The word innovation typically conjures up images of new technologies like networked sensors and quantum computers. That was certainly my focus when I wrote my February blog on the age of innovation. We had just closed NACD’s cutting-edge program at the Consumer Electronics Show, and the buzzing excitement felt on the showroom floor was on my mind.
But as directors, we know that although tech is important for our businesses, it’s merely a means to an end: sustainable growth that benefits all stakeholders. Technology plays a major role there, of course, but the real drivers of company value are people and, more specifically, culture.
Recent remarks by Facebook CEO Mark Zuckerberg before the Senate’s Commerce and Judiciary committees, as reported by the Washington Post, made this point clear. During the hearing, Zuckerberg told senators that Facebook is going through a “broader philosophical shift.” This is precisely why my recent focus at NACD has been cultural innovation.
When I became CEO of NACD in January 2017, I knew from my previous 16 years here that we had a strong culture. I had seen our staff grow from 12 to nearly 100 during those years, most typically through internal promotion and the hard work of engaged teams. But what was our cultural secret? Could we articulate it, and thus preserve it and pass it on? I got a head start on the topic by serving on the NACD Blue Ribbon Commission on Culture as a Corporate Asset, which released its report in late 2017. But there was more to come.
One reason I was chosen as NACD’s president and CEO was that the board knew that I would champion corporate culture as a core asset of the organization. Quoted in Lori Sharn’s CEO Update story, our chair, Dr. Karen Horn, stated, “The top people have all been together a long time and really share these values. Because we’re growing so fast, we’ve brought in a lot of new people to the organization. We need to be sure the new people feel the same kind of engagement and buy in to the current culture, and buy in to the development of the ongoing culture.”
Encouraged by the board, one of my first acts as CEO was to establish a Directors Council, made up of the 13 director-level managers. The Council meets every other week to promote collaboration across departments, with the goal of continuing to foster a healthy, thriving culture. The Council suggested that we develop a Values Statement, so we appointed a Values Squad made up of Council members to interview staffers, and by summer a first draft was ready. The six values, which were formally announced in a soft launch to staff in January, follow:
We are one NACD.
We succeed through member impact.
We communicate openly.
We are continuous learners.
We are innovators.
The current phase of this initiative is to weave these six values into the fabric of our organization, and the board has been engaged throughout.
As our own internal effort at NACD demonstrates, directors can make a tremendous difference in culture. In her March 26 blog, Andrea Bonime-Blanc suggests that directors ask management if there is an “explicit culture program in place,” and if it is “intertwined and integrated” with the company’s mission, vision, values, and strategy—all clearly board-level issues.
Along these lines, a recent blog covering a March 28 panel discussion at a Leading Minds of Governance event was aptly titled “Experts to Directors: Innovation, Culture Change Starts With You.” As the blogger (our own Katie Swafford) said, “There is a buzz in the air about renovating corporate culture in the name of innovation.”
I, for one, have heard—and amplified—that buzz. Have you?
An old boardroom adage is that directors must be “proactive,” rather than “reactive.” But what does this mean? When disruptive events occur, boards need to respond to them—so isn’t this reaction? I believe that board action must be based on principles, which I define (with Merriam-Webster) as a “moral rule or belief that helps us know what is right and wrong and that influences our actions.” A board’s response is reactive if directors focus mainly on an event; it is proactive if it stems from their values.
Principles can make a positive difference in the destinies of enterprises that embrace them. That is why NACD is in the principles business, so to speak. Every year since our first Blue Ribbon Commission gathered to discuss executive compensation a quarter century ago, we have been asserting general concepts that have had a measurable impact on boards. As this past research blog explains, many of our Blue Ribbon Commission reports and the principles they advocate have had a measurable influence on board practices. We know this by comparing the recommendations of our reports, and subsequent changes in practices as measured by our surveys.
And the good news is that a principles-based approach to governance can improve corporate financial performance. While many governance researchers have tried and failed to show a correlation between specific governance practices and financial performance, performance does seem correlated to an overall principles-based approach. Following the introduction in various countries around the world of principles-based governance (e.g., comply or explain stock listing standards), there have been improvements in financial performance. Studies in many jurisdictions, including Austria, Canada, Kenya, New Zealand, demonstrate the evidence.
Principles can also forge consensus. When you boil things down to basic principles, the three main actors on the governance stage—management, shareholders, and directors (the three sides of the so-called governance triangle)—think remarkably alike. Governance pioneer Ira M. Millstein noted this ten years ago in an NACD board discussion. When Ira speaks, boards listen. He was the original author of the first governance guidelines at General Motors Co., and, with Holly Gregory, a drafter of the original OECD Principles of Corporate Governance, another powerful guide to board work.
The NACD board responded to Ira’s idea by urging us to undertake what became the original Key Agreed Principles, which presented all known areas of agreement in principles published by the Business Roundtable, the Council of Institutional Investors, the International Corporate Governance Network, and NACD. NACD principles at the time numbered in the hundreds; they resided in the many Blue Ribbon Commission reports we had published on various governance subjects.
Other Notable Principles Documents
Since then, the Key Agreed Principles document has remained relevant to many boards. We have seen these Key Agreed Principles affect positive change in many areas, and we have seen other groups seek a principles-based approach to their activities.
In the future, in consideration of the new blueprints from these other groups, as well as developments at NACD itself, we will release a new edition of the Key Agreed Principles. To do so, we will once again compare the principles currently advocated by the original signatories.
Why keep the Principles document going? I believe that when directors apply sets of principles, rather than a hodgepodge of arbitrary rules, they can engage their minds and wills for action. Some principles in corporate governance prove so true that they operate as powerfully as first principles in science, determining outcomes. It may well have been principles that created our very nation. After all, Thomas Paine noted that “An army of principles can penetrate where an army of soldiers cannot.”
With good principles at hand, boards are always ready to respond to the next crisis, and to prevail with strength and wisdom. We trust that the power of principles will continue to animate corporate governance—and improve firm performance—in the years to come.
With headlines trumpeting high-level firings for “inappropriate behavior” in a variety of domains, it’s become more obvious than ever that corporate culture matters, and that boards should oversee it. So what exactly is corporate culture, and how can it be overseen? These questions might sound new, but they are as old as the corporate governance movement that began some 40 years ago when NACD was founded. Indeed, for the past four decades, the role of the board in overseeing corporate culture has been growing in breadth and depth, and much can be learned from history.
The Foreign Corrupt Practices Act of 1977 made the board a vigilante against foreign bribes. The original law made it illegal to do business abroad “corruptly” and required “internal controls” through oversight of books and records.
In 1987, the Committee of Sponsoring Organizations of the Treadway Commission put the board on alert against misdeeds not just in faraway lands but down the hall: its Treadway report required independent audit committees to prevent fraud in general.
Another decade later, in 1996, the Delaware Chancery Court’s decision In re Caremark International Inc.said that directors have an affirmative duty to seek reasonable assurance that a corporation has a system for legal compliance. Soon thereafter, NACD published its first handbook on ethics and compliance, authored by NACD pioneer Ronald “Ronnie” Zall, an attorney and educator then active in the NACD Colorado Chapter, which later established the Ronald I. Zall Scholarship in his honor.
In late 2007, as global equity markets went into panic mode, NACD forged Key Agreed Principles of Corporate Governance for U.S. Public Companies, highlighting all areas of agreement among management (the BRT), directors (NACD), and shareholders. Our report, published in 2008, stated that boards must ensure corporate “Integrity, Ethics & Responsibility.” NACD Southern California Chapter leader Dr. Larry Taylor began writing on “tone at the bottom,” publishing a series of articles and books on the topic over the next several years.
And now, in 2017, board oversight of culture has become more important than ever. Our NACD 2017 Blue Ribbon Commission Report on Culture as a Corporate Asset provides useful guidance.
NACD’s 2017 Commission made 10 recommendations, starting with this one:
The board, the CEO, and senior management need to establish clarity on the foundational elements of values and culture—where consistent behavior is expected across the entire organization regardless of geography or operating unit—and develop concrete incentives, policies, and controls to support the desired outcome. The Commission report explains that these foundational elements involve two sets of standards: first, the values and behaviors that help the company excel and that are to be encouraged, and second, the behaviors for which there is zero tolerance.
As I write this blog in December 2017, the business media are continuing to report firings or sabbaticals for executives—some 20 in the past eight weeks alone—over reportedly inappropriate conduct or speech. Many of these pertain to sexual harassment, but the corporate desire to clean house seems to be spreading like wildfire to other domains. One executive was recently fired for making a disparaging remark about regulators in private conversation to a former employee. Could a policy have prevented this? I think so.
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The NACD Commission urges a proactive approach backed by policies and training. The good news is that many companies are taking preventive action. A Wall Street Journal article titled “Harassment Scandals Prompt Rapid Workplace Changes” cites numerous companies that are instituting training to avoid bad behavior in the workplace. Some like Vox Media and Uber Technologies are responding to scandals. Others like Dell, Facebook, Interpublic Group of Cos., and Rockwell Automation are acting more proactively.
Boards in these companies and others are starting to oversee culture in proactive ways, but they still have a long way to go. Our most recent 2017–2018 NACD Public Company Governance Survey found that oversight of culture is stronger at the top than at lower levels, but that boards are taking steps to correct the imbalance.
The best cultures don’t happen by accident. They are intentional. They happen when a company makes a concerted effort to foster a good culture.