Oversight of culture is a growing issue in the boardroom. Here are ways boards can challenge and support management in realising the company culture’s value.

Corporate culture is defined by the implicit, unwritten rules that create expectations for how people choose to behave. It is reflected by what people actually do every day, by what’s celebrated, emphasised and overlooked. Culture is also how companies create and protect value through people.

A company’s intangible assets, which include talent and culture, are now estimated to make up 52% of a company’s market value and for some companies, it can be as high as 90%.  This is higher than at any point in modern history, and most likely to accelerate. Today, company value is defined less by industrial-era physical assets like plants and equipment and more by information-age human capital. It is clearer than ever that a company’s talent, and the culture that enables that talent, are sources of quantifiable competitive differentiation.

For these reasons, oversight of culture is a growing issue 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.

Regulators and investors across the globe are interested in how companies are better leveraging talent strategy and culture to accelerate long-term success and enhance viability. As examples, recent changes to the UK Corporate Governance Code require boards to assess and monitor culture, and revisions to Japan’s Corporate Governance Code and the Dutch Corporate Governance Code emphasise the importance of culture definition, measurement and oversight. The Embankment Project for Inclusive Capitalism (EPIC) identified talent and organisational culture among the key drivers of long-term value, and influential institutional investors are including company purpose, culture and human capital management among their global engagement priorities. 

Further, the Committee of Sponsoring Organisations’ (COSO) recent update of its enterprise risk management (ERM) framework recognises the foundational role that culture plays in ERM.  The COSO update suggests that boards should embed culture into discussions about strategy and risk. It further suggests that boards consider whether the misalignment of desired and actual values and behaviours can represent a risk to the achievement of the organisation’s goals and seek assurance that adequate monitoring is in place to enable the board to identify and react to cultural issues in real time. 

Accordingly, accelerating the talent agenda and activating culture as a strategic asset should be one of a board’s top priorities in 2019.

There are five key ways to help boards challenge how they govern culture and support management in realising culture’s value. 

1. Oversee how culture is defined and aligned to strategy

Many leaders struggle with defining and implementing the culture that is right for their business. A corporate culture that clearly aligns with a company’s purpose and strategy enables and accelerates that strategy. When alignment isn’t there, culture can drag the organisation down. It is difficult to accomplish new things with old ways of working. As a first step, leaders should spend the time to define attributes of culture needed to both realise what the strategy calls for and engage their people. 

As companies develop a blueprint for their purpose, vision, mission and strategy, they should include the cultural attributes needed to achieve the company’s overall strategic objectives. Does the strategy call for putting quality first and prizing precision? Or does it call for putting the customer first and empowering local leaders to optimise customer responsiveness? Or is the key priority encouraging innovation and seeding disruptive ideas? To make it real, how do these translate into everyday decisions and behaviours in the company?

While leaders want their company to be great at everything, a company’s strategy will call for a specific orientation in the market (e.g., the innovator, the best brand, the most efficient), and the culture should be intentionally designed by management in the context of that orientation. Doing so will help shape decisions and behaviours, e.g., what kind of people are hired, what workplace policies and processes are put in place, what behaviours are rewarded.

Five culture archetypes: Modernising the DNA of the company

Research shows that companies generally fall into one of five culture archetypes that defines who they are. Given innovation’s urgent role in creating long-term value in today’s disruptive era, many leaders are focused on properly calibrating their risk tolerance to cultivate a more innovative culture. Awareness of these archetypes may help boards ask better questions around how management is defining and shepherding the culture that best fits its business.

• Innovation: We innovate.

We are entrepreneurial, focus on anticipating market needs, encourage and recognise ideas, and support prudent risks.

• Brand: We build and protect our brand.

We build strong commitment and pride in our products and services while operating with integrity and respect.

• Customer: We make it all about the customer.

We gear everything we do to the customer, are relationship -based and empower our people locally to drive success.

• Efficiency: We are efficient.

We optimise and are productive through a formal structure, defined roles and effective organisation-wide coordination.  

• Quality: We focus on quality first.

We strive for precision and excellence through continuous improvement, collaboration and a long-term view.

Boards play a pivotal role in overseeing that management teams have defined their corporate culture in the context of their strategy. It should do more than sound good; it should actually fit well with the company’s current ambitions. Management should be able to articulate the organisation’s desired culture, gaps that may exist and how the gaps are being closed. The board should oversee how management defines and harmonises the culture and strategy, and help provide that culture modernisation and evolution is an ongoing priority. 

2. Create accountability for how culture is communicated and lived – internally and to key external stakeholders

Everyone in the company contributes to culture. Each person is accountable for how she or he shows up every day. It only takes one event or sometimes one person to disrupt harmony, prompt a wave of employee turnover, damage client relationships or impact share price. Organisations should clearly identify the right behaviours, manage performance against those behaviours and reinforce them with incentive structures. They should also be aware of and address the challenges of building a cohesive, “borderless” culture in a global organisation, where desired cultural attributes may conflict with local norms (e.g., speaking up in a culture where hierarchy and politeness reign) and language barriers may compound challenges. Just as important, leaders at every level should “set the tone at the top” by modelling desired behaviour. So, there is a system around behaviours in an organisation to provide that the right ones are lived. If the system is weak or broken, sometimes unhealthy, divergent behaviours happen. 

The board can play a role in supporting this system, including by aligning executive compensation, including senior executive performance metrics, to the behaviours/culture the business needs. Boards should discuss how the current incentive structures might impact behaviours and what changes might be required to align incentives to the desired behaviours. Including cultural indicators in performance metrics can also help to incentivise the executive management team to embed the values and behaviours throughout the organisation.

The board should also regularly evaluate how the CEO and other senior executives are modelling desired behaviours and communicating the desired culture to the organisation. Does the content and tone of training materials and internal communications consistently reinforce the desired cultural values and behaviours? How does management communicate what is unacceptable behaviour to employees? How does leadership react to breaches of the company’s stated values? Transgressions can be an opportunity to shift the culture of the company in the right direction. Hundreds of little shifts over time is how company culture evolves. This should be deliberately directed by executive leaders, with oversight from the board.

The board’s responsibilities around succession planning and executive compensation give it meaningful opportunities to shape culture. If the leadership pipeline ultimately does not reflect the company’s values, the board may need to make changes at the top to better support the cultural fitness of the organisation. 

Further, given that investors, regulators and other key stakeholders are paying closer attention to culture, it is important that boards understand how culture is communicated externally. This includes details about how the board is engaged and exercising oversight of culture. Communications should give stakeholders confidence that culture is clearly defined and shaped to align to strategy and purpose, and that the systems that reinforce the right behaviours are set and current. 

 3. Monitor how culture and talent metrics are measured to keep a pulse on how culture is evolving

Effectively governing culture calls for boards to understand and monitor the metrics that best reflect the health and strength of a company’s culture. Culture is measurable; there are many options to directly and/or indirectly measure it. The 2017 COSO update notes that reporting on culture to the board may include consideration of analytics of cultural trends, bench-marking to other entities or standards,”lessons learned” analyses, reviews of behavioural trends, and surveys of risk attitudes and risk awareness. EPIC recommends that boards oversee, and companies report on, the different dimensions of culture, such as ethics and integrity, alignment with purpose and values, leading by example, performance and accountability, and inclusion and well-being.⁵

Companies are embarking on cultural assessments. In addition to these assessments, boards should expect data from as many sources as possible, and at different layers in the organisation, on the culture of the company. Customers and employees are key sources of intelligence. Customer Net Promoter Scores, data from culture surveys, employee engagement scores, social media scans, employer review sites (e.g., Glassdoor) and other human capital metrics can provide the board with insights on the health and strength of the culture. The collected data should be interpreted in the context of the purpose and strategy of the company. 

Data related to the company’s policies, procedures and risk management efforts are also valuable. This includes whistle-blower hotline data, social media audits, compliance training results, and recent legal claims and litigation. Other sources of intelligence include operations (e.g., corporate responsibility policy, decision-making structure) and financial metrics (e.g., market share and shareholder return). 

EY

Stephen Klemash, Joe Dettman PhD, May 2019