What latest research says about governance of culture

A round-up of industry reports on how boards should approach corporate-culture oversight.

A recurring governance theme is the need for directors to spend more time outside the boardroom, talk to stakeholders and gain insights on their organisation. But how do directors allocate extra time for corporate-culture oversight in their busy roles?

Diligent Institute – the think tank of global governance-technology provider Diligent – examined in its March 2020 study, “Beyond the Boardroom: How Directors Gain Insight”, latest trends in how directors gain insights on organisations and prepare for board meetings.

The research surveyed 189 directors worldwide and included a series of follow-up in-depth interviews to understand how directors are allocating their time.

Diligent Institute found the days of management-prepared board packs as a “single source of truth” are largely over. Almost two thirds of directors surveyed said they were gathering independent information about their organisation as pre-meeting preparation.

Directors spend 40 per cent of their meeting-preparation time engaged in activities beyond reading information prepared by management. About a fifth of their time is spent conducting their own research, through stakeholder meetings, site visits or talking to other business leaders.

Directors also showed a strong interest in understanding corporate-governance trends. Almost two thirds of respondents read material on corporate governance thought leadership or best practices, suggesting they are eager to stay abreast of evolving issues in their field.

As one director respondent noted: “You’re being irresponsible if you’re not looking more widely to understand what’s happening in your sector rather than relying solely on CEO reports. Especially in today’s high-risk culture, when you’re assessing risk all the time, if you just looked at one source, you wouldn’t be doing your job properly.”

The findings align with anecdotal trends of how directors are approaching corporate-culture oversight: less time in the boardroom and more time with executives and stakeholders; less reliance on board packs as the sole information source and extra time on curating and assessing independent information sources; and a far more proactive approach to governance.

The takeout from Diligent’s research is clear: today’s directors spend, on average, about 60 per cent of meeting-preparation time reading board packs and the rest on talking to people and their own research – a proportion likely to change in coming years as greater emphasis is given to directors testing corporate culture through their own research and stakeholder liaison.

Building a strong board culture

Having a strong board culture is the key to good governance and corporate-culture oversight. Yet not enough is known about cultures within boards and how they differ. Global search consultant Russell Reynolds considered key differences between boards with strong and weak cultures in its latest Global Board Culture and Directors Behaviour Survey. The study was based on responses from 750 directors of large companies worldwide.

The survey found “Gold Medal Boards” – those that rated themselves highly in the survey and where their organisation’s total shareholder return outperformed its benchmark index for two or more years consecutively – differed significantly from “All Boards”.

The top three governance priorities for Gold Medal Boards were Strategic Planning or Review, Oversight on Major Transactions, and CEO and Management Succession Planning. Gold Medal Boards gave each of these issues higher priority than All Boards did.

In contrast, directors of All Boards spent more time on Financial Statement Reviews, Compliance-Related Activities and Audit-Related Activities. There was a trend of high-performing Gold Medal Boards giving less priority to compliance activity and more to strategic issues.

Boards with the strongest self-identified culture also behaved differently from those with weak cultures, the survey found. Boards with strong cultures were twice as likely to feel confident that their company’s culture reflected that desired by the board.

Also, strong-culture boards were more than three times likely to discuss corporate culture at their board meeting than weak-culture boards.

Strong-culture boards were also likely to have participated in self-evaluation exercises for directors, and were broadly engaged in all aspects of board responsibilities, suggesting their directors were more engaged in their role.

The study said: “Interestingly for those advocating for improved board oversight of corporate culture, boards with strong cultures spend more time discussing corporate culture as a regular part of their agenda and are more confident that the corporate culture reflects the desires of the board.”

Diligent found that individual director behaviour that contributed to building a strong board culture included:

• The Chairperson facilitating and fostering productive debate.
• Non-executive directors not crossing the line into management issues.
• The board drawing out relevant expertise of independent directors when needed.
• Directors being open to new ideas and ways of doing things.
• Directors willing to challenge management constructively, when appropriate.
• The board focusing discussion on issues at hand and eliminating “tangent” matters.
• Directors building and demonstrating trust with fellow directors.

5 tips for organisation-culture oversight

Creating a suitable governance framework to aid corporate-culture oversight can challenge boards given complexities in defining and measuring various cultures across organisations.

Ernst & Young believes accelerating an organisation’s talent agenda and activating its culture should be key governance priorities, a position it outlined in a 2019 paper.

EY notes: “Oversight of culture is a growing priority in the boardroom – and rightly so. The board plays a critical oversight role for various dimensions that shape culture. Responsibility for defining the right culture for the company and embedding it within daily operations falls to management, but the board must oversee and hold management to account on how it is defining, aligning (to purpose and strategy), embodying and reporting on culture.”

The accounting and consulting firm identified five main ways for boards to challenge how they govern culture and support management in realising the value of their firm’s culture.

• Oversee how culture is aligned to strategy

As companies develop a blueprint for their purpose, vision, mission and strategy, they should identify the culture required to achieve the organisation’s strategic objectives.

• Create accountability for how culture is communicated and lived

EY believes the board should regularly evaluate how the CEO and other executives are modelling and communicating desired behaviour; factor culture goals into executive-remuneration planning; consider culture within succession planning; and have a strategy for the Chair or other directors to communicate organisation culture to external stakeholders.

• Monitor how culture and talent metrics are measured

Culture is measurable and boards should expect data from as many sources as possible, and at different layers in the organisation, on the culture of the organisation, says EY. Culture indicators include: Customer Net Promoter Scores, company culture surveys, employee-engagement scores, social-media scans, employer-review sites, whistle-blower data, compliance-training results, customer complaints and remediation, and audit information.

• Provide oversight of intentional culture shifts

As company strategies change, so too might the desired corporate culture. EY says boards should “monitor progress towards the desired culture and help management challenge whether changes being made across the organisation are superficial, which could feel disingenuous to employees, or truly changing the undertone of how the company works”. Boards should also help manage stakeholder expectations around the long-term nature of culture change.

• Challenge the board’s culture

Because the board “sets the tone at the top” for organisation culture, it must focus on building and maintaining its own strong culture. A genuine board commitment to diversity, inclusion, cultural values, personal behaviours and governance innovation is needed. Boards should also challenge whether they are devoting enough time to organisation-culture matters, says EY.

Governing ‘elusive’ organisation culture

Effective boards understand the importance of organisation culture, its relationship with risk management, and their role in culture oversight. But a theme among directors is the challenge of defining, measuring and monitoring organisation culture.

Complicating matters is the part-time role of non-executive directors in their organisation. How does a director who has several board roles and visits each firm once or twice each month govern culture when he or she only sees first-hand glimpses of it?

The PwC Governance Insights Centre reported that two thirds of directors used their intuition to assess company culture. PwC said directors also needed quantitative data to understand, assess and track culture and recommended boards had access to a “culture dashboard” that provided timely information on a range of organisation-culture metrics.

The 2019 PwC report, “Board Oversight of Culture”, suggested a sample culture dashboard where each metric ideally addressed elements of strategy and risk. PwC’s recommended culture dashboard for boards includes:

Behaviour

• Proportion of employees who completed training relative to strategic initiatives
• Ethics, code of conduct training certification results
• Whistle-blower/hotline trends
• Summary of lawsuits/legal/regulatory activity
• Degree to which significant internal audit issues are addressed on a timely basis

Reputation

• Social media analysis
• Analyst/activist investors/social activist commentary
• Media interest
• Customer satisfaction survey complaint trends
• Anonymous employee comment board

People

• Number of new hires who resign within 12 months
• Number and coverage of management communications (eg webcasts, town-hall meetings)
• Turnover rate of high performers
• Percentage of leadership turnover rate
• Employee engagement/employee pulse survey
• Ability to attract and retain diverse talent
• Exit interview trends
• Trends in 360-degree feedback

Performance

• Product quality ratings
• Incentive compensation plan details and performance
• Key performance indicators for business units
• Safety and cyber metrics