Topics:   Business Ethics,Corporate Governance,Strategy

Topics:   Business Ethics,Corporate Governance,Strategy

September 6, 2018

How Can Boards Effectively Oversee Organizational Culture?

September 6, 2018

The concept of culture oversight is gaining traction in the boardroom. More than ever, directors are acutely aware that culture plays a role in delivering outcomes—both good and bad—for their companies.

In June 2018, Protiviti met with 15 active directors during a dinner roundtable at an NACD event to discuss board oversight of organizational culture. The conversation revealed several key concepts related to culture that boards must understand.

Culture must be nurtured in a changing environment. Culture means different things to different people throughout the organization, from the board down. A good general definition of culture is “the behaviors that people experience when they work for or interact with the enterprise’s management team and other representatives, as manifested through their decision-making, attitudes and actions day to day.” Note that the focus is not on what leaders and employees say but what they do.

The roundtable discussed the intricacies of understanding a company’s subcultures—for example, an innovation culture, a quality-committed culture, a sales culture, a safety-conscious culture, a risk culture, and a diverse, inclusive culture. Organizations should pay attention to their subcultures to ensure they align. As the company expands, its cultures may develop to the point they vary across locations, functions, departments, and countries and regions. These cultural distinctions also must be understood and managed.

In some organizations, especially in the technology industry, there can be a dominant personality (often the founder or founders). Such companies may lack a healthy, transparent, and open culture, and they run into trouble if these individuals drift away from the company’s values or acceptable societal norms.

All of these aspects of culture can create friction across the organization, which the board should expect management to periodically assess to ensure behavior is consistent with the enterprise’s vision and values.

The board has an important role in understanding and monitoring culture. When a leader’s actions stray from the entity’s mission, vision, and values, the board should note the change as a red flag. When a flawed culture adversely affects an organization’s reputation and brand, the question arises: Did the director see any of these red flags?

The roundtable discussion raised two fundamental questions: How do board members learn what they need to know regarding culture? More importantly, is their understanding representative of the entire organization or just certain areas? Consider these two methods to address these questions:

  • Board members should engage directly with operating personnel through site visits. During these visits, directors can directly observe the culture, interact with employees, experience how people communicate with customers and each other, and see what their priorities are in relation to the core values espoused by executive management.
  • Directors should focus additional “eyes and ears” on culture. They should insist on observations from the chief risk officer, chief compliance officer, chief information security officer, and human resources and environment, health, and safety personnel, as well as other independent second-line-of-defense functions. These functions should have a unique viewpoint, as they assist business unit leaders and process owners with assessing culture in their respective areas of The third line of defense—internal audit—may also perform a culture audit looking at processes used across the entity by first- and second-line personnel.

Culture should be measured. Culture is not intangible. Key issues to consider tracking are values, mindset, and the behaviors that follow. If these align during the organization’s recruiting, onboarding, and training, a strong culture will exist.

Metrics focus attention on what matters and clarify management’s priorities, and may include mission and values alignment, innovation, resiliency, collaboration, and employee satisfaction. Employee satisfaction, for instance, might be addressed through employee retention rates and feedback from anonymous employee surveys and exit interviews.

Additionally, methodologies exist for companies to compare their culture to leading organizations. For example, Ethisphere offers a benchmarking survey tool to measure culture around eight pillars of corporate culture.

Directors need to be curious enough to probe on cultural issues. The board must want to know whether there are any concerns pertaining to culture warranting its attention. In the context of understanding and measuring culture, are board members curious enough? How about executive management, or the executives supporting the board’s oversight activities?

For board members at companies that have experienced scandals related to a toxic culture in recent years, another question arises: “How did this happen, and why didn’t we know?” In light of recent events and the attention that they have drawn to culture oversight, it’s imperative that the board and management are inquisitive—plausible deniability of a flawed culture carries little weight.

Directors should insist that executive management have effective processes for escalating concerns and, as noted earlier, second- and third-line-of-defense functions focused on identifying early warning signs and red flags for cultural dysfunction. In addition, useful insights about patterns that suggest potential issues can be obtained from independent, confidential surveys and opportunities for public commentary on culture such as Glassdoor. Executive management can also provide ongoing research to board members, offering insights on how market perceptions are trending with respect to the organization and the customer experience it delivers.

Dig into deeper insights from Protiviti by visiting its Board Perspectives piece on board oversight of organizational culture here

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