The Importance of Corporate Culture for Good Governance

Nicholas J Price
5 min read
News travels fast, regardless of whether it's good news or bad news. We can count on technology to increase the speed and scope of traveling news. That's just one thing that makes a corporation's reputation such a valuable asset. Fast-spreading news affects branding and reputation for better and for worse.

The board has a responsibility to practice good governance, which includes working to develop a healthy corporate culture. While that sounds good in theory, abstract philosophies and ideas like culture can be hard to define and even more difficult to put into practice. Beyond that, there's also the issue of how to monitor and measure corporate culture.

Tackling corporate culture is challenging. When boards approach culture proactively rather than reactively, it helps to protect a corporation's future. This is how it also protects employees, shareholders, vendors and other stakeholders.

Board Directors Play a Role in Overseeing Corporate Culture

Creating awareness is central to developing a healthy corporate culture. Awareness begins in the boardroom, which is why developing corporate culture should be on every board's agenda.

Board discussions about corporate culture can take many turns. To begin with, in seeking candidates for the CEO position, boards should be looking at how the new CEO fits in with the corporation's desired culture and behavior. Senior executives communicate much about corporate culture through their words and actions. Managers who naturally fit well into the desired corporate culture will more easily be able to drive positive change.

Corporations that are working to improve or shape culture need leaders who can leverage existing processes and use an intentional approach when making decisions. Culture starts at the top and the best test of culture is when things go wrong. How the board and senior executives handle crises and times of duress is always a true reflection of corporate culture. Board discussions should include how they can maintain a positive corporate culture through difficult times.

How to Define Your Corporate Culture

Defining a healthy corporate culture is challenging, but not impossible. Think of culture as having two components. One of them requires having leadership that is in strong agreement about what they value. The other is leadership that has a high level of intensity with regard to those values. Board directors can start by embedding these components into a strong ethics and compliance program.

Defining corporate culture is challenging because of the wide variety of people and cultures that can become part of a corporation's culture. Before a board can begin to narrow their definition of culture, they need to create a corporate environment where employees feel that their input has merit.

Linking CEO Succession to Organizational Culture

As part of overseeing corporate culture, boards must consider succession planning for the CEO. Since the CEO plays a primary role in corporate culture, when a CEO gets fired or resigns, it opens up the possibility for the culture to break down. Board nominating committees need to consider past performance, industry experience and public reputation as they pertain to cultural development when narrowing their choices for a new CEO. Placing strong emphasis on culture during the candidacy process will help to keep the corporate culture strong despite any expected or unforeseen leadership changes. Failing to address these issues could spell future disaster.

The Methodology to Enhancing Corporate Culture

Something that makes understanding and promoting culture so challenging is that it has so much to do with who people are and how they feel. Promoting a strong and specific culture means that leaders need to strike an emotional chord with their employees. Establishing an emotional connection forms the cornerstone for everyone to share the same purpose and motivation from the top to the bottom.

Besides encouraging well-connected manager-employee relationships, there are some tangible ways that boards can pursue to create awareness about their corporate culture.

  • Appoint a Chief Ethics Officer who is responsible for cultural assessment and training.
  • Create and distribute independent questionnaires that provide insight about the employees' perceptions and levels of trust.
  • Assess how well middle managers translate corporate culture into everyday policies and practices.
  • Create an outlet where the employees' thoughts and ideas can be heard, such as an anonymous suggestion box.
  • Encourage storytelling or invite employees to write articles about culture for the company newsletter.
  • Find interesting and attention-getting ways to communicate cultural values to employees.
  • Find ways to reward employee behavior that supports the culture.
  • Communicate strongly ' weave it into every communication and action.

The Impact of Good Corporate Culture on Governance

Regulators are taking a critical look at all of a corporation's operations, including how seriously they approach governance. Regulators know that corporations with weak cultures are susceptible to having leaders or employees who have bad conduct. A weak corporate culture and bad employee conduct create the perfect storm for overall poor performance and potential crises. Poor culture can send a corporation into a downward spiral where they experience financial loss, employee turnover and possibly legal troubles.

Conversely, studies have shown that a healthy corporate culture increases productivity and generates positive long-term shareholder value. Corporations that enjoy a healthy corporate culture improve their branding and reputation. They also find that their customers have a strong sense of loyalty. These issues translate to a direct contribution to the overall strength and profitability of the corporation.

A Few Final Thoughts on Corporate Culture and Good Governance

Where many corporate boards get it wrong is that creating and maintaining a good corporate culture isn't one-size-fits-all. The culture starts at the top, but everyone working in and connected with the corporation creates a cultural whole.

Building a solid corporate culture isn't 'one and done.' Rather, it's a continual work in progress. Economic and technological forces are coming together with a strength that's causing vast change for how corporations function. The future of the marketplace is uncertain. The only thing that corporate boards can count on is that major things that affect their operations will continue to evolve in various and unexpected ways over the next decade or longer. What won't change is the importance of a good corporate culture and a strong commitment to good governance.