5 Guidelines for Structuring Board Oversight of Corporate Culture

Kerie Kerstetter
8 min read
A few weeks ago, we began to dig into Board Oversight of Culture, a risk area for today's boards that's proving to be difficult to define, much less oversee. We recently met with a group of Next Gen Board Leaders, public-company directors in their 30s and 40s, to discuss recent corporate crises ranging from Uber (i.e., tone at the top) to The Weinstein Company (i.e., sexual harassment) to Wells Fargo (i.e., poorly designed incentives and performance targets). The group was divided on whether these disparate incidents can even be placed under one umbrella of 'culture oversight'--a testament to the complexity of this topic.

We recently called on Jan Babiak, a board member with three public companies and a previous guest on Inside America's Boardrooms, to get her take:
  • What's the board's role in influencing organizational culture?
  • How can today's board members ensure they have a finger on the pulse?
In the discussion, she extended several tactics that boards can use to monitor culture throughout the organization, but not first without acknowledging its complex and intangible nature, which makes it so difficult to 'tackle'.

[blockquote source="Jan Babiak, corporate director on multiple boards"]From a governance stand point, culture is rather ethereal. It's not like other areas of oversight where boards can say 'We beat our earnings per share by X.' You can't measure culture in that way, because culture is both positive and negative--and every culture has both good and bad within it.[/blockquote]

Indeed, culture drives behavior throughout the organization. Therefore, the board's formula for risk mitigation entails (1) understanding and monitoring culture throughout the organization, and (2) positively influencing it. But, where to start? In just the last few weeks, several organizations have published board guidance around culture oversight (particularly interesting and comprehensive was the CII's How Corporate Boards Can Combat Sexual Harassment). So instead of taking an overarching, 30,000-foot view of the topic, we decided this blog should focus on some of Babiak's specific tactics for monitoring and influencing culture.

Start with an audit.

For the board that's wondering where to start, a simple audit of past incidents (particularly for oversight of sexual harassment) is a logical first step. 'Look back at the company history,' said Babiak. 'What incidents have there been over the last three, five, and even ten years? What's the nature of the infractions? The frequency? How many settlements, no matter how immaterial, have been paid?'

According to Babiak, starting with this information not only provides a starting point, but it begins to paint a picture of the organization's culture and history.

Keep in mind: If the organization has few reported incidents relative to the company's size, it could also be an indication of a fear-based culture or a broken reporting system, said Babiak, rather than a sign of cultural virtue.

Don't settle for the highlights.

Most all companies conduct employee culture surveys, which get filtered up to the board in the form of a high-level report or presentation. “Given what we have learned in recent years, boards shouldn’t be content to rely on the summaries or high points anymore,” said Babiak. “[Directors should] ask to read the full report with the results filtered by gender, tenure, geography, job function, etc.”

As you slice the data and begin to examine the results from different angles, it brings forward important trends, explains Babiak. “You may discover a prevailing view among the women or the new hires at the company, which would otherwise be lost in a sea of responses.”

Be inquisitive, advises Babiak. Again, boards can piece together the survey data of years past to paint a historical picture of the organization's culture.

Don't feel pigeonholed when structuring oversight.

As boards begin to structure oversight around culture, it's important to remember that there's no one right way to do it. “I’m not sure we’re mature enough to have best practices around culture oversight yet,” said Babiak. “Yet, at some level, the board needs to decide where this oversight is going to sit.”

Some are going to be comfortable addressing the issue as a full board, explained Babiak, whereas others will seek more regular, in-depth analysis by a committee that reports to the board--whether nom/gov, audit, compensation, risk--or in extremis form a separate committee altogether.

Boardroom Resources recently featured a webcast hosted by the Center for Audit Quality (in partnership with the Anti-Fraud Collaboration), which described the role of the 'Ethics & Culture Committee' at Citigroup.

[blockquote source="Mike Carawan, Chief Compliance Officer at Citigroup"]The objective of the [board] committee is to have that overarching look at the organization and to ask some of those questions about how we're getting [to our goals] and how we're driving the right sorts of [behavior] across the organization.[/blockquote]

In the webcast, Chief Compliance Officer Mike Carawan discussed the various initiatives and company-wide training programs that resulted from the board's targeted approach to culture. Yet, a dedicated committee might not be the best structure for every board. Culture oversight should be shaped by factors ranging from board dynamics and existing committee structure to company maturity, industry, and the board's historical culture analysis.

“Ultimately, the CEO and board chair/lead director need to own this,” said Babiak. “It doesn’t mean they can’t delegate, but it is important that they stay close and do not abdicate.”

Be intentional. Look for clues.

Being a board member today requires diligence and a keen interest in the details. In general, board members need to remember that they are not management, said Babiak. Yet, the old saying 'noses in, fingers out' should be much more than the occasional sniff... 'Boards certainly should never be 'holding their nose' when the smell indicates that something is rotting,' she emphasized.

Recent high-profile corporate crises (e.g., Wells Fargo, Theranos, Wynn Resorts) call into question whether a board member who performs the bare minimum (e.g., only attending the scheduled board meetings) is really meeting his/her fiduciary duty.

“Too many board members are still relying on the information that’s being filtered up to them,” said Babiak. “As a board member, if possible, you should be visiting the store locations (ideally incognito) and talking to the clerks (or whatever the equivalent might be for your company). You should be looking at employee and customer reviews on sites like Glassdoor. You should be following employee and customer conversations on social media. These things aren’t hard to do, but as a board member, you have to be intentional about it.”

In addition, Babiak encourages board members to make the most of their interactions with members of management. “In my normal-course meetings, I ask them about the strategy and the things that worry them,” said Babiak. “If you’re really paying attention, you’ll be able to flag areas of discomfort and dig deeper.” Committee chairs, in particular, are often well-positioned to have these discussions given their regular interaction with the teams of the CFO, CHRO, CIO, etc.

If you open the dialogue, members of management (whether middle managers or executives) can be among your most accurate indicators of culture, both good and bad. 'Being a board member today requires a good EQ [i.e., emotional intelligence],' explained Babiak, 'and a bit of effort.'

It all ties back to board culture.

If you haven't made the connection between corporate culture and board culture, it's time to connect the dots. 'Is a board without women even capable of understanding and mitigating risk around sexual harassment?' asked Babiak. “Board diversity is actually an important part of the board’s culture oversight role.” “You need board members that are brave enough to raise uncomfortable subjects that might not be on the usual board agenda–subjects that would heavily influence culture,” said Babiak citing recent examples ranging from financial incentives at the store/branch level to whistleblower programs and bystander training for bullying/sexual harassment.

Babiak also points out that, in the case of boards with a joint chairman-CEO, one person can ultimately be in the position to act as a gatekeeper to the board: 'What kind of board members are they most likely to recruit? People who criticize them or go along with them? What kind of tone does that set?'

[blockquote source="Jan Babiak, corporate director on multiple boards"]You need to hire board members that ask the hard questions--that are intentional as they proactively pursue the information needed to assess culture and determine whether the CEO and others in management are being reckless versus 'commercially courageous.' You need board members who aren't afraid to challenge or support [management] accordingly--whether collectively or individually. You're never going to get the company culture right if you don't have the board culture right.[/blockquote]
In our opinion, Babiak does a good job peeling away the layers of corporate culture to reveal a set of actions that today's boards can take. As the oversight around culture grows more complex, directors can't forget to step back and focus on the fundamentals. It was hard work and persistence that got directors to the board level in the first place; that same level of diligence may be the board's best asset when the conversation turns to culture.

We'll have much more on this topic in the weeks ahead. Stay tuned!
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Kerie Kerstetter
Kerie Kerstetter is the former Senior Director of Content Strategy for Diligent and the Next Gen Board Leaders.