The Role of Boards in Shaping Corporate Culture
Boards have never been under greater scrutiny when it comes to the culture and reputation of the organisations they serve on behalf of shareholders.
Social licence to operate has become a subject that Boards have had to grapple with and the question of ‘whose job is it to manage corporate culture’? has been debated in boardrooms, management teams and by regulators around the world.
It was Peter Drucker who once famously said, “culture eats strategy for breakfast”.
Drucker was not saying that a clear and well executed strategy is unimportant, rather that without a strong, positive, and empowering corporate culture underpinning it, a good strategy, even well executed, will not bring about long-term success. In other words, culture is the bedrock of organisational success. So, if culture is so critical to organisational performance, whose responsibility is it?
Is it the Board’s, or perhaps the Chief Executive’s and the Top Management Team’s or does accountability fall to the Risk and Compliance or Human Resources? The answer is that each of these groups has an accountability and as with any well executed piece of work, a clear understanding of roles and responsibilities is important in ensuring effective execution. To be able to assign these in relation to shaping culture, it is first important to have some understanding of what is meant by corporate culture.
As with leadership (on which there is at least as much written), there is no one definition of culture. In a 2018 article by the UK Banking Standards Board, it argues that culture refers to: “the collective assumptions, values, beliefs and expectations that shape how people behave in a group”. They go on to say that culture runs much deeper than the dress-code, floor layout or the set of values displayed in the lobby, although they acknowledge that these visible symbols can and often do reflect and reinforce the underlying culture.
So, if culture is about behaviours, shaped by collective values, beliefs and assumptions, what is the role of the Board in shaping and influencing them?
An important piece of research was conducted on this very question in 2016 by the UK’s Financial Reporting Council (FRC) https:/www.frc.org.uk ‘Corporate Culture and the Role of Boards’.
The report focuses on the important role of Boards in shaping, monitoring and overseeing corporate culture. However, it also canvasses the crucial role of the Chief Executive and of functional departments such as Risk, Compliance and Human Resources. In all the research canvassed the views of more than 80 FTSE CEOs and Chairs and in summarising the role of the Board in shaping and influencing culture, came up with the following two primary responsibilities:
- Establish (in conjunction with Management) the desired culture and the values and behaviours necessary to support it and then role model/lead by example (especially in the behaviours exhibited by directors towards management in the boardroom).
- Ensure through the selection and ongoing management of the Chief Executive, culture is both at the forefront of the selection criteria and an integral part of the ongoing performance management and incentivisation of the CEO and top management.
In our experience working with Boards and Executive Teams around this question, we would add a third, which is also canvassed in the report:
- Ensure a regular and effective reporting and measurement framework is in place to hold management accountable for driving and embedding the agreed culture and supporting values and behaviours.
It is interesting to note in the FRC’s report, in answer to a survey question: “How frequently is ethics and culture a full board agenda item”? 11% of respondents answered never and only 6% said on a quarterly basis.
The report quotes the example of one large UK Bank Board that had tasked management to come up with a report of cultural indicators focussed on a small number of the most meaningful qualitative and quantitative measures that provide crucial insight into the firm’s culture and can be tracked and monitored over time. This report is presented to a sub-committee of the main Board called the Reputation Committee each quarter and the Board uses it to interrogate management on the steps it is taking to embed the desired culture.
In summary, the Board has a crucial role to play in shaping an influencing culture. It is an active not a passive role and whilst the Chief Executive and management are primarily responsible for driving and embedding the desired culture, the Board has a critical role to play in helping articulate it, role modelling it and holding the Chief Executive and management accountable for embedding it.