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Driving corporate culture
Many significant failures in company performance can be traced back to corporate culture. The collapse of Lehman Brothers and the banks involved in the Libor scandal were notable failures of ethics and culture in the banking industry. More recently, Volkswagen’s emissions testing scandal, Uber’s toxic work environment and WeWork’s freewheeling culture have made the headlines for all the wrong reasons.
Boards are challenged to ensure that the culture within their companies is fit for purpose. The 2018 Code of Corporate Governance states, in Provision 1.1:
“The Board puts in place a code of conduct and ethics, sets appropriate tone-from-the-top and desired organisational culture, and ensures proper accountability within the company.”
Corporate culture refers to the beliefs and behaviours that determine how a company's employees and management interact among themselves and with external stakeholders. Put simply, it is “the way things are done here”.
The “desired culture” should be closely aligned to the company’s purpose, values and strategy.
A first step to influence corporate culture is to understand the company, its systems and processes. The board needs to first establish monitoring and reporting systems and then direct specific actions and interventions.
A monitoring system could use the following:
- Employee engagement survey results, especially responses to those questions which relate to ethics, values and behaviours.
- Site visits to see operations first-hand and watching for cultural indicators such as whether the facility is clean and tidy, maintenance is conducted on schedule, and safety regulations are followed.
- Conversations with employees to gain an understanding of the behaviours expected of them.
- Questioning internal and external auditors on their perceptions of the prevailing culture.
- Reviewing complaints from external stakeholders especially customers and suppliers.
- Exit interviews and whistleblowing reports, perhaps using tools such as “word clouds” to pick up key themes.
- Monitoring mainstream and social media. Specific job sites, such as vault.com or glassdoor.sg, can be a good source of unfiltered employee views.
To be practical, information can be organised into dashboards. However, boards should be alert to potential failures of “information aggregation”, where averages mask meaningful outliers. Large companies, particularly those operating in diverse countries or formed from mergers, are likely to have a variety of subcultures within the business. Significant problems can often arise from smaller operations which act with a level of independence.
Statement of values
Once a board has a clear view on its organisational culture, it can then start taking steps to address any misalignment. The company should have a clearly articulated statement of values which the board and senior executives believe in. Values should include what is important to the company.
Executives need to ensure that decisions and actions are consistent with these values, and independent directors need to hold executives to these commitments. If the “tone from the top” is mixed or confused, there will be little chance of creating the right culture at lower levels.
Employees cannot be assumed to know what behaviours are expected of them and which are not going to be tolerated. An effective training programme explaining key ethical principles, values and behaviours is critical. The board can have input into the design of the training programme and should have management certification that relevant employees have completed training. Where there are strict rules on ethics, the compliance function will be used to support enforcement.
Rewards and incentives
The way that performance is rewarded will directly impact behaviours. If bonuses are entirely based on profits, then that is what people will be incentivised to produce. Ideally, a culture component should be included in the remuneration system. If not, there should be clear mechanisms to reduce bonuses if measured performance has come through unacceptable behaviours.
Other human resource processes can be more nuanced than the reward system. Promotion decisions, recruitment interviews, induction processes and performance management systems (including deciding when someone should leave the company) can all be used to reinforce values and ethics and so directly influence culture.
Whilst managing culture is important, most boards would not have enough time to give this proper attention. As such, culture management could be delegated to, say, the board risk committee (if the board has one) or the audit committee because culture is clearly a risk issue. However, the processes for managing culture are mostly related to managing people. Many board remuneration committees have a broader human resource charter which could be extended to include culture monitoring and management.
Finally, companies should consider including information on culture in their annual reports. In the UK, companies are beginning to do this. For example, Marks & Spencer devoted three pages of its recent annual report to culture. The company notes that: “Transforming a deeply entrenched culture, reinforced by years of retreat in the marketplace, will take the life of the transformation programme at least.”
Getting to the desired culture is a challenging task requiring commitment and perseverance. Boards and management should be ready to face this challenge.
The writer is a member of the Advocacy and Research Committee of the Singapore Institute of Directors.