While I am not sure that it should be a radical idea, the following concept seems radical to some: internal organizational culture and external environmental, social, and governance (ESG) matters are, and should be, intimately and inextricably interconnected. They’re two sides of the same coin. I believe that it is not only time for boards to get cracking on internal culture governance, but that it is also a core part of good modern governance for directors to know the key ESG and corporate responsibility issues relevant to their companies. By tying the two together, boards can proactively and carefully oversee management’s efforts to act on these often siloed, disparate, or even ignored and untreated parts of a more resilient organization.
#MeToo, #TimesUp, and #NeverAgain
In the first and second installments in this series, I discussed these movements, context around them for corporate governance, and what directors might do to best oversee these risks. It has grown apparent that these movements also are related. So, what do the #MeToo, #TimesUp, and #NeverAgain movements have in common? Beyond simply being hashtags, they are movements that emerged in reaction to perceived and real decades of troubling policies, behaviors, and practices in both the private and public sectors. They represent both external stakeholders’ reactions as well as potential reputation risk and attendant financial losses to companies and their leaders (including boards).
These movements also represent a singularly contemporary phenomenon which both management and the board should proactively respond to: the intricate and deepening interrelationship of internal corporate culture and external ESG and stakeholder issue management. These two aspects of running a business have been long ignored or sidelined as not important to a business, but they are now emerging and, arguably, merging before our eyes. It is the job of management and the board to understand, manage, and oversee these governance imperatives effectively.
A company’s treatment of external stakeholders is a mirror of its culture. The following four cases offer stark examples of the two extremes of how companies treat their stakeholders.
The Weinstein Company The toxic culture spread by its CEO and founder Harvey Weinstein was ignored, supported, tolerated, and proactively encouraged by its executives and board for many years. Take a look at this “Frontline” documentary to understand the full extent of the actions that led to the bankruptcy of this Hollywood film powerhouse. This case illustrates the intertwining of toxic culture on the inside with no sense of corporate responsibility. It also demonstrates disrespect for outside stakeholders such as established and aspiring actresses and other key third parties.
Wynn Resorts The news out of this company affords another example of a long-standing toxic culture initiated and vitiated by the CEO and apparently supported or ignored by his handpicked board. Key stakeholders such as employees and third parties were adversely affected. Now the ex-wife of the deposed CEO and chair is leading the charge to create positive change at both management and board levels with an aggressive plan to cleanse and grow a healthy culture from the boardroom down into the organization.
In both of these cases it’s likely that neither board ever asked the CEO or management questions about internal culture or exercised oversight of ESG and stakeholder issues. It would not be surprising in both cases to learn that the board actively or passively ignored culture and responsibility issues while focusing exclusively on the financial bottom line.
Merck & Co. The pharmaceutical company has for decades had a succession of great CEOs who have led the company to financial success while building a strong culture of integrity and social responsibility. Witness the crisis management of the complicated Vioxx case by former CEO Ray Gilmartin who voluntarily withdrew the medication, in contrast to Merck’s competitor with equivalent challenged medications. The explanation? Merck did not want to adversely affect their most important stakeholders: customers and patients. Current Merck CEO, Ken Frazier, continues their long-standing tradition of having both a strong internal culture and being a leader on cutting-edge ESG issues externally.
Starbucks A company with leadership that for years was known for having an enlightened corporate culture and for proactively managing its corporate social responsibility (CSR) initiatives may weather its current Philadelphia store racial incident better than most because of this close interrelationship. Starbucks’ ingrained, demonstrated care for its stakeholders were like muscle memory, allowing their management team to respond in lockstep with their lived values. How else does a company’s reputation survive this kind of incident and go further than probably any other company would by shutting down 8000 stores country-wide for a day for implicit bias training?
Second, boards must get much more involved in overseeing and ensuring that management has the right ESG and stakeholder relations program in place. The right program will embrace the interests of important stakeholders like customers, regulators, the media, suppliers, and current and future employees, among others.
And third, any discussion at the board level of culture or ESG should connect the two topics. Culture is part of ESG, and ESG is part of culture.
Crises that are not well managed can mean the difference between value creation and value destruction. Organizations need to forge a culture that is consistent both on the inside and the outside. When something critical happens, an organization that has forged a robust and resilient culture on the inside is more likely to weather the storm than a company that has paid little or no attention to laying a sound culture of values. Indeed, such enlightened companies may even have a reputation and value creation advantage, as I have discussed at length in my book The Reputation Risk Handbook: Surviving and Thriving in the Age of Hyper-Transparency.
Seven Critical Questions the Board Should Ask Management
As boards wrap their minds around the oversight of internal and external culture, they should consider asking the CEO and management the following critical questions:
Does the leadership (CEO/C-Suite) ever discuss culture?
If so, is it only culture talk (nice speeches, pretty pictures, glad-handing) or does it include culture walk (budgets, resources, reports)?
Is there at least one high level executive who has “culture” explicitly included in his or her portfolio of responsibilities? If not, why not?
Is there at least one high level executive who is in charge of managing ESG issues that are critical and important to the mission, vision, values and strategy of the company? If not, why not?
Have ESG issues been identified as core and critical to the wellbeing of shareholders and key stakeholders (employees, customers, regulators)?
When there has been a crisis involving ESG issues (e.g., a chemical spill, an allegation of executive harassment, an accusation of corruption) what is the track record of the company in handling that crisis? Were they prepared or did they manage the crisis by the seat of their pants?
Is there an effective integration of key roles on ESG issues between human resources, legal, ethics and compliance, risk, public relations, and others that are relevant? Or is the management of such issues siloed, fly-by-night, or otherwise non-existent?
The answers to these and additional questions will lead to a holistic look at the culture of the organization, and will allow the board to understand what buttons need to be pushed to help the organization attain consistency, synchronicity, viability, transparency, and value in the marketplace.
The way a company treats its external stakeholders starts with its internal culture. And the internal culture of an organization starts and ends with leadership. The greatest responsibility of the board at the end of the day is to hold the CEO and the executive team responsible and accountable for all aspects of strategy—not just financial results.
#TimesUp for boards that are ignorant, negligent, or oblivious to these central issues.
Dr. Andrea Bonime-Blanc is founder and CEO of GEC Risk Advisory, a strategic governance, risk, cyber 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 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 (Spain) and IAE Business School (Argentina). 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. All opinions expressed here are her own.
“In my experience, we need to start all our discussions about board membership, accountability, and responsibility with the term ‘leadership,’” said CACI International Executive Chair Dr. J. “Jack” Phillip London. “Leaders cultivate and sustain an organization’s culture. They set the expectations right from the beginning. They are continually communicating what’s appropriate and what’s not appropriate in terms of behavior. And that’s done by example, by discussion, by dialogue, and by role modeling.” As London pointed out, however, having leaders with strength of character is not enough to transform an organization’s culture.
London further explained his view of the role of the board in helping to establish and perpetuate a strategically advantageous culture during an interview with Steven R. Walker, NACD general counsel and managing director, Board Advisory Services Group. Among the highlights, excerpted from their interview, were his reflections on contagions, communication, and culpability.
For these aspiring directors and current directors, how can the board verify and check on the fact that every company holds itself as having high integrity and high ethics?
One of the things that we’ve done at CACI in the last year or so is put together our culture, character, integrity, and ethics [board] committee. We have at least 20,000 employees around the planet, and we surveyed them to get feedback on how they viewed the company’s culture, our standards of ethics, and our operational perspectives on being innovative. This committee is now in the process of putting together a dashboard of metrics that we can use to assess and evaluate as we go along. Turnover rates, anonymous reports of problems—those kinds of things. Of course, you want to do it in a light-handed way. You’re trying to bring people along and encourage them. It’s amazing what happens when you ask people to perform with sincerity and integrity. Good folks, well-intended folks, will tend to rise to the requirement, and it’s amazing how that can be contagious. And the beauty of that is, when there are people who come along who don’t subscribe to that kind of thing, they find a way to meander out the door.
What was the motivation to create the board’s culture, character, integrity, and ethics committee?
I saw too many things going in the wrong direction in our society, our culture, our government, religious institutions, and the athletic world that I didn’t care for. And I thought, “We’ve got a pretty good culture at CACI, and I think we’ve got a good reputation. Let’s put something together that can sustain this.”
How do you, as a leader, make sure the board has access to the layers beyond the C-suite and has open access to things and can nip problems in the bud?
We have concerns in that area. One of the things I do is go around to my organizations and sit down and talk to people. I meet with our customers. I’m confident that the board wants me to do that. And when you do it in the field, you’re diving way below a lot of players. And I’m amazed at the kinds of questions I get in one of these sessions.
Communication’s a big deal. And we work hard at making sure we communicate with our people. But it takes persistent effort and, again, priority, and one of the wonderful things is that our leadership group—the CEO, general counsel, and human resources executive vice president—are very on board with this. By the way, they are members of our culture, character, integrity, and ethics committee. It’s not just board people. It’s members of the C suite and others, and I’ve even thought about bringing on some people that are outside the corporation with appropriate liability considerations.
How do you address crisis from the top?
Well, you’re probably talking about our Abu Ghraib situation. If there’s anything that I’ll absolutely never forget in my career, it’s the experience that CACI went through with the wrongful allegations and charges with regard to our interrogators in the early days of [the war in] Iraq. I first found out when Seymour Hersh put out his article in The New Yorker [in 2004] making some claims. The public was ready to hang me. I made the fairly early discovery that the allegations in the leaked report had flaws in them. They had listed some people in there as being our employees, who weren’t our employees.
And so, I dug down into it and found out that our culpability was really misrepresented. It gave me the fortitude, commitment, and the confidence to stand up on it. The main problem was a lot of people wanted to have me fired because of the type of work that we were doing. I would save my neck in the media at least by letting all those people go, but that was not the right thing to do. If you just hang in there, and you’re credible, and you’ve got your facts together, you’re going to prevail—and our reputation today is probably better than ever.
Dr. J. “Jack” Phillip London is the Executive Chairman of the board of CACI International, a Fortune 1000 Largest company that provides services to many branches of the federal government, and serves on the boards of the U.S. Navy Memorial Foundation, the Naval Historical Foundation, Friends of the National WWII Memorial, the Senior Advisory Board of the Northern Virginia Technology Council, and CAUSE (Comfort for America’s Uniformed Services), the “wounded warriors” support organization. He has served on numerous other boards and foundations.
There is a buzz in the air about renovating corporate culture in the name of innovation. Directors hear the changing desires of their stakeholders, and are developing a greater understanding of their business’s role for society at large. That buzz guided a recent roundtable discussion in Miami at NACD’s Leading Minds of Governance event.
A panel of governance experts and directors discussed recent trends in corporate governance with a full room of directors (fuller remarks from the panel will follow in the March/April 2018 issue of NACD Directorship magazine). Panelists included:
John Borneman, managing director, Semler Brossy Consulting Group LLC
Stuart R. Levine, nominating and governance committee chair and audit committee member, Broadridge Financial Solutions
Kathleen Misunas, director, Boingo Wireless and Tech Data Corp.; principal, Essential Ideas
Michael Stevenson, partner, BDO USA LLP
Peter P. Tomczak, partner, Baker McKenzie LLP
Highlights from their answers to select questions from directors in the audience follow. Comments have been edited for length.
To Build an Innovative Culture, Start with Hiring
I work in a heavily regulated industry. We’re in a very steady environment, but our industry is changing rapidly in all directions. Helping shift that culture is essential, so I’d love to hear your differing perspectives.
Misunas: I think it starts with the people you hire—and you need the buy-in from your senior staff. The people that are hired help you move in the right direction.
Levine: One of the criteria for hiring should be intellectual curiosity. If you’re hiring people at any level, including on the board, if those people do not express intellectual curiosity, I think you’ve got a problem on your hands. In the boardroom, consider sharing content that stimulates discussions around technology or governance trends. By discussing strategic material, it encourages excellent outcomes.
Misunas: Right. This absolutely should cascade down through the organization. The C-suite alone shouldn’t be concerned with curiosity. The next level should be doing the same thing with their staff, and so on.
Tomczak: When you consider innovation strategy, what does innovation mean to your board? Do you mean bringing in new ideas from outside your industry? If you’re hiring the same 20-year industry veterans, you’re probably going to get the same 20-year-old strategy. I’ve also found that tying individual economic incentives to strategy outcomes is useful, and it’s hard. There’s no right answer to the compensation question and innovation.
Borneman: I’ll add that innovation should be on the CEO’s scorecard. Is it one of the top priorities that you want to hold her accountable to for the organization? You can say it’s important, but if it’s not on the scorecard, you’re merely talking about innovation. There’s no accountability. It doesn’t have to be tied to compensation—to put dollars on it gets tough. But we can find innovation measures in some kind of meaningful, quantifiable way.
Stevenson: I think that when some boards assess themselves, when they probe their expertise, they find that because of the complexity of transactions (for example, in financial instruments and other changes associated with this current business environment), audit committees are finding themselves ill-equipped to handle changes happening in their organizations. As you take a fresh look at your board, understand the other situations that they have been involved with will arm them for change. That’s a critical point to know about members of this committee. Boards that are refreshing [their composition] with this understanding are also the easiest to work with from an audit perspective.
Don’t Miss the ESG Bus
How do we translate ESG into something with real business meaning that management can be held accountable for to deliver results?
Levine: Approaching the governance standpoint, regardless of the business you’re in, we’re all trying to anticipate client and customer needs. If you don’t have people of diverse backgrounds on your board, you risk not understanding the people who are buying your products and services. If you’re looking to deploy capital, and you look around and don’t have representatives on your board of the populations you’re serving, I don’t know how you develop the right strategy.
Misunas: I don’t walk into a business anymore where this is not a topic of conversation. Boards and executives are peeling back the onion to see where their companies stand, and where they should be, on environmental issues. ESG is top of mind for millennials. They speak up about real environmental issues. As a result, companies can look at their distribution lines, for instance. What are our transportation means? What are those contracted companies doing to protect the environment? Could we switch out business partners for a company that is more responsive to these issues?
If there’s no penalty for not doing anything, you’re omitting ESG from culture. I’m not saying you should give an extra reward for doing something, but should there not be some penalty other than getting left off the bus?
Borneman: The penalty is the impact on your business, your employee population, and getting kicked off the bus. It’s not about your bonus. It’s not about compensation. It’s about a longer perspective on business.