The corporate culture conundrum: board leadership and the trust compact

Many of the headline-grabbing scandals over the years (think WorldCom, Enron, Wells Fargo, WireCard) had their root cause attributed to a culture that bred and perpetuated a blatant disregard for ethical conduct.

Even in the absence of corporate malfeasance, organisational culture affects the risk profile of a company. In the recent collapse of Archegos Capital Management, the hedge fund was allowed to accumulate leveraged positions in excess of 10 times the collateral pledged - despite founder Bill Hwang having been previously charged with insider trading by the US Securities and Exchange Commission and banned from trading in Hong Kong.

Credit Suisse took a US$4.7 billion (S$6.3 billion) hit from the fallout that ensued. Its CEO and Chief Risk and Compliance Officer had to step down, the entire executive board forfeited their bonuses, and Chairman Urs Rohner waived the fees of his chairmanship.

Where does responsibility reside?

Clearly, leadership plays a critical role in setting the "tone at the top". Senior executives, given their day-to-day and direct involvement in the business, are accountable. But the responsibility cannot lie squarely only on their shoulders, as their mandate comes from the board of directors.

The Code of Corporate Governance in Singapore recognises that the board has the dual role of setting strategic direction and the company's approach to governance, including "establishing an appropriate culture, values and ethical standards of conduct at all levels of the company". Moreover, given the centrality of the board to good corporate governance, it is fundamental that the chairman of the board sets the right tone.

Outwardly, most (if not all) directors will agree that boards need to have some form of oversight in defining corporate culture. Behind closed doors, however, they may have concern about the practicality of instituting an organisation-wide framework that not only drives desired behaviours and actions, but also contains assurance and intervention mechanisms all the way back to the board-level.

The thing about culture is that it is sometimes nebulous and challenging to determine its exact nature. What compounds the issue is that there are also sub-cultures that exist, and this could lead to disconnects within the organisation. Then there is the risk of overreach and undermining the executive team.

Establishing candour and trust

Often, the board only becomes aware of the situation on the ground when things go awry, like a major fraud or the adverse impact of a natural disaster. The fallout from getting corporate culture wrong may not be limited to financial loss but reputational damage, such as commuter disruptions arising from poor maintenance or environmental damage from oil spills.

What happens when the "tone from the top" does not effectively translate? And how can boards increase the effectiveness of their leadership and build trust with executive management?

First, corporate culture emanates from the top and, most of all, by example. The board can start by defining the organisation's values and mission, providing cultural clarity and transparency. This entails being explicit about what the organisation stands for and articulating it in a way that is easy for everyone to understand.

Second, behavioural alignment is key. The board can provide guidance in building these values into the performance management and remuneration frameworks. This should involve a review of key performance indicators that may unintentionally drive the wrong behaviours.

Third, the engagement perception is critical, meaning there needs to be "feedback on feedback". Organisational behaviour and attitudes stem from how the company treats its people. Are people able to trust the integrity of the system in place, or do they see it as another black hole where their opinions disappear?

Organisational integrity and culture-building initiatives go beyond financial incentives. The more effective boards tend to take the time to cultivate relationships with the broader executive management team. The improved relationships not only provide the board with added insights into how various business units and functions operate, but often has the added effect of improving candour between them and executives.

Building the trust compact

It comes as no surprise that walking the ground is an essential activity for directors to get a pulse of their organisation's culture. Just as important is building and maintaining that trust compact between the board and management. Only when trust is established can there be an alignment of the organisation's cultural lexicon.

This candour and openness are essential in culture-building, and the whole process is iterative. The board needs to be able to obtain honest, unadulterated feedback to ascertain if the leadership is doing enough to influence and drive the desired behaviours amongst the staff, as well as to intervene accordingly when it is not.

To that end, the board chair plays a critical role, first in driving the desired culture within the board, then in galvanising the collective board to invest time and actively engage management on issues related to culture.

The writer is a member of the Advocacy and Research Committee at the Singapore Institute of Directors.