Corporate culture has moved into the spotlight in the past few years as boards, management, regulators and investors increasingly recognise that failure to build healthy core values and a decent code of behaviour has led to shocking outcomes.
Scandals such as Wells Fargo’s bogus accounts in the US, PPI misselling in the UK by Lloyds Banking Group and others, arguably would not have happened if those companies had run a healthy, well-managed culture.
In March, the Financial Conduct Authority (FCA), the UK’s financial watchdog, announced its aims to transform culture in the financial sector.
“Culture in financial services is widely accepted as a root cause of the major conduct failings that have occurred within the industry in recent history, causing harm to both consumers and markets,” wrote Jonathan Davidson, FCA executive director of supervision for retail and authorisations, in a discussion paper.
A broken or unprincipled culture is not confined to financial services. Ryanair, the no-frills airline group, would have avoided running into trouble over pilot rotas and crew shortage if it had chosen to embed a healthy, less exploitative culture in the company. Similarly, Uber, the taxi service group, might have avoided a series of scandals and the wrath of regulators if it had not pursued an aggressive culture.
The focus on corporate culture comes at a time when regulators want to raise standards and make sure companies’ aspirations for a good culture match actions. Last December, the Financial Reporting Council (FRC) brought out proposed revisions to the UK Corporate Governance Code, which provide a framework for boards to take responsibility for the health of the company.
“Building trust in business has to start in the organisation and forming a healthy corporate culture is integral to the credibility of a company,” said Sir Win Bischoff, FRC chairman.
A safe place to shape a healthy culture
Building a healthy, shared culture is a difficult and long-running task that needs input from the board, top management and sub-committees such as audit, risk and remuneration. Employee input is also valuable in influencing whether cultural values and standards permeate the company, and understanding the views of the workforce.
Whether the board’s task is reshaping an entrenched culture that no longer meets current requirements, or questioning the company’s values and behaviour on a specific issue, it is important for everyone involved to know that the boardroom is a safe place for open, constructive discussion. One of the biggest contributing factors is how well the discussion or meeting is chaired.
“The chairman can encourage an atmosphere of safety to address any topic,” says Barry Gamble, a board specialist who chairs Board Lab, a joint initiative on board effectiveness between the Chairman’s Network and Brainloop, a provider of board portals.
Unfortunately, this does not always happen. A chairman who tends to bully and dismiss members’ views is not likely to encourage open debate. Executive directors can sometimes be arrogant and show a lack respect for their non-executive colleagues too, which discourages frank discussion.
“Some humility can help all round to get the right atmosphere,” adds Gamble.
Honest information flow
Few people want to be the bearer of bad news, whether it is in the political, corporate or social sphere, yet it is often essential to the wellbeing of an organisation and its vulnerability to risk to do just that. Within the boardroom, “it is important to understand whether it is OK to deliver bad news to the chairman,” says Mark Edge, managing director at Brainloop.
If the culture discourages bad news and searching questions then few members are likely to have the courage to challenge and stand their ground. This goes for online information discussion flows and boardroom meetings.
“Boards clearly malfunction if they only ever hear good news,” says Gamble. “A good board should always be examining downside risks and mitigation strategies. If bad news is not communicated then there is a risk of operating in an isolated bubble.”
A poor information flow and a badly managed culture at Volkswagen were seen to be contributing factors to the company cheating on diesel emissions, which erupted into a huge scandal. Lack of access to information is one of the tell-tale signs of a culture problem, according to the FRC.
Board diversity and a healthy culture
Challenging a culture that has been resistant to change or has started to erode needs directors to be robust and ready to stand up for their views. The ability to do this is more likely to come from a diverse board whose members have a mix of skills and experiences, rather than a homogeneous group that may lean towards siloed thinking.
“We need more diversity of thought to guard against groupthink, which inevitably runs the risk of self-reinforcing thinking,” says Gamble. Friction and tension can be necessary to have a proper debate, and a good chairman will look for alternative views, he adds.
Set up a clear digital discussion
One way to focus the company’s attention on cultural values and behaviour, including the chief executive, is to start a discussion document using a board portal where everyone can contribute and give feedback on what they see as cultural strengths and weaknesses.
“A board portal can drive discussions and reviews and bring issues to the surface so they can’t be ignored,” says Edge. But like any communication tool, it can also be “a double-edged sword and, if misused, can be a place to hide bad news rather than share it,” he adds. “Properly used, it should be the place for sharing good and bad news.”
Using a board portal is likely to encourage people to tap in at any time, rather than gathering everyone together in a physical space. It can also provide an audit trail of who said what, when, and—tellingly—who has not given any input. Chief executives in particular need to make their insights and support clear in the cultural agenda as the right tone needs to come from the top of an organisation.
Document-building is especially useful for newcomers to the board and non-executives who are not involved in the everyday running of the business and need information about the company’s values, ethical behaviour and whether they are evident through company strategies.
Many boards talk about focusing on digitalisation to tackle issues, but either lack the skills or just do not use relevant technologies within the board, according to Edge. “This can increase risk, reduce efficiency and is a failure to lead by example.”
Get it right
The FRC’s guidelines for boards to establish a strong culture are detailed and clear and leave boards with little room to manoeuvre. Some companies will still have a long way to go to put their house in order.
Getting the culture right and ensuring the stated values chime with the behaviour and strategies driving company operations is essential to the long-term success of any business. Working on core cultural weaknesses and contradictions can certainly prevent a lot of problems, as companies that have run into trouble have found to their cost.
This article has been prepared in collaboration with Brainloop, a supporter of Board Agenda.