Emerging Issues

Board & Management Oversight of Corporate Culture (LDN Report)

Posted by and

At the most recent meeting of the Lead Director Network (“LDN”), LDN members and general counsel (“GC”) guests had a discussion about the importance of corporate culture and how organizations can better embed legal and regulatory compliance into their corporate culture.  On December 7, 2015, King & Spalding and Tapestry Networks published a ViewPoints report providing highlights of the meeting’s discussion.

The discussion focused on three topics: emphasizing culture, evaluating culture, and changing culture.

Emphasizing Culture

A main commonality amongst participants was that corporate culture extends beyond mere prevention of misconduct. As one GC stated, “It is more than a mission statement. With every action they take, senior leaders influence the organization’s culture.” Additionally, the discussion touched upon the importance of focusing on compliance with more than a simple program. Chris Wray, chair of King & Spalding’s Special Matters and Government Investigations Practice Group, pointed out that evidence of “prior proportional internal punishment” signals to the government the presence of an upright, ethical culture, which often proves useful during a regulatory investigation.

Evaluating Culture

Analyzing the characteristics of a positive culture, the main tenets that members agreed upon were openness, adaptiveness, and risk taking.

  • Openness: Lead directors and GCs identified openness as one of the hallmarks of a positive culture. One lead director said, “The single most important part of a company’s culture is having it be all right to have real conversations without worrying about who might disagree.”
  • Adaptiveness: A recent study by Stanford business professor Charles A. O’Reilly found that creating and promoting an adaptive culture within a company can bring about “revenue growth, market and book value, ‘most admired’ ratings, employee satisfaction, and stock analysts’ recommendations.” Cultural characteristics identified by the study as “adaptive” included “the willingness to experiment, personal initiative taking, fast decision making, and the ability to spot unique opportunities.”
  • Risk taking: The group noted that a “critical component of culture” is the company’s attitude towards risk, or “risk appetite.” LDN members observed that there has to be a balanced stance when it comes to risk, with an outlook towards calculated risk that does not punish poor risk decisions to such an extent that it deters innovative thinking.

Because independent directors do not work at the company full time, do not visit all of the company’s offices and facilities in the regular course of their role, and meet with only a small fraction of the company’s employees, it can often be difficult for independent directors to comprehend the full scope of the culture of a large organization at all times and in all places. Accordingly, LDN members and GC’s outlined several practices they use to gain a better sense of a company’s culture.

  • Relationships with different levels of employees: Different companies employ different methods to facilitate with directors outside of the board room context. One company has a mentor program that requires, between each board meeting, board members to meet and talk with members of management who do not regularly present to the board to gain a sense of company culture. Other directors suggested that board members should build relationships with middle management. One lead director said, “We talk a lot about the tone at the top, but the muddy middle is really critical. When we engage with people in the middle, we learn about ways to change and energize the organization.”
  • Travel to company operations: Conducting board meetings at company sites other than the company headquarters, or visiting company operations for factory tours and spending time with local management, were other examples of engagement that directors found to be valuable. One lead director said he used these visits to see if “people [are] saying the same things about the company that the CEO is saying to the board.”
  • Employee surveys: Employee surveys were also cited as useful ways to identify different opportunities for improvement and problems at both local and company-wide levels. Monitoring a company’s hotline, required by law, for reporting issues to the board’s audit committee also allows patterns of problems to be identified early on so they can be resolved in a timely manner.

Changing Culture

Participants identified a number of best practices for changing culture, whether as a systematic transformation or slow adjustment.

  • Hire the right managers: Place an emphasis on hiring managers who have formulated an approach to ethical and cultural issues the company faces.
  • Move around successful leaders: By rotating top executives around the company into new roles and locations, companies can spread successful culture around as well as expose workers to different parts of the business.
  • Tie compensation to culture: By putting cultural values on the same level as other metrics affecting executive compensation, companies send a strong message that culture matters.
  • Punish bad behavior: Not only should bad behavior be punished severely, it should also be punished quickly and publicized/explained to signal company-wide the premium that is placed on a culture of compliance and good behavior.
  • Provide meaningful training: Positive cultural characteristics are only as valuable as the organization’s ability to convey them to its workforce. This often means trainings presented on site, in native languages around the world.

Finally, lead directors and GCs further identified certain external factors influencing corporate cultures. Technology’s rapid development has made it both harder to identify the skills needed to help improve corporate culture and creates additional challenges for changing culture to meet the new technological changes.  Participants agreed that the shift from baby boomer employees to millennial employees has created cultural challenges. Increased dual-income households, according to one GC, make it “hard to just pick up and move somewhere else in the world for the company.”  With an increasingly diverse customer base, driven by a more diverse American marketplace and expansion into new global markets, companies have to adapt and become more diverse to match their customers who may be off put by a company that lacks diversity.