally tone at the top was narrowly defined as a company’s internal financial controls, but today it refers more broadly to general corporate culture or ethical climate. It’s a normative system of values that’s very personal to each company. Simply put, “It’s the way we do things around here.”
Every company has a “way,” but what is it? Is it articulated? More narrowly, does your board’s way mirror the same tone that has been identified as the greater tone of the company? Conversely, does the board’s tone set the right tone for the rest of the company? While it can be difficult to articulate tone in words, you know it when you see it. Make time to describe what you observe and commit it to policy or collective memory.
As a lead independent director, the tone set by the board should matter. First and foremost, an ethical, positive culture prevents your company from getting into trouble, but more importantly, it helps the company perform well if the standards, rules, and expectations are cleared understood. The same should stand in your boardroom, and the lead director can help articulate the tone to his or her peers.
Get Tough On the Soft Stuff
The average board spends a lot of time on administrative tasks, firefighting, and worrying about management. Often times the soft stuff gets neglected as a result. There’s a huge emphasis on financial results, to be sure, but how much time in each meeting does the board spend on leading indicators versus trailing indicators? Given how hard it is to develop a strategy that lasts more than a minute and a half in today’s dynamic world, we need to ask what the company is doing to prepare for what’s completely unexpected.
Imagine, for a moment, that you’re leading a mining company in the 1850s. Gold has been discovered, and you know you’ve got to get to California, but because it’s such new territory, you’re not quite sure how to get there. There’s not enough room in the wagon train for all the food, water, and bullets that you think you’ll need along the way to sustain and protect your crew. How do you decide what to take? What bets are you going to make?
Boards do talk about bets and the risk and reward trade-offs related to their business, but does your board talk about who should be on the wagon train? Do they discuss what kind of leadership DNA (not resume or skills) they need as independent directors and how to find them? Do they ask hard and honest questions about the roles, responsibilities, and performance of directors?
The lead director of your board is uniquely positioned to guide his or her peers through tough conversations about performance, whether current directors are embodying the right tone, and how to get tough when hard decisions about staffing have to be made to get to the proverbial gold at the end of the road.
Ours is a rapidly changing world. Boards still may be putting too much emphasis on “knowing the business,” meaning knowing today’s business model and how to provide oversight of that model accordingly. But many (maybe most) of those business models are going to be extinct soon. Consequently, companies would be better served by boards that spend more time on the key business processes that are germane to any business, as well as on—you guessed it—corporate culture.
It is up to the lead director to spearhead this effort by working closely with the board’s individual directors and committee leaders to find the right people and ensure that they work together productively—with each other as well as with management.
How Do You Know You’ve Gotten it Right?
Do research. Very few companies spend time understanding what their “tone at the top” is and then improving it on more than an ad-hoc basis. Tone at the top is not what the board thinks or management thinks. Rather, it’s what employees, customers, and whole communities think about the actions and performance of the whole body of the company—including the board. Companies routinely do 360 reviews of management to “see how we’re doing.” Why not ask the same questions of the board?
This is another place where the lead director can make a difference. He or she should have the courage to measure the performance of the board and its members.
As directors, we wouldn’t dream of neglecting to measure the performance of management. Shouldn’t we be just as rigorous and demanding of ourselves?
Roger O. Goldman is chair of the board of American Express Bank, lead director of Seacoast Bank, and former chair of the board for Lighthouse International. Opinions are his own.
In the final mainstage panel discussion of the National Association of Corporate Directors’ (NACD) 2017 Global Board Leaders’ Summit, Richard Edelman, the CEO of communications marketing firm Edelman, spoke with Nicholas Donofrio and Helene Gayle about how corporate culture drives long-term value. He preceded the conversation by offering some sobering statistics. Since 2001, Edelman has researched and measured the trust invested in business, nongovernmental organizations, media, and government by the public. It found that, around the world, only 47 percent of the general population thinks these institutions are trustworthy.
Little more than half (52%) of respondents say they trust businesses. CEO credibility dropped in all countries surveyed, reaching an all-time nadir of 37 percent. Fearful over disappearing employment opportunities, people perceive their current way of life as being threatened, resulting in a rise in protectionist, antitrade sentiments. In addition, looking at survey responses from the investor community, 76 percent of investors indicated that companies should address one or more social issues, ranging from employee education and retraining to environmental issues.
From Edelman’s point of view, business is the last fortification defending public trust in our age-old social institutions. “The board matters,” Edelman said. “Reputation matters. Are you engaged when a company is considering the issues of the day? You have to be. You can’t sit back and let management do this themselves.”
When looking to solve the widespread issue of flagging trust in businesses, directors may do well to take a look at corporate culture. Healthy corporate cultures help drive bottom-line results, increase customer satisfaction, and attract top talent at all levels of the organization. And in the past year alone, media headlines in industries ranging from banking to healthcare to entertainment to automotive manufacturing have highlighted examples of how deficient corporate culture can lead to financial and reputational disaster. As both a source of competitive advantage and as a potential risk, culture is a natural component of boardroom agendas. Yet all too often, it is regarded as a secondary human-resources issue that gets directors’ attention only when a problem arises. In NACD’s most recent public company governance survey, less than half of directors reported that their boards assessed the alignment between the company’s purpose, values, and strategy in the last 12 months.
To upend the common perception of culture as a soft issue, NACD convened directors and governance professionals to develop practical guidance that directors can use to enhance their culture-oversight practices. The resultant publication, The Report of the NACD Blue Ribbon Commission on Culture as a Corporate Asset, makes ten recommendations on culture oversight and offers associated action steps and tools for directors. Donofrio, a director of Bank of New York Mellon, Advanced Micro Devices, and Delphi Automotive PLC, and Gayle, a director of the Coca-Cola Co., the Rockefeller Foundation, and the Center for Strategic and International Studies, co-chaired the commission.
“In many ways, the issue of trust is aligned with issues of culture,” Gayle observed. “While we have a sense of what our culture is, we haven’t defined it and put those pieces together so that culture can be a unifier across those issues.”
“It truly is not just about [financial] results anymore,” Donofrio added. “It’s about what you did and how you did what you did.” And if board members have concerns about how those results were achieved, it’s time to start asking the CEO and management team questions about the beliefs, protocols, and procedures underpinning the company’s performance. If the chief executive is resistant to examining these issues in an open dialogue with directors—or, worse, is taking positions contrary to the company’s espoused culture and values— that is a sign the company does not have the right leadership in place. As Gayle emphasized, “Creating and managing the company’s culture is the responsibility of the CEO and management team. Culture oversight, and holding leaders accountable for a vibrant and healthy culture, is the board’s job.”
Regarding the rising importance placed on a company’s stance on social issues such as education, the environment, or free trade, Gayle advised that directors frame boardroom discussions on these matters in terms of how a given issue is aligned with the business and take into consideration the communities in which the firm operates and the customers it serves. When Edelman asked if board recruitment should include asking directors about their views on key social issues, Donofrio said that these discussions ultimately tie in to the director-recruitment process, where the criteria for board candidates should include their ability to contribute to and support healthy culture—in the boardroom and across the firm as a whole.
Gayle agreed. “How you relate to society is part of how the company sees itself and how the company expresses its culture. Having a well-thought-out position on how [a particular social issue] furthers the business, how it creates an environment of trust, and how it fosters talent—all those things have to do with culture.”
Learning how to implement sustainable business practices can be challenging for companies in any industry, and boards may wonder how to integrate sustainability issues into discussions with management. NACD has compiled a set of resources offering practical information to help boards discuss climate-related risks, as well as opportunities associated with environmentally- and socially-sustainable business practices.
The first step is to assess why sustainability and social responsibility are such hot topics for the boardroom. Two important factors to consider are the political environment and shareholder expectations.
Signals From the Current Administration
President Donald J. Trump in June announced that the United States would be withdrawing from the Paris climate agreement, an international deal in which 191 countries have pledged to work toward goals to restrict the increase in temperatures globally to less than 2.0°C and reduce the amount of greenhouse gases being created.
The president in April also signed an executive order aimed at “promoting energy independence and economic growth,” curtailing federal environmental regulations. The order instructs the Department of the Interior to lift former President Obama’s ban on coal leasing activities on federal land.
Watchdog group Environmental Integrity Project recently reported that this year, the Trump administration, when compared to the prior three presidential administrations in the same period, has collected approximately 60 percent less in fines from companies’ violations of pollution-control regulations.
Opposing Pressure From Shareholders
Despite strong signals from the current administration that enforcement of environmental-related regulations will decrease over time, shareholders are applying an opposing pressure on corporations.
More than half (56%) of shareholder proposals introduced this year on proxy ballots related to social, environmental, or policy issues, and Proxy Monitor reports that this proportion is the highest it has seen since it began tracking such data in 2006.
Shareholder proposals relating to environmental and social issues 10 years ago sought fairly basic changes such as increased clarity into companies’ environmental policies. The proposals now seek, for example, enhanced disclosures around what the company is doing to manage climate risks and how executive pay links to sustainability initiatives, the Wall Street Journal reports.
Proposals about environmental issues received a record breaking average of 27 percent support this year, according to Proxy Monitor. That percentage was 21 percent last year and fell in the teens before that.
Meanwhile, State Street Corp., a global financial services and investment management firm with $2.47 trillion in assets under management, published a report earlier this year in which they found that traditional obstacles (like the lack of quality data about ESG) to investing more heavily in companies that prioritize ESG initiative are diminishing.
“Over the long-term, environmental, social and corporate governance issues can have a material impact on a company’s ability to generate returns,” Ron O’Hanley, president and CEO of State Street Global Advisors, said in a press release.
Resource centers are repositories for NACD content, services, and events related to top-of-mind issues for directors. In these resource centers, individuals can find practical guidance, tools, and analyses on subjects varying from board diversity to cyber-risk oversight. Below we have highlighted a sample of helpful materials from our new resource center on sustainability and social responsibility.
The handbook, produced in conjunction with EY, centers around four key recommendations:
Directors should understand the company’s definition of sustainability in the context of the company’s strategy and specific circumstances.
The board and management should align on the sustainability message and information the company chooses to report publicly.
Boards should clarify roles for oversight responsibility for sustainability activities, including external reporting.
Directors need to establish parameters for sustainability reporting to the board regarding the information required to support robust discussions with management.
A number of items included in the resource center provide expert commentary on myriad issues related to sustainability and social responsibility. A favorite of mine is “Living in a Material World,” an article written by Veena Ramani, program director of the Capital Markets Systems, at sustainability-focused nonprofit Ceres.
Ramani discusses the corporate director’s critical role in engaging with management over which sustainability issues are material for the enterprise. She offers four suggestions for board members who want to address the materiality of certain sustainability risks.
Boardroom Tools & Templates
The resource center houses several tools and templates to assist directors as they oversee sustainability-related risks and opportunities. One such tool is the “Self-Assessment: Is Your Board Sustainability-Ready?” evaluation. Directors can answer a set of questions to gauge their board’s level of engagement—or lack thereof—in sustainability oversight.
Videos and Webinars
The NACD BoardVision—Sustainability Oversight video in the resource center features a candid discussion by EY subject matter experts Brendan LeBlanc and Kellie Huennekens on how investors are engaging with boards around sustainability and social responsibility issues. (A transcript of the video is also available here.)
Our hope is that you find this resource center useful and visit it often. We will continue to update it regularly with new and interesting content. If you would like help finding resources on a specific subject matter, please let us know. We welcome the opportunity to engage with directors on pressing needs and concerns.