Wednesday, 7th September 2016 – In the UK, the Financial Reporting Council’s recent Culture Coalition and its ‘Corporate Culture and the Role of Boards’ Report put culture firmly on the Board agenda. There is undoubtedly increasing pressure on Boards, which are being held accountable for setting the tone from the top. Definitions and metrics of culture, however, remain elusive. As such, how can the Board ensure it is contributing to an improvement in corporate culture?
To address these questions, Fidelio was delighted to be joined by Oonagh Harpur, Advisory Panel Member, Walgreens Boots Alliance. As a Senior Advisor to Tomorrow’s Company and Board Member of City Values Forum, Oonagh has been heavily involved in recent publications and thought leadership on Boards and culture.
Fidelio’s conference call discussion was part of an ongoing series on Board effectiveness as part of the flagship “A Seat at the Table” development programme for senior female executives and directors. On the call we were joined by “A Seat at the Table” Alumni and select governance experts (including Non-Executive Directors, Company Secretaries and investors) from a wide range of geographies and sectors – from financial services, investment management, to not-for-profit organisations.
The Rise and Importance of Culture
“Culture eats strategy for breakfast” and trumps strategy as determinant of company success or failure.
The Financial Crisis of 2008 was a stark example of failure in corporate governance. The need to improve governance was clear and the initial focus was on regulation. But it became apparent that regulation could achieve only so much and hence the more recent focus on the Board’s role in establishing a culture that would support and enable corporate strategy to be achieved. As such over the last four years, discussion on culture has broadened from the CEO’s responsibility for the implementation of culture within the company to the Board’s (and especially the Chairman’s) role in setting the “tone from the top”. The interest from investors predicated on the Stewardship Code has also driven the focus on culture.
Culture, by its very nature, is hard to define and intangible – rendering measurement elusive. From a Board member’s perspective, it is diluted to ‘are we behaving and how do we behave with and through our people (employees; customers; supply chains; wider society)’.
Oonagh referred to the tripartite definition pioneered by Edgar Schein, Professor Emeritus at the MIT Sloan School of Management, as a useful framework. Culture is comprised of:
1. Artefacts (reception and dress: the visible brand)
2. Espoused values
3. Underlying values (that underpin assumptions and behaviours)
As business becomes more international and more complex, the importance of company values is critical. With the breakdown of conservative, homogenous corporate composition, underlying values need to be robust and clear if they are to be translated and embraced across geographies and business lines.
In times of uncertainty, with business strategy buffeted by crises, core values and purpose are a means of anchoring the organisation and enabling the business to be much more agile and adaptive. And of course, key to all this is the centrality of a business’s license to operate.
Practical Steps Forward
Clearly the expectations for Boards are changing, as evidenced by the FRC’s report on culture published in September 2016, and a host of other reports from members of the Culture Coalition including the City Values Forum and Tomorrow’s Company’s Governing Culture: Risk & Opportunity, a practical guide to Board leadership in purpose, values and culture.
To enable Boards to navigate the challenge of enhancing culture, Oonagh Harpur recommended three areas of focus:
1. Initiate: articulate the values from the Board level down. Ensuring from the Board perspective that the business strategy is aligned with the purpose and values of the organisation
2. Embed: promote and embody the purpose and values – providing leadership from the Boardroom. In guiding decisions, through L&D frameworks and guidance, the Board can take ownership of encouraging the desired behaviours across the organisation
3. Assess and assure: institute metrics, starting from where the current situation is and ensuring results come to fruition – with a clear roadmap of key milestones – and get out into the organisation and “smell” the culture for yourself
Companies must be clear regarding the values they are trying to embed. There are basic moral and ethical values that form a foundation for all companies. Core company values should be over and above these and ensure a clear link to strategy. For example, suitable, sector-specific, company values in the utilities industry may be an emphasis on the safety of people and customers; for a food and drinks company clean water could be core; whilst integrity and security are critical values in Financial Services. Values are as much about who and what you value as how you value them.
Implications for Boards
What does this mean for the Board skill matrix? If Boards are to get a grip on culture, greater diversity is non-negotiable. Fidelio has however previously noted that the FRC report makes surprisingly scant reference to diversity! Surely a critical oversight.
The Board also needs to be increasingly well positioned to take the pulse of the organisation. This involves ensuring good communication with the Executive and employees more broadly. In addition to establishing good channels of direct communication, tech-savvy Boards will be able to tap into a range of tools which permit good insight into the views and mood within the company.
Board Directors on the call were quick to point out that the Board evaluation process can make a major contribution to enhancing Board effectiveness. In this regard there has been a shift from evaluation that is a tick-box exercise to a much more qualitative assessment of Boardroom dynamics, culture and effectiveness.
Following the UK Stewardship Code (2012), the rise of stewardship forums, such as the Investor Forum (which began work in 2014), is now also adding pressure on corporate Boards. To date the focus has been most acute on major corporates but we are now seeing investor focus extend beyond the major caps.
But executives and directors on the “A Seat at the Table” call pushed back: how does a Board implement a better culture in practice? Oonagh suggested it starts with setting an example including in Board meetings which represent an opportunity to clearly set the tone from the top. This needs to be supplemented with thoughtful and judicious informal communication, in particular between the Chair and the CEO, as well as the Chair and individual directors. Increasingly Board development and evaluation is focussing on the quality of engagement and communication between Board members and with the Executive. This ensures open channels of communication which are essential in times of crisis but also more prosaically enable Board meetings to be more focussed on key topics that should come to the Board rather than background issues.
Conclusion
Expectations of Boards are clearly becoming more onerous. The FRC’s report on culture is expected to feed directly into a review of Board effectiveness guidance in 2017. Similarly, revisions to the Dutch Corporate Governance Code introduce the concept of culture as a Board responsibility. We see similar calls being made to German Supervisory Boards to demonstrate greater shareholder engagement and set the tone from the top.
Culture is an exceptionally difficult subject for Boards to pin down but the interest from regulators and investors is clear. The expectation that the Board is accountable for the tone from the top is becoming commonplace. To fulfil this expectation Boards will need to listen more closely and to communicate better. Fidelio has argued previously that Board composition must inevitably also adapt if Boards are to become the custodians of culture.
“A Seat at the Table”
Fidelio’s expertise in Board effectiveness underpins the “A Seat at the Table” development programme for senior female executives and directors. The Programme is now in its fourth iteration and will next be held at Leeds Castle on 14th – 15th March 2017.
For further details about Fidelio’s Board Practice or our flagship “A Seat at the Table” programme, please contact Luke Main or call +44 (0) 20 7759 2200.