In Setting the Tone at the Top: How Director Conversations Shape Culture, Melinda Muth and Bob Selden outline how the significant elements of culture — values, rules, leadership behaviour and rewards — influence the way employees think, behave and interact with one another.
However, one of the major challenges for directors is that they are not working in the organisation on a daily basis. “Estimates of the time a director spends on company business across the course of the year range from 20 to 40 days. On this basis, directors are not often in a position to consistently observe employees and their interactions. If and when they do have the opportunity to observe, their presence may impact the dynamics of interactions and obscure reality.”
Read more on culture from this issue below
So, with these limitations in mind, and provided the directors have hired the best CEO for the job and inducted and remunerated that person properly, how can they ensure that a positive and ethical culture is being transmitted and maintained in the organisation?
They outline six visible aspects of organisational environment and leadership behaviour that provide signals about culture and whether the tone being set is positive or negative.
These are: words and language, locus of control, rules and procedures, formal statements, rituals, and physical space. Directors should examine the words being used in board and CEO statements (particularly to external stakeholders) to establish the organisation’s locus of control. Does the organisation take responsibility for both successes and failures, or does it look to external factors? And in shaping culture, what are the ethical standards the organisation is setting through its rules and policies, formal statements, rituals and physical space it operates in?
They cite a recent Harvard Business Review study aimed at identifying the norms and behaviour found in unethical companies, resulted in a number of patterns correlated with scandals. One of the patterns was the language used by leaders, for example, describing events in terms of pressure, threat and the need to “survive”. “When it comes to setting the tone, the use of words and language matters.”
Five questions for directors
When it comes to culture, directors should bear in mind the axiom: “noses in, fingers out” (a board’s obligation to stick its “nose” into company’s governance matters, but to keep its “fingers out of management). ASIC has five questions for directors:
- Is culture a regular topic on the board and committee agendas?
- Do directors interact broadly across the organisation to gain insights?
- Does the board get pertinent input from stakeholders?
- Are key indicators of cultural health reported and monitored?
- Do the company’s stated values match the experience of customers, employees, business partners and the general community?
Five culture basics to look for:
- Exit data — resignations, redundancies, exit interviews
- Entry data — where recruits come from, for example: are all new staff coming from referrals or do we cast broadly beyond “people like us”?
- Engagement or culture pulse surveys, or Net Promoter Scores and any movement or patterns in these
- Third-party hotline data — whistleblowing, bullying, harassment
- Leadership development and promotion. Look for movement or patterns over time and put a diversity lens across each one.
The board sets the tone for responsible decision-making throughout the organisation, according to AICD’s Good Governance Principles and Guidance for NFP Organisations. Principle 9 relates to culture and ethics.
The culture of an organisation could be thought of as its “personality”. It is represented by shared values, norms, practices and core beliefs that shape behaviour. Organisational culture is sometimes described as “how we do things around here”.
The culture of an organisation therefore influences what it does, its relationships with stakeholders and its reputation. It can also be an important determinant of whether the organisation is able to achieve its strategic objectives and deliver on its purpose.
While culture can be a complex and elusive thing to identify and improve, it can have a direct impact on the activities and success of an organisation. For example, through the effect it has on the level of staff morale, absenteeism, the ability to attract or retain staff, the level of “wastefulness”, the level of risk-taking (including reputational risk) and the potential exposure of the organisation to legal or regulatory action.
A board and its individual members have a leading role to play in promoting a healthy culture for the organisation they serve. The chair has a leadership role in this context to set the standard for others to follow in terms of culture. Recognising the relationship between culture and strategy, many boards take a conscious and active role — both at a board and an organisation-wide level — in promoting the culture and behaviours necessary to deliver on purpose.
It is widely recognised that the culture of an organisation will be influenced by the conduct and actions of the board and individual directors. As the Chinese proverb goes: “the fish rots from the head”.
Some organisations set out elements of expected conduct and ethical standards in “codes of conduct”.
One area of particular focus has been to establish arrangements to deal appropriately with potential conflicts of interest, including policies and procedures concerning the identification, declaration and management of conflicts.
Having clear codes around potential conflicts and other conduct and ethical standards sends a message to the organisation and all those who have dealings with it that the board is committed to upholding certain standards, and is transparent about what it believes is appropriate behaviour.
Many desired behaviours that promote a healthy culture in the boardroom are often unwritten, such as:
- Arriving at board meetings on time and staying until the meetings end
- Reading board materials in advance of meetings
- Not talking over others or monopolising board discussions
- Giving each board member the opportunity to speak
- The asking of questions not being discouraged or frowned upon
- Board issues being dealt with in the boardroom and not “in the lift lobby” or externally.
A well-functioning board will necessarily entail a high-level collegiality and mutual respect, but at the same time recognise the need for constructive discussion and debate where appropriate.
Five common mistakes
In a recent Forbes article, former Amgen CEO Kevin Sharer said there are five mistakes directors commonly make:
They don’t do their homework, so they just come in with opinions, and they think they somehow have been promoted to omniscience
They don’t understand the social dynamic and culture of the board and try to advance a position before understanding what the group dynamic is
Not realising where the power on the board really lies
Not investing the time with the CEO to truly gain their trust and understand what they’re trying to do
Not understanding there are really only three questions that the board is there to monitor. “Every day you’re trying to make only a few judgements: Is this company performing for shareholders? Do we have a healthy environment — including social factors, compliance factors, legal factors? Does this CEO have the judgement, deportment and personal characteristics to lead this company?”
In late September, the Australian Prudential Regulatory Authority (APRA) ordered Australia’s biggest -financial institutions and super funds to conduct in-depth culture and governance reviews.
Professor Graeme Samuel AC, co-author of APRA’s Prudential Inquiry into Commonwealth Bank of Australia (CBA) offered some simple advice for any company planning to assess its operations. He told the Australian Financial Review recently that all big companies, not just financial institutions, should take advantage of the report to assess how well their company is running.
“My suggestion is to photocopy it (the APRA report) as many times as you need and to distribute it to the board, all senior executives and maybe even middle management,” said Samuel. “Ask them to read it, highlight anything that may apply to their own company and hand it back to the CEO and the chair. That effectively does a targeted survey of the corporation. The CEO and the chair should then aggregate all the highlighted paragraphs and the margin comments. That gives a really good blueprint on what needs to be done.”
Samuel also noted it was important that staff down the line recognise that change isn’t being imposed by consultants, but by the people responsible for the company. “Someone told me that cultural change takes 10 years,” he said. Cultural change, if it’s owned and directed at the top, can be done in a matter of months.”