A culture of innovation sustains reinvention and breathes life into the organization itself. As high-speed, ever-connected networks and maturing digital technologies enhance ties between organizations and their stakeholders, opportunities to innovate processes, products, and services emerge that were unthinkable a few years ago. With such unmistakable mega-trends in the business environment, the board of directors has a role in ensuring that the organization it serves is not missing out on opportunities to innovate and, as a result, running the risk of getting swept aside by the forces of disruptive change. In this context, the often-referenced adage of “disrupt or be disrupted” gives way to the harsher specter of “innovate or die.”
For organizations that make innovation a priority, the process has traditionally involved designating responsible individuals, setting performance expectations linked to entity objectives, allowing designated innovators to operate in a risk-free environment, monitoring their progress using appropriate metrics, and then holding them accountable for results. However, for most organizations, innovation has been opportunistic and ad hoc.
For innovation to reach its full potential in the digital age, a culture that emphasizes innovation must also encourage diversity, collaboration, empowerment, continuous learning, ingenuity, change enablement, and team performance. Accordingly, it is important to the board’s oversight of the innovative culture to understand how the organization should position itself, even if it has little appetite for competing as a front-runner.
Given that every organization is different, the board should ask management to consider whether the organization is a digital follower, expert, or leader:
Digital follower. The organization has developed a digital strategy and has a proven track record delivering on digital initiatives, which are typically focused on discrete aspects of the customer journey.
Digital expert. The organization has a proven track record of adopting emerging technologies, has achieved high levels of process automation, and quantitatively manages digital aspects of its strategy enterprisewide.
Digital leader. The organization has a proven track record of disrupting traditional business models; digital aspects of strategic plans are continually improved based on lessons learned and predictive indicators.
The approach to innovation is very different for these distinct classes of organizations. Leaders disrupt. Experts aspire to be leaders. Many companies are content to be agile followers, meaning that they frequently reassess and adapt their digital strategy as the market changes. Most businesses are not where they want to be. Many that desire to be followers are in fact beginners. They have multiple digital initiatives underway with objectives that are well-understood, but they lack fully developed digital plans. And many companies that want to be leaders are in fact followers.
Even though they may not know it, some entities are actually skeptics (or observers) because they do not fully buy into the digital revolution and its impact on the business. Usually, these organizations lack formalized digital plans, and their management of digital initiatives is ad hoc. Also, their leadership team may view digital business as mere hype and their business as immune to change.
Neither the skeptic nor the beginner is likely to foster the culture necessary for sustained innovation in the digital age because, at best, they are digital on the edges but not at the core. Therefore, moving beyond these two levels of digital maturity—whether a skeptic or beginner—is desirable.
The challenge for management and the board is to decide the level of digital maturity they desire for the organization. In this context, the digital follower can be a relatively high-performing business. Effective followers play the waiting game, monitor the competitive landscape, and react quickly when necessary to defend market share by enhancing the customer experience. Followers, to succeed, must be agile enough to respond quickly as an early mover, even if they aren’t first movers.
Regarding the assessment of digital maturity, Protiviti’s original research has identified more than 30 empirically supported competencies arrayed across six core disciplines at which digital leaders excel. These competencies consist of capabilities and structural characteristics that can be used to benchmark the organization to identify its strengths and weaknesses.
For example, one of the core disciplines of Protiviti’s digital maturity assessment framework is “organization, structure, and processes.” Within that discipline is the innovation and research competency, which is useful in distinguishing between digital leaders and followers. The point is that competencies can be used to assess an entity’s resilience and likely innovation performance in creating new markets and eventually disrupting existing markets and displacing established incumbents, products, services, and alliances.
These are the real stakes of the innovation game in the digital world. Everything else is small ball.
Companies committed to innovation are confident in facing the future because they know they are playing the right game: viewing innovation as a continuous process rather than a dramatic event. Understanding whether the company desires to be a leader, a follower, or something in between is important, as management’s digital appetite provides directors with the context they need to focus their oversight of the innovation process. If the enterprise is a skeptic or beginner, directors may need to strongly encourage management to assess the organization’s digital readiness and review the results of that assessment with the board. When changes to the corporate culture are needed, the required investments should be made to forge an environment that empowers and rewards employees to test new ideas and take the appropriate risks to make those ideas a reality, without the fear of repercussions or reprisals if they don’t succeed.
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.
When former Zale Corp. CEO Theo Killion shared his leadership lessons of turning around Zales at a recent NACD TriCities Chapter program in Austin, Texas, it jogged some childhood retail memories for me.
Growing up in the 1960’s, my small hometown of Marshville, North Carolina, boasted a thriving town square of mom-and-pop stores. Because my family’s home was a hop, skip and a jump from these businesses, they became my playground. I was their frequent visitor, and with those visits came benefits. For example:
Remember when white go-go boots were all the rage? Mr. Gaddy, who owned the shoe store, made sure my sister and I scored pairs from his first shipment.
As a child, I received a personal call from Mr. Creech, the toy store owner, when his long-awaited skateboards arrived.
One spring, I stood with other locals as the Chrysler dealer eagerly removed the drop cloths revealing that year’s beautiful new big-fended models. (The fact the dealership offered up lots of free doughnuts, coffee, and soft drinks didn’t hurt either.)
I was rapt throughout the program as Melissa Fruge interviewed Killion, a modern-day version of my favorite childhood shop-owners, but on a grander scale.
Zales was on the brink of bankruptcy in 2004. Something had to be done. The bold and unvarnished self-assessment undertaken by the company’s senior leadership uncovered the business’s truths. These revelations, combined with sheer perseverance not to fail, brought the national jeweler back from the edge.
Here are some of my top take-aways from Killion about what executives and boards should do to turn around a struggling business:
1. Stay humble. Killion prefaced his remarks by stating that they were his opinion, and that many of the tenets he spoke about originated from great thought leaders. A mark of a strong leader is his or her ability to acknowledge with humility the admired ideas of others.
2. Interim in any title keeps you focused. By the time Killion took the reigns, Zale Corp. had had six CEOs in 10 years. When Killion’s best friend was fired as CEO, the board needed a quick fill. Killion was named interim CEO—leaving him keenly aware that he was considered temporary. He entered the role ready to make the most of the time he had.
3. Follow the money. Zales had six short months before its cash ran out. The company was in desperate need of an equity infusion. From day one, Killion and his finance team were reaching out to possible providers.
4. Dig deep for insight. Over a three-month period, Killion and his two-member strategy team worked 12- and 14-hour days, including weekends, to put a decade of operational decisions under a microscope. They carefully ferreted out what worked, what didn’t work, and why. They then presented these findings to the board. Killion observed and reported that management’s bad decisions were made on the board’s watch. He wanted the board to feel the same deep discomfort that the executive leadership team was feeling.
5. Detail the new strategy. Zales’ new strategy document totaled 150 pages and spelled out in clear, concise details what the company would do going forward—and why. For example, severe cost cutting had reduced the customers’ experience of buying an engagement ring into a commodity. Consider, for instance, that the customer left the store with the ring—which often times is one of the most meaningful, expensive jewelry purchases a person will make—in a plastic bag.
The new strategy brought customer emotion and meaning back to a purchase at Zales. The purchase process was no longer treated as a transaction, and store training ensued to make it a well-crafted, loving, and memorable customer experience.
6. Flip the pyramid. Before Killion stepped in, the leadership philosophy of the company placed management at the top of the pyramid. The pyramid was inverted and a customer-focused culture was born. It looked like this:
Top tier: customers of Zales’ 1,100 stores;
Middle tier: 12,000 employees; and
Bottom tier: corporate management.
7. Think like Jeff Bezos. Bezos has built Amazon.com to be customer-obsessed, keen on technology and analytics, and is always testing new concepts. Killion sees this as a road-map for any retailer succeeding today.
8. The nominating and governance committee is key to matching strategy to board composition. Killion pointed out that Zales needed board directors with skill sets that matched the company’s five-year plan. Retail expertise was a must, and the nominating and governance committee needed to ensure its goals matched those needs. This committee must ask itself what skill sets the business needs. In retail today, Killion advises, a board member with deep literacy in e-commerce is essential.
9. Apply lessons from Vanguard’s 2017 Open Letter. Killion admires Vanguard CEO F. William McNabb’s open letter to public company boards of directors. Vanguard has 20 million investors, and currently is the second largest fund manager in the world. McNabb is keenly aware of the responsibility boards play in the success of the companies that the fund invests in. Here are the highlights of McNabb’s message to directors that especially resounded with Killion:
Sell quality things.
Practice good governance.
Pay close attention to the compensation program crafted for senior management.
Understand the company’s risks, and especially the role of climate risks.
Inclusion of women and other directors from diverse backgrounds on boards is important.
10. Brick-and-mortar retail is not dying. Instead, Killion believes retail is entering its golden age partly because of the many ways today’s retailer can reach a customer and make a sale.
The program is available to view via NACD Texas TriCities Chapter’s YouTube channel. It’s a meaty discussion and well worth your viewing time.
By the way, to this day I’m a recreational bargain shopper. Simply walking into a favorite store lifts my spirits, and I’m glad that Killion and the directors of companies are working to help the retail industry thrive in the twenty-first century marketplace.