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3 Ways Corporate Boards Can Have a Direct Impact on Company Culture

Regulators are increasingly focusing on culture as a critical driver for corporate compliance, and board members should take note of this trend.

Hardly a week passes without another warning regarding its importance, and companies of all sizes and sectors have recognized a strong internal culture as the backbone of success and sustainability. It’s the responsibility of the board to regularly assess culture with management and ensure it doesn’t become at cross purposes with ethics and compliance. But that can be easier said than done.

Board members have limited day-to-day contact with the organization and could easily be caught off guard when small problems that go ignored fester in secrecy and explode into major compliance failures. For example, as the contours of the Volkswagen scandal continue to become clearer, it looks like minor incidents may have laid the groundwork for bigger failures.

“There is one common thread underlying these negative incidents: a management culture of blind obedience, one that relies upon and is enabled by secrecy.”

A few months ago, The Wall Street Journal reported that U.S. employees who sought to report mundane but required information to the EPA were shut down and ordered not to comply by German headquarters. Recently, Valeant Pharmaceuticals’ board fired its CEO and is letting go its former CFO, now on the board. The company stated that “the tone at the top of the organization, and the performance-based environment at the company, where challenging targets were set and achieving those targets was a key performance expectation” may have contributed to improper financial reporting.

There is one common thread underlying these incidents: a management culture of blind obedience, one that relies upon and is enabled by secrecy. And the unfortunate reality is that all the prosecutions, training, checklists, and “tone at the top” will not change the way things are done until company culture shifts to encouraging openness and transparency and moves away from empowering secrecy and autocracy.

Here are 3 tips that can help board members make this happen.

1. Request a formal assessment of the company’s culture. The first step to changing a flawed culture is a broad, frank look at behaviors within the organization. Using the right metrics, an “organizational MRI” will identify pockets of rogue sub-culture, as Financial Industry Regulatory Authority (FINRA) calls them, which can breach the best processes and controls if left unchecked. Building upon the MRI insights, leaders get a blueprint for replacing autocracy and secrecy with shared values, engagement and transparency.

2. Use the “MRI” to drive change. Once the factors that actually influence behavior are identified and out in the open, board members can work with executives to ask the right questions and catalyze the conversations needed to strengthen the culture. The process also helps rebuild trust with anyone in the organization marginalized by autocratic leadership and dismayed by unethical behavior.

3. Audit your own process. Boards have their own cultures as well, which sometimes need scrutiny and revitalization, particularly when there has been a compliance failure on their watch. Often we hear board members want executives to “think long-term,” but then hound them for quarterly results. Responsibility for corporate cultures includes everyone.

The results of assessing culture, if analyzed insightfully, are inevitably full of surprises. Even highly engaged board members may not be aware of how far their corporate cultures have drifted from the organization’s core values or where the real disconnects occur.

Getting an organization’s culture right is not only important for employee engagement and morale, it also makes good business sense. Research from LRN shows that employees who experience a high trust environment are 11 times more likely to report higher levels of innovation relative to their competitors. Even more, employees functioning in a high trust, risk-taking, and innovative culture are six times more likely to report elevated levels of financial performance compared to the competition.

While creating and sustaining a healthy organizational culture is an intricate process, the dividends a company receives are both significant and worthwhile.

About Susan Divers

Susan Divers
Susan Divers, a senior advisor with LRN Corporation, has more than 30 years of experience in the ethics and compliance area, including serving as the Chief Ethics and Compliance Officer of a Fortune 500 corporation. LRN’s mission is focused on values-based leadership and ethics.