Too often the media alerts the public to something a board should have known about—or knew about but was failing to address. From there, it’s firefighting and catch up. Organisational culture is now firmly on the board’s agenda. Here we consider the board’s oversight and ‘tone from the top’ roles.

Increasingly important…

What are the right reasons? They make a long and growing list. It’s surprising that the basics of human decency and ethical behaviour need to be explained—and that the lack of them in a workplace is anything other than a matter for urgent correction. But we are constantly reminded of the need.

A recent LinkedIn survey [2] of more than 3000 people found 70 percent of professionals in the US would not work at a leading company if it meant they had to tolerate a bad workplace culture. In fact, 65 percent would rather accept lower pay than deal with a bad workplace environment.

In the 2021 Institute of Directors/ASB Director sentiment survey, labour quality and capability came out as the biggest risk facing organisations. In our own recent work, we find more organisations becoming very conscious of the face they present to the world when looking for good but scarce employees.

An interesting study [3] from Columbia School of Business interviewed 1,300 senior executives—notably finance people, not HR practitioners. More than half said that corporate culture is one of the top three drivers of firm value. And 92 percent said that improving their culture would increase their company’s value. Unfortunately, while nearly every respondent said that improving culture would improve value, only 16 percent said their culture was where it should be.

The investment company State Street Global Advisors noted in their 2019 letter [4] to boards that ‘studies show that intangibles such as corporate culture are driving a greater share of corporate value, precisely because the challenges of change and innovation are growing more acute’.

Backing this up is a recent EY study that found that ‘intangible assets’ such as culture average 52 percent of an organisation’s market value (and in some sectors as much as 90 percent). Researchers have documented [5] that in the US and UK now, more value is driven by intangible, rather than tangible, assets.

…but often poorly done

The same State Street letter goes to say that ‘however, through engagement we have found that few directors can adequately articulate their company’s culture or demonstrate how they assess, monitor and influence change when necessary’. Important, yes, but done well? Rather rarely. In his recent excellent article [6] in Stuff, Dave Winsborough cautions that most so-called ‘corporate values’ are sadly little more than counterproductive virtue signalling. An MIT study [7] taking in 1.2 million reviews across 500 companies reveals no correlation between the cultural values a company emphasises and how well the company lives up to those values in the eyes of employees.

Going further, another study [8] by economists found an organisation‘s proclaimed values bore absolutely no relationship to its financial performance. But employee perceptions of managerial ethics and trustworthiness did predict productivity, profitability and the state of industrial relations, and employees care deeply about what firms say they value and believe in.

Actual workplace culture lies in the informal elements that are not written down or codified. These can be described as ‘water cooler norms’, or the unwritten ground rules. Often ‘the way we do things around here’ and the corporate values on the reception wall plaque have an unfortunate amount of daylight between them. What is walked past or ignored becomes the baseline of acceptable culture.

For a culture to be effective, the company’s formal statements need to demonstrably align with and support these informal elements. It is this gap that generates problems. In their detailed workplace assessments, the Barrett Values Centre [9] measures the values held by employees and maps them to the espoused corporate values. Their work indicates that a gap of 40 percent or greater is a reliable indicator of performance decline or even institutional collapse. Values held by an adult human are largely set early in life and cannot be changed by top-down corporate edict. Any culture-setting process that does not seek broad input is almost certainly doomed to fail.

The board’s role

Ethical failure quickly lands on the board table. Our recent article marking Enron 20 years on considers the governance flaws that led to that debacle and others. New Zealand organisations are not exempt, with very public failings across several sectors—sport, law, fashion, emergency services and others.

Organisational culture starts with the board’s own behaviour. How it wishes to conduct itself should be laid out in the board charter and that policy preferably made public. Directors should feel comfortable to hold each other accountable for boardroom behaviour and ethical standards. We favour a quick post-meeting review which can include, ‘did we stick to our values today?’ Any formal board assessment process is expected to canvass this area in a more thorough way.

Expectations around ethics and culture are increasingly being written into governance codes.

Principle 1 of the NZX Corporate Governance Code [10] states:

Directors should set high standards of ethical behaviour, model this behaviour and hold management accountable for these standards being followed throughout the organisation.

In June 2018, the UK’s Financial Reporting Council affirmed the importance of culture by formalising the board’s role in aligning corporate culture with the company’s purpose, values and strategy. The revised U.K. Corporate Governance Code [11] notes:

The board should assess and monitor culture. Where it is not satisfied that policy, practices or behaviour throughout the business are aligned with the company’s purpose, values and strategy, it should seek assurance that management has taken corrective action

The 2016 King IV (South African) governance code [12] clearly lays out the board’s role:

The governing body should exercise ongoing oversight of the management of ethics and, in particular, oversee that it results in the following:

• Application of the organisation’s ethical standards to the processes for the recruitment, evaluation of performance and reward of employees, as well as the sourcing of suppliers.
• Having sanctions and remedies in place for when the organisation’s ethical standards are breached.
• The use of protected disclosure or whistle-blowing mechanisms to detect breaches of ethical standards and dealing with such disclosures appropriately.
• The monitoring of adherence to the organisation’s ethical standards by employees and other stakeholders through, among others, periodic independent assessments.

Importantly, the King IV code recognises that the board will need to both check and verify. Most boards in Aotearoa New Zealand comprise non-executive directors who gather infrequently and do not spend their days ‘inside the shop’.

Some elements of organisational culture are, of course, covered under the Health and Safety at Work Act (2015), which lays out clear expectations of directors. Most organisations will already have monitoring regimes in place to address those matters. But ultimately health and safety is only a subset of a broader perspective. Boards have three main options to receive and verify information: via the chief executive, direct observation and independent review.


Maintaining oversight

Hands down, the most persistent governance challenge is the obligation to exercise oversight over workforce culture [13]

Before any regime of oversight is set, understanding and agreement must be reached about:

• the culture we currently have in place
• its strengths and failings
• alignment to achieving our strategy
• any desirable changes
• mechanisms the management team is using to influence or effect change
• current monitoring processes and their adequacy.

This may take time and involve some broader consultation, but once agreed the board can maintain a perspective through a combination of these tactics:

• maintaining a permanent agenda item on organisational culture alongside health and safety (grouped as people and organisational culture)
• including an annual deep dive into this area on the board’s work plan
• adding culture to the mission-critical items on the risk register
• broadening directors’ understanding of their health and safety obligations to include culture
• clearly stating values and publishing them widely, together with the reasons for each item
• including in the annual report the statement of values and the board’s approach to ensuring these are lived within the organisation
• providing opportunities for board members to experience the organisation at all levels
• ensuring recruitment processes are clear about the culture of the organisation and the behaviours consistent with the values
• broadening the chief executive’s performance review to include internal and external opinion on lived values
• having the board commission occasional, independent verification of organisational culture and workplace climate
• establishing clear, secure whistleblowing processes that flow through an independently monitored channel, all of which is visible to the board
• adopting zero tolerance of behaviours inconsistent with espoused culture and values.

It is useful to paraphrase what multiple commentators have pointed out: if you don’t manage your culture, it will manage you. Setting standards begins in the boardroom and the highest level of oversight sits squarely at that table. The fish rots from the head! [14]

We acknowledge SportNZ as the commissioner of the longer opinion piece from which this article is drawn. The full discussion can be found here.


Notes:

[1] https://www.drucker.institute/did-peter-drucker-say-that/
[2] Linked In report
[3] Shivaram Rajgopal et al. Columbia School of Business Ideas and Insights January 2019
[4] State Street letter
[5] Jonathan Haskel and Stian Westlake, Capitalism Without Capital: The Risk of the Intangible Economy, (Princeton University Press, 2017).
[6] Company value statements and virtue signalling
[7] From an MIT study by Donald Sull, Stefano Turconi, and Charles Sull. See July MIT Sloan Management Review July 2021
[8] The value of corporate culture
[9] https://www.valuescentre.com/
[10] NZX Corporate Governance Code
[11] Financial Reporting Council. The UK Corporate Governance Code. London: FRC, 2018.
[12] King IV Report on Corporate Governance for South Africa 2016. Institute of Directors in Southern Africa, 2016. p. 45.
[13] Peregrine, M. ‘The most persistent of all governance challenges’. Forbes.com. 29 October 2018.
[14] Referencing Bob Garratt’s seminal book, The Fish Rots from the Head. Harper Collins Business 1996