NACD Calls on Boards to Actively Monitor Corporate Culture

We don’t know who invented water, but we can be pretty sure it wasn’t a fish. It’s the same with corporate cultures. The people swimming in a particular culture all day are often the least reliable judges of whether the culture is performing as advertised.

Directors, who have one foot in and one foot outside the culture, are in the most reliable position to monitor how the organization’s stated values align with actual incentives and performance, concludes the Report of the National Association of Corporate Directors Blue Ribbon Commission on Culture as a Corporate Asset.

Boards need to step up to measure and monitor the cultural foundations of their organizations, just as they would any other risk. “Culture oversight is, by definition, a key board responsibility, as it is inextricably linked with strategy, CEO/senior leadership selection, assessment and evaluation, and risk oversight—all of which are squarely in the board’s domain,” the report states.

Does any CEO doubt that risk certainly exists when an organization’s stated ethical values come into tension with incentives and corporate conduct designed to promote corporate integrity? Look no further than recent scandals at The Weinstein Company, Uber Technologies, and Wells Fargo & Co. to see what risks a breakdown in corporate culture represent.

“ boards must look beyond mere compliance in their oversight of a corporation’s culture.”

Most boards understand the importance of aligning incentives, pay, and promotions to a strong, value-based culture, the report suggests, but few have been intentional in defining culture at the board level and implementing ways to actively monitor it. Doing so is especially critical for multinational companies where workplace norms and values often vary by region. For these companies, especially, a board-level understanding of a common set of ethical values and business norms provides a critical cultural baseline.

Corporate cultures, the report says, are company-specific and revealed through the behaviors of employees at all levels, particularly those that respond to “carrots” and “sticks,” the rewards and punishments that every culture provides to normalize behavior. Moreover, culture extends beyond the company’s organizational chart in that cultures are expressed in the treatment of customers, partners, suppliers and the communities in which companies operate.

Commissioners were united in agreeing that boards must look beyond mere compliance in their oversight of a corporation’s culture. The recommendations of the commissioners call for boards to:

Require the CEO to produce a narrative outlining the organization’s cultural foundation and how cultural artifacts (codes of conduct, whistleblower hotlines, and especially quotas and incentives) support that culture.

Demand more rigor to gauge consistency between aspirational and actual cultural performance. That means evidence, not anecdote.

Establish board-level active monitoring of the cultural interdependencies and oversight that defines culture.

Scrutinize the culture operating within the board of directors as a body.

The report suggests that boards recognize that corporate culture and reputational impacts are increasingly linked. While a majority of boards are confident they can track the company’s cultural tone at the top, the span of understanding of the culture as it actually operates in business departments and workgroups is much less reliable, the report concludes.

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John Kador

John Kador is a business author based in Lewisburg, PA. His last book is What Every Angel Investor Wants You to Know: An Insider Reveals How to Get Smart Funding for Your Million Dollar Business (with Brian Cohen, McGraw-Hill).