Tag Archive: corporate culture

Culture: The Board’s Expanding Frontier

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Peter Gleason

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.

Click to enlarge in a new window.

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.

Governance at 30,000 Feet

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American Airlines Group director Alberto Ibargüen recently led a fireside chat with the company’s CEO and Chair Doug Parker during the NACD Florida Chapter’s season kick-off event at Miami International Airport. With more than 100 in attendance, the program featured insights into the highly competitive airline industry along with some key considerations for directors.

A New Day for the Airline Industry

From left to right: Sherrill Hudson, NACD Florida Chapter Chairman; Lauren Smith, NACD Florida Chapter President: Doug Parker, American Airlines Group Inc. and American Airlines CEO and Chairman, and American Airlines director Alberto Ibargüen

From 1978 until deregulation of the airlines, the airline industry yielded no return on capital; however, since the merger of American Airlines and US Airways less than four years ago, American has generated $20 billion in profits. Three airlines—American, Delta, and United—are now leading the pack in rationalizing and leveraging the hub model to offer passenger service across the globe while generating positive returns. Parker insists this is the industry’s “new normal” and spends a great deal of time convincing constituents that the industry is not simply experiencing a temporary “up” in a long-term cycle.

Parker explained that the company must now invest in its people and its products, taking a long-term view of the business. For example, American invested in new aircraft and now has the youngest fleet of any U.S. airline. With regard to employees, many of whom are unionized, Parker raised wages in the middle of a contract term in order to fulfill his promises to them during the merger. He explained, “I use the ‘look them in the eye’ test when it comes to the 120,000 people on the American payroll,” emphasizing the importance of transparent communication with employees. Another area of investment is data protection, and the board routinely raises the issue of cyber risk.

Merger Advice

“Never undertake a merger when there’s not a clear strategy,” cautioned Parker, when talking about the successful US Airways and American merger. Recognizing the herculean amount of work required to meld systems and go-to-market philosophies, he added, “You shouldn’t put your team through one unless two plus two will equal five, not 4.2.”

In terms of building a post-merger board, the merged company board consisted of two American board members, three US Airways board members, including Parker, and five members from the creditors’ committee. With this blended group, directors did not focus on the “this is how we did things” historical perspective, but rather the group was able to move forward as a relatively cohesive unit from the beginning.

Communication and tone at the top became priorities for the board and management after the merger as well. Parker began holding town hall-style meetings, taking questions from employees. These sessions are recorded and offered to American’s employees worldwide.

A Strategic-Asset Board Focused on the Customer Experience

Parker emphasized that by asking the right questions, the board has had an enormous impact on management, “ensuring that the team has a strategic focus.” Given the day-to-day demands of running an airline, pulling the team from those responsibilities can be challenging. Still, the board insisted on an offsite focused on strategic planning, which proved to be very valuable. “I put off the retreat for two years because we were so busy with the integration,” said Parker. “But the offsite was valuable because we were forced to articulate our strategy in a way that could be understood by others, like the teams and investors.”

American Airlines director Susan Kronick, who was in the audience, added that the board works well because it is diverse. “Our board is diverse in terms of gender, ethnicity, and, most importantly, points of view,” she said. “We have rich discussions, and everyone is moving forward together.” She added that a keen focus on the customer experience is a unifying factor. “We take the proactive perspective that the culture of the company is a competitive advantage for us with customers.”

Parker added that the board members aren’t afraid to speak up, and his job is to ensure his team is communicating well to the board. He also echoed the board’s focus on the customer.

“We are transporting people at 525 miles per hour, so we are constrained by the laws of physics,” said Parker. “But we can make sure the rest of the experience is as efficient and comfortable as possible.”

The NACD Florida Chapter would like to thank American Airlines and Miami International Airport for supporting this event and the behind-the-scenes airport tour that preceded the program.

Kimberly Simpson is an NACD regional director, providing strategic support to NACD chapters in the Capital Area, Atlanta, Florida, the Carolinas, North Texas and the Research Triangle. Simpson, a former general counsel, was a U.S. Marshall Memorial Fellow to Europe in 2005.

Corporate Culture, Public Trust, and the Boardroom Agenda

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In the final mainstage panel discussion of the National Association of Corporate Directors’ (NACD) 2017 Global Board Leaders’ Summit, Richard Edelman, the CEO of communications marketing firm Edelman, spoke with Nicholas Donofrio and Helene Gayle about how corporate culture drives long-term value. He preceded the conversation by offering some sobering statistics. Since 2001, Edelman has researched and measured the trust invested in business, nongovernmental organizations, media, and government by the public. It found that, around the world, only 47 percent of the general population thinks these institutions are trustworthy.

Little more than half (52%) of respondents say they trust businesses. CEO credibility dropped in all countries surveyed, reaching an all-time nadir of 37 percent. Fearful over disappearing employment opportunities, people perceive their current way of life as being threatened, resulting in a rise in protectionist, antitrade sentiments. In addition, looking at survey responses from the investor community, 76 percent of investors indicated that companies should address one or more social issues, ranging from employee education and retraining to environmental issues.

From Edelman’s point of view, business is the last fortification defending public trust in our age-old social institutions. “The board matters,” Edelman said. “Reputation matters. Are you engaged when a company is considering the issues of the day? You have to be. You can’t sit back and let management do this themselves.”

When looking to solve the widespread issue of flagging trust in businesses, directors may do well to take a look at corporate culture. Healthy corporate cultures help drive bottom-line results, increase customer satisfaction, and attract top talent at all levels of the organization. And in the past year alone, media headlines in industries ranging from banking to healthcare to entertainment to automotive manufacturing have highlighted examples of how deficient corporate culture can lead to financial and reputational disaster. As both a source of competitive advantage and as a potential risk, culture is a natural component of boardroom agendas. Yet all too often, it is regarded as a secondary human-resources issue that gets directors’ attention only when a problem arises. In NACD’s most recent public company governance survey, less than half of directors reported that their boards assessed the alignment between the company’s purpose, values, and strategy in the last 12 months.

To upend the common perception of culture as a soft issue, NACD convened directors and governance professionals to develop practical guidance that directors can use to enhance their culture-oversight practices. The resultant publication, The Report of the NACD Blue Ribbon Commission on Culture as a Corporate Asset, makes ten recommendations on culture oversight and offers associated action steps and tools for directors. Donofrio, a director of Bank of New York Mellon, Advanced Micro Devices, and Delphi Automotive PLC, and Gayle, a director of the Coca-Cola Co., the Rockefeller Foundation, and the Center for Strategic and International Studies, co-chaired the commission.

“In many ways, the issue of trust is aligned with issues of culture,” Gayle observed. “While we have a sense of what our culture is, we haven’t defined it and put those pieces together so that culture can be a unifier across those issues.”

“It truly is not just about [financial] results anymore,” Donofrio added. “It’s about what you did and how you did what you did.” And if board members have concerns about how those results were achieved, it’s time to start asking the CEO and management team questions about the beliefs, protocols, and procedures underpinning the company’s performance. If the chief executive is resistant to examining these issues in an open dialogue with directors—or, worse, is taking positions contrary to the company’s espoused culture and values— that is a sign the company does not have the right leadership in place. As Gayle emphasized, “Creating and managing the company’s culture is the responsibility of the CEO and management team. Culture oversight, and holding leaders accountable for a vibrant and healthy culture, is the board’s job.”

Regarding the rising importance placed on a company’s stance on social issues such as education, the environment, or free trade, Gayle advised that directors frame boardroom discussions on these matters in terms of how a given issue is aligned with the business and take into consideration the communities in which the firm operates and the customers it serves. When Edelman asked if board recruitment should include asking directors about their views on key social issues, Donofrio said that these discussions ultimately tie in to the director-recruitment process, where the criteria for board candidates should include their ability to contribute to and support healthy culture—in the boardroom and across the firm as a whole.

Gayle agreed. “How you relate to society is part of how the company sees itself and how the company expresses its culture. Having a well-thought-out position on how [a particular social issue] furthers the business, how it creates an environment of trust, and how it fosters talent—all those things have to do with culture.”

 

Download The Report of the NACD Blue Ribbon Commission on Culture as a Corporate Asset for recommendations and guidance to help boards benchmark and improve their culture-oversight practices. NACD members can access the report’s toolkit that contains boardroom discussion guides, sample culture dashboards, and other materials.