Corporate Culture: A Governance Priority

With increased frequency, and in the wake of several high-profile, value-destroying lapses attributed to corporate culture, boards of directors need to measure and monitor organizational culture as a staple of their governance agendas.

The National Association of Corporate Directors’ report from its 34-member commission, entitled Culture as a Corporate Asset, outlines recommendations that boards should follow to be more proactive in attending to corporate culture. Among them are the following seven that require direct, quantitative, and qualitative support:

1. The board, the CEO, and senior management need to establish clarity about the foundational elements of values and culture — where consistent behavior is expected across the entire organization regardless of geography or operating unit — and develop concrete incentives, policies, and controls to support the desired culture.
2. Directors and company leaders should take a forward-looking, proactive approach to culture shaping to achieve a level of discipline comparable to leading practices in the management and oversight of risk.
3. As a result of its significant interdependencies with strategy and risk, active monitoring of the organization’s culture is a full-board responsibility, with specific oversight activities housed in committees as appropriate. The nominating and governance committee should ensure that board policy documents and committee charters clearly delineate the allocation of such responsibilities and explain how culture oversight is embedded into the board's ongoing work.
4. Integrate culture into the board’s ongoing discussions with management about strategy, risk, and performance, emphasizing that how results are achieved is as important as whether a given goal is met.
5. Boards should set the expectation with management that regular assessments of culture will include both qualitative and quantitative information and incorporate data from sources outside the organization.
6. Directors should make culture an explicit criterion in the selection and evaluation of the CEO and set the expectation that the CEO and senior leaders do the same in their own leadership development and succession planning activities.
7. Boards and compensation committees should review the company’s recognition and reward systems (including incentive compensation as well as promotion decisions and other non-financial rewards) to ensure that they reinforce the desired culture and avoid unintended outcomes that could undermine culture.

The bottom line is this: boards must understand whether results were achieved across stakeholder groups and how the companies they govern achieved these results.