This blog post is one installment in a series related to board oversight of corporate culture. The National Association of Corporate Directors (NACD) 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.
In a recent study by Stanford University’s Rock Center, less than half of directors surveyed strongly believe their boards tolerate dissent, and 46 percent expressed concern that a subgroup of directors has disproportionate influence on boardroom decisions. A 2015 survey cited by Heidrick & Struggles reflects similar concerns about culture in companies as a whole: 87 percent of organizations listed culture and engagement as a top challenge, with half of business leaders ranking the issue as “urgent”—a 20 percent increase from the prior year.
In light of the importance of the culture issue for boards, NACD, Heidrick & Struggles, and Sidley Austin LLP cohosted a meeting of the Nominating and Governance Committee Chair Advisory Council on March 28, 2017. The session and a related conference call brought together nominating and governance committee chairs from Fortune 500 corporations to discuss how boards can improve their own cultures and, by doing so, reinforce the elements of good culture in their corporations. The discussion was held using a modified version of the Chatham House Rule, under which participants’ quotes (italicized below) are not attributed to those individuals or their organizations, with the exception of cohosts. A list of attendees’ names are available here.
The council meeting resulted in the following takeaways:
1. Recognize and implement characteristics of a strong board.
Council delegates at the meeting listed a number of indicators of productive boardroom culture:
- Extensive and thorough preparation on the part of every director, without exception. “Every board member needs to have an in-depth understanding not just of the company, but its peers, competitors, and the broader industry. Passive reliance on management presentations for information is no longer sufficient.” Another director added, “Intellectual curiosity and learning agility are essential ingredients of good board culture.”
- Directors are able to strike the right balance between collegiality and directness, challenging one another―and management―constructively. “Attack the issue, not the individual,” said one director.
- The board has well-functioning continuous improvement processes, including regular evaluations, director and committee succession planning, and review of needed skill sets in light of current and future strategy. This includes the notion that board service is not a guarantee, but subject to the needs of the board and the strategic direction of the company.
- The board should model the culture that the corporation as a whole desires: “Walk and talk the culture you’re expecting.”
- The board has a healthy relationship with management and can speak with candor.
Holly Gregory, partner at Sidley Austin, added that the notion of teamwork as an element of productive board culture goes beyond semantics. “Boards are teams in the legal sense,” she said. “The board’s authority is as a body, and board decision making is by collective action.”
2. Use inflection points as opportunities to address board culture.
Directors agreed that changes in board leadership—such as a committee chair, lead director, or nonexecutive chair—can be good opportunities to reevaluate board culture and performance. According to one delegate, “How are you challenging yourselves? Your board may be working fine today, but maybe you’re missing a chance to take the board’s performance and culture to an entirely different level.”
Council members also suggested a number of other inflection points to use as opportunities to examine board culture:
- Patterns of breakdowns or concerns regarding compliance and ethics—“If we see two or three ethical violations and we don’t do anything about it, what does that say about our strategy and the performance of the board?”
- Major transactions—“After a large acquisition, [a culture-consulting firm] came in to work with management. Then [the firm] came back and did a session for the full board. We got a much better understanding about how our culture was aligned with where the company was going.” Another director observed, “Creating the culture for a spin-off board was easy compared to [changing culture on] an established board. [In either case], team-building on the board is actually a good idea.”
- CEO succession—“The previous CEO had a very strong demeanor in the boardroom and [held strong control] over strategy. After he stepped down, the lead director was in a position to take a much more active leadership role that coincided with a significant regulatory change. The board was much more challenged and became much more engaged in strategy and more productive and useful to the company.”
3. Proactively examine board culture at scheduled periods.
Although the inflection points described above can be useful opportunities to review board culture, council meeting participants agreed that boards should be proactive about assessing and molding their cultures. “You don’t know the culture you have before you hit a bump in the road,” one director said. “Be that person that says, ‘maybe we can improve by doing XYZ.’ If our major shareholders had been listening to the process we just went through, how would we feel about that?” Theodore Dysart, a vice chairman at Heidrick & Struggles, observed, “It’s important for boards to be able to rally after a crisis, but how can that cohesiveness of purpose be made more routine? We are seeing a growing number of boards making use of tools and processes to embed cultural assessments more deeply, but it is not yet a widespread practice.”
Directors provided a number of examples where their boards took a proactive approach to evaluating culture:
- Board succession planning—“On one board, we initiated a self-examination of our culture in anticipation of some turnover coming up due to director retirements. We realized it was an opportunity to clarify what we stand for as a board, how we want to operate, and the elements of board performance we want to evaluate.”
- Reviewing key management reports—“We use the review of the company’s sustainability report as an annually scheduled inflection point [to review culture]. It has extensive statistics on environmental, safety, and other issues, as well as key stakeholders and the firm’s interactions with them. It helps us see the cultural underpinnings of the company and also drives deep discussion about our own culture as a board.”
- Risk appetite discussions—“Our board’s discussions about risk appetite led us to a conversation about culture. It emerged that we were not all on the same page with respect to the level of risk we felt was appropriate for the strategy. Some directors were gung ho; others were more reserved. The work we went through to gain alignment highlighted some important aspects of our board culture and dynamics.”
Board evaluations provide another opportunity to assess the current state of boardroom culture and identify opportunities for improvement. See the Report of the NACD Blue Ribbon Commission Report on the Strategic-Asset Board for specific guidance and tools to help conduct evaluations and elevate board performance.
Council delegates emphasized that both measuring and changing culture can be extremely challenging, but the benefits are significant. As one director observed: “The board can have a culture and interact with senior management to form what you believe is the tone at the top. It takes a different curiosity to see if that trickles down into the institution. There’s no magic here; this is really hard work, but directors can have enormous positive impact when they model and reinforce the company’s desired cultural attributes.”
- Bill & Melinda Gates Foundation, “Lead your culture. Or your culture will lead you.”
- EY, “Sustainability reporting—the time is now”
- Heidrick & Struggles/Senn Delaney, “The Four Principles of Culture Change”
- Heidrick & Struggles, “Leading Change: Five CEOs on the Power of Culture”
- NACD Advisory Council on Risk Oversight, “The Board’s Role in the Oversight of Risk Culture”
- PwC, “Reporting with purpose”
- Sidley Austin LLP/Holly J. Gregory, “The Challenge of Director Misconduct”