Culture: The Board’s Expanding Frontier

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.

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.