Almost two-thirds of European company directors work on boards that either fall short of giving corporate culture significant attention, or fail to include it in their formal risk-management systems, according to new research.
Board Leadership in Corporate Culture: European Report 2017, conducted by Board Agenda in association with professional services firm Mazars, and business school INSEAD, gathered the views of 435 board members across Europe.
The survey found that 63% either work on boards that exclude culture from formal risk considerations, or fail to routinely assess the risks associated with their own corporate cultures.
The news will come as a disappointment to many, following efforts by politicians and regulators to highlight the importance of maintaining and monitoring a sound corporate culture. In the UK, regulators have stressed that boards have a responsibility for defining a company’s purpose and ensuring its values are in tune.
The Financial Reporting Council is expected to emphasise the importance of culture when it publishes a review of the UK Corporate Governance Code in November this year.
David Herbinet, global head of audit at Mazars, said: “Many years after the famous Peter Drucker quote about culture, strategy and breakfast, culture has finally, and rightly, taken centre-stage on the governance agenda.
“Much work, however, remains to be done by boards to fully grasp it and use it effectively in decision-making, and for investors to properly assess it, for the long-term benefit of companies, their stakeholders and wider society.”
The survey suggests that while some directors give culture ample time, it is has failed to grasp the attention of a significant number of boards.
Indeed, agenda time for culture appears to be absent for many, potentially undermining the ability of many boards to set a tone from the top. Almost 15% of respondents said that culture was not valued, while a quarter, 26.5%, said their boards “need to devote significant additional” time to the topic. This was despite respondents ranking the option of “setting the tone at the top” as the leading way to influence culture in their business.
And there appears to be a “culture gap” opening up for many board directors who struggle to integrate concerns about strategy on the one hand, and culture on the other (see Fig.1., above). Half of those who took part in the survey said either that there are significant gaps between their defined purpose, strategy, and company culture, or that little time has been spent on the subject. The other half are either “clear on purpose” and “actively” check alignment, or “broadly” have purpose, strategy and culture aligned.
However, boards could be hampered in their efforts to consider culture if their companies fail to gather relevant data. Only 5% of respondents could say they were “very confident” with the data at their disposal. Almost 30% said that they were “reasonably satisfied” with their data.
But 65% admitted that, while their data was “reasonable”, they were also aware of gaps, or they did not have much data at all and were “unclear on the alignment between the desired and actual cultures.”
Alignment issues may, in part, be due to the way management and boards see the function of culture. When change programmes were introduced to address culture, 39.5% said it was to align culture with strategy. But 41% said it was to “enhance” employee motivation and productivity.
There is some cause for optimism that culture will receive more attention. Respondents believed wholeheartedly that culture is best influenced by people serving at the highest levels within their companies.
As already mentioned, when asked to rank the most important influences, those surveyed placed “tone at the top” at number one. Second was ensuring that the chief executive is on board with company culture; third was having a boardroom recruitment process that supports the desired cultural outcomes. However, training programmes for cultural change was ranked lowest.
The findings from this inaugural survey of leadership in corporate culture within Europe drew comment from institutional investors, board directors and NGOs about the role of the board in enabling the effective management of culture within their organisations.
“It is clear from this interesting report that culture and leadership need to be addressed by boards. Culture must be removed from an HR remit and made visible to all, into the front office. The board must be highly responsible for the tone at the top and make a clear interlinkage with culture to strategy.”
Alexandra Schaapveld, independent director and chairwoman of the Audit and Internal Control Committee, Société Générale
“Public trust in business has been rocked in recent years by several high-profile corporate failures. Regaining trust begins with ensuring the right culture is being set at the top of companies. As this report highlights, 85% of the value of leading businesses is in the form of intangible assets. With increased scrutiny on how a business conducts itself in relation to a diverse range of stakeholders, getting culture right is no longer just the right thing to do, it is essential for long-term success. Board Agenda and Mazars have drawn out a range of evidence in their report which should be read and digested by boards across the business community.”
Stephen Martin, director general, Institute of Directors
“Culture is still seen by some as among the softer issues that boards and executives may turn their attention to only when they can find the time. The reality is that generating a good culture is hard but absolutely essential to sustaining long-term value-creation. I absolutely agree with the report’s key finding that understanding both the desired corporate culture and that which exists in practice is vital if a board is to provide effective leadership and direction to the business.”
Dr Steve Waygood, chief responsible investment officer, Aviva
“We have seen from numerous studies that board diversity is beneficial to corporates, which means that having boards that encompass gender and cultural diversity—thereby ensuring a diversity of perspectives—can provide a competitive advantage. However, it’s always difficult to change behaviours that have been around for many years. But as the study shows, the good news is that boards slowly seem to be accepting the fact that diversity is good for business.”
Fiona Reynolds, managing director, UNPRI (United Nations Principles of Responsible Investment)
“A good corporate culture is integral to a company’s DNA to achieve long-term success. Boards must be able to qualitatively judge the degree to which they themselves engender a positive corporate culture throughout the company and describe their approach in a code of ethical conduct. This includes how they identify and manage indicators of corporate culture, such as employee behaviour, to avoid negative consequences. This is often linked to incentive structures which in turn is driven by a company’s business model to generate desired results. Good corporate governance must be part of the equation together with appropriate dialogue with shareholders to instil confidence and public trust.”
Kerrie Waring, managing director, ICGN (International Corporate Governance Network)
“This study shows the compartmentalised approach that companies and boards have with culture. Almost as if boards think the it’s the rest of the company that need to be told what the culture is, and there is not a tremendous amount of self-criticism.”
Marie-Louise Clayton, non-executive director, and chair of the audit committee, Clarksons PLC
“Management should be best placed to implement corporate culture, but boards must set the tone at the top. By doing this, boards show a committed leadership and they can incentivise the right behaviours. The Mazars/Board Agenda survey conducted with INSEAD is very helpful in supporting boards towards a journey of change in overseeing and actively monitoring the culture of their company.”
Irena Prijovic, chair of ecoDa (European Confederation of Directors’ Associations)
“This report places a timely and important spotlight on the importance of culture in an organisation. Culture is a key part of a company’s value creation model and is vital to its long-term success. When board and management think through the prism of broader value-creation, placing importance on resources and relationships including human, intellectual, social, relationship and natural capitals, the culture of a business benefits. Investors increasingly want to see that the right culture is embedded throughout the organisation, supporting integrated thinking and leading to long-term value creation.”
Neil Stevenson, managing director, global implementation, International Integrated Reporting Council
By David Herbinet, global head of audit, and Anthony Carey, head of board practice in the UK, Mazars
Understanding both the desired corporate culture and that which exists in practice is vital if a board is to provide effective leadership and direction to the business.
This is recognised by survey respondents: understanding the actual culture in the business was rated as a principal area of focus by 42% of respondents, along with monitoring the upholding of aspects of culture related to ethics— also, of course, related to the actual culture—and considering the desired culture.
Worryingly, whilst boards are aware of the need to focus on the desired and actual cultures, addressing these issues in the boardroom is still very much a work in progress. Only a fifth of respondents felt that their boards fully consider the issue with widespread consultations in the business on it, and a further half felt that they were reasonably clear on the desired culture, having had some discussions on the matter.
This leaves just under one in three boards as not very clear on their desired culture. Similarly, a third believe that they do not have much information on the culture that actually exists [see Fig.2, below].
Three sources seem to predominate when assessing actual culture: far in front is feedback from employees, for example from surveys and staff dialogue, followed by customer complaints and satisfaction surveys, and risk events such as rule breaches, HR issues and compliance-monitoring.
Interestingly, far less attention seems to be paid to information emerging externally, such as social media and newspaper comment or from investor engagement; and only a quarter undertakes an internal or external audit of their culture. We would expect these are areas to be of far greater importance to boards in future.
Around 85% of the value of leading businesses take the form of intangible assets, most of which are linked to people, reputation and brand—and all of which are critically influenced by organisational culture. Therefore, many boards need to assess whether their information on cultural issues is sufficiently comprehensive, structured and subject to independent scrutiny to meet their current and future needs.
High-quality data is essential if businesses are to achieve their full potential and enjoy sustainable success.
By Erik van de Loo, professor of organisational behaviour, and Jaap Winter, visting professor of corporate governance, INSEAD.
Culture is a complex and broad phenomenon that needs to be better defined, understood and researched in the board context.
One needs to differentiate between culture in visible and invisible phenomena (artefacts, norms and values, assumptions and behaviours) and all the factors shaping and explaining culture (incentive schemes, rules and regulatory context, group dynamics, cognitive biases, individual characteristics, etc.).
Common traps when confronting culture issues are to do so either superficially (reducing its complexity) or too technically (changing culture via rules, regulations, policies). It is an illusion to think that a board can implement a chosen culture in a disciplined way.
Understanding and impacting culture is more than articulating corporate norms and values, conducting cultural surveys, or organising workshops or programmes—though one might need elements of those. A misunderstood area is the impact of incentive schemes on behaviour and culture, both at board level and in the corporation at large.
Despite the increasing awareness that tone at the top matters, it is rarely translated into effective new board practices. Board evaluations are a case in point: they do not include the required attention for culture and behaviour.
Culture begins with the board
Corporate culture starts with the board and the board space: what kind of interactions, behaviours, language, and data does one observe? How packed is the agenda with technical content, or too many topics to discuss?
Many board meetings prevent, by design, engagement in meaningful conversation. Can the role and behaviour of the CEO and chairman truly be discussed, as they are the key players driving the functioning of the board? Few boards possess explicit expertise in this domain.
Boards often assume that having some experience with corporate culture (like with leadership and change) is sufficient to navigate and supervise issues of culture. But it is not the same as expertise.
That assumption is a naïve self-serving illusion. Appointing a single board expert will not work if the other board members do not understand the language and distinctions that seek to address issues of culture.
Executives and non-executives need to up their game in corporate culture and be open to learn and develop. That is a challenge; the ability to truly learn is not easily triggered in boards.
Board members feel pressure to be seen as knowledgeable—and the assumption that everyone is on the board because of previous achievements and expertise often creates an environment that is hostile to true learning.
Acknowledging limited understanding is the first step for boards to open up to developing their knowledge of corporate culture.