In a general sense, culture refers to one’s beliefs, values, attitudes, customs and way of behaving. How does the idea of culture relate to the context of the culture of a board of directors? How does a company’s culture relate to its corporate governance? More importantly, what is the effect of company culture on productivity and profitability?
Today’s boards of directors are taking a deeper look at their company’s culture from the top to the bottom, as well as horizontally across the company’s stakeholders, employees, customers, suppliers and the wider community.
In giving board culture and corporate governance a broad-scope perspective, boardroom conversations increasingly include discussions surrounding how boards can best foster the company’s culture to permeate through every part of the organization.
Developing a Culture of Corporate Governance That Is Vast and Integrative
Sir Winfried Bischoff, Chairman of the Financial Reporting Council, has said that corporations can’t ignore the topic of corporate governance culture as a matter of course, and then expect it to magically appear in all the right ways when a crisis occurs.
As with any relationship, people’s true colors and behavior surface when things are not going well. This is especially true when corporations are experiencing economic downturns, public criticism or scandals.
Healthy Board Culture Starts at the Top in Words and Actions
Developing a culture of corporate governance starts at the top, beginning with the board directors and leaders. A good start to developing the intended culture of corporate governance begins with words from corporate leaders and directors, but they must do more. Actions speak louder than words. When actions match the corporate message, the roots of corporate governance culture begin to grow and extend to other parts of the organization and its network.
The relationship between the board chair and the CEO is crucial toward infiltrating the corporation’s culture to other parts of the network. When board directors and managers are not strongly aligned with the corporation’s commitment to developing the culture of corporate governance, board directors have a larger task ahead of them to expand and develop the corporate culture. Directors will need to accomplish this with consistent words and actions.
Developing Healthy Board Culture Inside the Boardroom
Board directors need to fully embrace the culture of their corporation by focusing on it all the time, especially in the boardroom. Board directors establish the company’s overall purpose and strategy, which provides many opportunities to connect their duties with the corporation’s culture. What does this look like in practice?
Board directors start by incorporating the company’s culture into the recruitment process for board director selection so that the board culture at large embraces the corporation’s overall image and business strategy. Developing a culture of corporate governance also transcends to aligning the corporate values with incentives that reflect the company’s purpose, values, strategy and business model. Rewards and incentives should be connected to performance as it pertains to embracing the corporation’s culture.
Working together with the CEO and other organization leaders, the board of directors can enhance a culture of corporate governance with actions that demonstrate transparency and accountability. The culture should be incorporated into any public reports and other communications, particularly when it comes to engaging with shareholders.
Board Culture of Corporate Governance Outside the Boardroom
While much of the work toward developing a healthy board culture of corporate governance occurs internally, the board needs to work to expand their efforts to the corporation’s extended network. In their continued dealings with the extended network, managers and directors have the opportunity to drive the company’s incentives to motivate a sense of trust and respect among its stakeholders. The board directors and managers can accomplish that by asking investors and other stakeholders to consider how their behavior corresponds with the company’s behavior and expectations.
Assessing and Measuring Board Culture for Corporate Governance
The board of directors holds the responsibility not only for developing board culture but also for assessing and measuring it. One of the most viable ways of measuring board culture is by taking a sincere, critical look at the internal audit process.
As part of developing a healthy board culture, board directors need to place the internal audit in high regard within their corporate communications with employees and shareholders. Part of preparing for an internal audit is assessing whether those conducting the auditing process have the degree of independence needed to conduct a thorough and objective audit. The board should also ensure that the corporation’s charter includes wording that mandates internal audits to include incorporating cultural issues.
The board should also assess what steps they may need to take to develop the skills and capabilities of their internal auditors and the auditing processes. In addition, the board needs to look at whether they need to do more to make sure that the independent auditors and the human resources, compliance, and risk departments work collaboratively to help the board assess the culture.
Sustaining a Healthy Corporate Governance Culture Adds Value to the Stakeholders
It’s obviously not as easy to assess and monitor board culture in the same way that the board can monitor productivity and profitability. Yet, it is no less important because integrating a healthy corporate governance culture across the scope of the corporation impacts the bottom line.
Maintaining a consistent cultural environment drives capital efficiency by improving productivity, which ultimately adds sustainable value and protects shareholders. Shareholders also know that they can rely on management and the board to adhere to the culture because they send a consistent message of the corporate culture by their words and actions.
Some Final Thoughts on Developing a Healthy Board Culture of Corporate Governance
Many corporations think that it’s enough to communicate the message about their intended corporate culture in their marketing, reports and social media efforts. Realistically, it takes more than that.
Boards can’t isolate the corporation’s purpose and strategy from the corporation’s culture. Board directors and managers need to make developing culture a priority, starting with placing the priority on their own words and actions relative to every corporate duty and activity.
Boards should also note that moving in a new direction takes time. For example, many companies now use board portal technology as a way to keep secure in an ever-changing cyber world. Cultures, including corporate cultures, don’t develop overnight.