“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.
This blog post is one installment in a series related to board oversight of corporate culture. The National Association of Corporate Directors announced in March that its 2017 Blue Ribbon Commission—a roster of distinguished corporate leaders and governance experts—would explore the role of the board in overseeing corporate culture. The commission will produce a report that will be released at NACD’s Global Board Leaders’ Summit , Oct. 1–4.
A panel discussed how the iconic company became embroiled in scandal.
Wells Fargo & Co., Volkswagen AG (VW), Mylan NV, and Valeant Pharmaceuticals International are just a few of the companies that have recently experienced high-profile corporate crises stemming from ethics and compliance breakdowns. As corporate directors look to learn from these scandals, the John L. Weinberg Center for Corporate Governance, Association of Corporate Council, and Bloomberg Law® this April co-hosted the event Volkswagen Emissions Scandal—Lessons for Investors, Boards, Chief Legal Officers and Compliance & Governance Professionals.* The panel discussed the VW emissions scandal and lessons for boards of directors and general counsel (GCs) on instituting a corporate culture that promotes ethics and compliance.
Corporate Governance Causes of the VW Scandal
Charles M. Elson, director of the University of Delaware’s John L. Weinberg Center for Corporate Governance, notes in an article that three main governance practices at VW created a perfect environment for noncompliant behavior stemming from a lack of independent shareholder representation on the board:
A complicated web of interests with dual-class stock, pyramidal ownership, and family control. The Porsche and Piëch families own just over 50 percent of VW’s voting rights through their preferred class stock in Porsche Automobil Holding SE, which in turn owns shares of VW (known as pyramidal ownership). Ferdinand Piëch, the grandson of Porsche company founder Ferdinand Porsche, was chair of VW’s supervisory board at the time of the scandal and served as CEO from 1993 to 2002. Piëch’s primary goal is said to have been to create the largest automaker in the world, with less regard for creating profit and shareholder value. This directive from the company leader, in an environment where shareholders outside of the family had little influence over the board, created a corporate culture where employees chose noncompliant behavior over failure when designing the “defeat devices” used to cheat U.S. emissions tests.
The government as a major shareholder. VW was a state-owned enterprise until 1960 when it became privatized and left Germany’s Lower Saxony region with a 20 percent stake in the company. Elson opines that the interest of government officials is to be re-elected, often achieved through high employment rates. Therefore, government representatives on the board of VW were driven to create jobs at VW, the largest employer in Lower Saxony, even if adding those jobs was detrimental to profits.
Labor representation on the board (codetermination). German law requires all companies with more than 2,000 employees to fill half of the board with employee representatives. Elson argues that the board’s ability to provide effective compliance oversight was diluted by labor representatives on the board who were essentially monitoring themselves, and hence more focused on obtaining higher compensation and decent working hours for employees.
In light of these conditions at VW, panelists shared a number of leading practices for GCs and directors in creating a compliant corporate culture:
Lessons for GCs
“You can’t legislate ethics, but you can promote them,” said one panelist. Be the devil’s advocate and stress the importance of risk management and cultural tones at different levels of the organization, i.e., the so-called tone at the top, mood at the middle, and buzz at the bottom.
Ensure your board spends adequate time on compliance issues. Directors are often bogged down by compliance and want to spend more time on strategy, but prioritizing compliance at the board level will create a culture that allows strategy to be carried out successfully.
Get the right information to the board at the right time. According to one panelist, “The GC—as well as risk managers and in-house lawyers—need to be tough enough to speak up and report to the board. At Lehman Brothers, the CEO was known as the ‘gorilla on Wall Street.’ He doubled down on real estate, which the risk officer beneath him knew was risky, but their concerns were never known to the board.”
Remember that your duty is to the company—not the CEO—even if you’re reporting to him or her. “If [you as] the GC [are] aware of a violation, you need to do the right thing and not be swayed,” said one speaker.
Lessons for Directors
Increase your exposure to more employees, including mid-level employees, to get a better sense of the corporation’s culture in practice below the C-suite.
Create straight reporting lines from the compliance officer, chief risk officer, and internal auditor to committee chairs. This empowers these officers to speak openly with board members about their concerns without management present. (See NACD’s brief on Audit Committee Oversight of Compliance, which is open to the public for download.)
* The distinguished panel of speakers included: Robert E. Bostrom, senior vice president, general counsel, and corporate secretary at Abercrombie & Fitch Co.; Charles M. Elson, Edgar J. Woolard, Jr. chair in corporate governance, director of the John. L. Weinberg Center for Corporate Governance, and professor of finance at the University of Delaware; Meredith Miller, chief corporate governance officer at UAW Retiree Medical Benefits Trust; Gloria Santona, retired executive vice president, general counsel, and secretary at McDonald’s Corp.; Professor Christian Strenger, academic director, Center for Corporate Governance at the HHL Leipzig Graduate School of Management; Anton R. Valukas, chairman at Jenner & Block LLP; and The Honorable James T. Vaughn, Jr., justice of the Delaware Supreme Court. Italicized comments above are from panelists that participated in this event. However, this discussion was conducted under the Chatham House Rule, so quotes are not attributed to individuals or organizations.
Overseeing a company’s corporate governance process and structure, the nominating and governance (nom/gov) committee is essential to a company’s long-term success. In this BoardVision interview—moderated by NACD Director of Partner Relations and Publisher Christopher Y. Clark—Bonnie Gwin, vice chair and co-managing partner of the global CEO and Board Practice at Heidrick & Struggles, and Thomas Bakewell, CEO and board counsel at Thomas Bakewell Consulting, discuss the qualities of an effective nom/gov committee chair:
Sets the right mix between board culture and composition
Facilitates cross-committee communications
Performs effective board evaluations
Spots diverse talents in director candidates
Bonnie Gwin, vice chair and co-managing partner of the global CEO and Board Practice at Heidrick & Struggles (left) and Thomas Bakewell, CEO and board counsel at Thomas Bakewell Consulting.
Here are some highlights from the discussion.
Christopher Y. Clark: Depending on what your definition of best is, why should the best director on the full board be the chair of the nom/gov committee?
Bonnie Gwin: In my opinion, it is an incredibly critical role. You’re talking about a director who is helping guide the board in not just developing a great composition for the board that is strategic and focused…, but also a director who understands the culture of the company and the board that they’re trying to build. You really need an outstanding director who understands that mix between composition and culture and can work closely with the board to get it right.
Thomas Bakewell: Bonnie is spot on in terms of composition and having the right team around the table. The other magic that you need in a terrific nom/gov chair is somebody who can draw people out, spot talent, make sure everybody gets heard, [and] really…build the team. Coming from a baseball town where we have a pretty good manager [who] wins a lot of World Series, we know the value of having a great person who can draw everybody out and get the team to work together. It’s really [about teamwork] … and using a lot of the tools that are available today. One of the trends in tools is…much more thorough and in-depth evaluations. [These are] … not just check-the-box or check-the-list [exercises] but in-depth individual board evaluations to know what’s really going on in the boardroom and among directors.
Clark: NACD [held] a combined meeting of the NACD Audit Committee Chair Advisory Council and NACD Risk Oversight Advisory Council. … It was invaluable for both sets of committee members. How do you feel about [meetings between committees] … whether it’s audit and risk [or] compensation and nom/gov? Do you think those interrelationships of committees should be enhanced or promoted?
Gwin: Generally speaking, transparent communication across all the committees of the board is essential. It’s essential for a high-functioning board. And in particular where you have, for example, [the] nominating [and] compensation [committees], there’s a lot of interplay between them and the issues they’re addressing. I think it’s important to ensure that there [are not only] good transparent lines of communication between those two committees, but frankly across the whole board.
Bakewell: The magic ingredient is how people work together, and part of that key element is how they communicate. The old approach to boards was everybody showed up the day before the board meeting [and] went to the committees. A lot of times people went to every committee [meeting]. What’s the point [now]? You don’t have the time. You don’t have the energy. You don’t have the resources today. So how do you have a board where everybody trusts each other and they communicate? If you’re not on the audit committee and important issues come up…, can you simply pick up the phone and reach out to the audit committee chair, or is there another process that’s very helpful for you to get the information you need?
Clark: Please give us one last piece of wisdom.
Gwin: The piece of wisdom I would share is the importance of long-term succession planning. We’ve talked about that several times, but I really think, looking at board composition [and] board dynamics… over the next four or five years…is very important.
Bakewell: I would say my secret sauce is [that when looking at director candidates] it’s not so much [looking at] … particular talents, [because] everybody can look at a resume and see what somebody has. They’re going to see if they’re a CEO, [or] they’re skilled in marketing. The real magic is [asking], “What is their true personality? Are they a ‘driver’ personality? Are they a curmudgeon?” Sometimes boards need curmudgeons. … Is somebody a strategic thinker, or is their skill set not [being] a strategic thinker but taking strategy and converting it into action? What have they done in their past experience that really makes them qualified for this role?
Clark: Well I think we’ve got all the synapses popping. I wanted to thank the both of you for joining me today.