27 Jun 2016 11:18am

Culture: from buzzword to governance action

Culture matters. This is the overwhelming message from a recent EY survey of 100 FTSE 350 board directors. Almost 90% of respondents view culture as very important or fundamental to their company’s overall performance and strategy. Yet half thought the board should take more responsibility

Given the stark statistics, is your board’s deliberation and focus on culture adequate and appropriate? What roles should the board and board committees play in shaping and monitoring culture? EY’s new report published in June, Governing culture – practical considerations for the boards and its committees, is intended to help answer exactly these sort of questions.

Culture has moved up the corporate agenda since the financial crisis. Its importance in performance and strategy is steadily gaining recognition, yet, the question we often hear from boards is, “Conceptually we understand culture is important, but what can we do about it practically?” EY’s report identifies key questions for the board and its key committees – nomination, audit and remuneration – to help them get under the skin of culture and to spur some action.

It will surprise few that the board has the biggest part to play. Culture may have only recently become a corporate watchword but there has never been a factory, office or company without one. Boards need to establish the culture and values and espouse these in the way they operate.

There obviously isn’t a one-size-fits-all corporate culture. A successful retailer’s corporate values may not be the same as those which allow an asset manager to thrive. Boards instead should ask themselves “Where do we want to go and what sort of culture will help us get there?” While the embedding of culture or the implementation of cultural change (if needed) is the remit of management, it needs to circle back to the board to oversee and monitor progress.

A corporate culture will always exist in any organisation regardless of whether or not it is a topic on board agendas

This is what makes a difference - as many say, “what gets measured gets done”. However a common question I have heard is, “But… can culture be measured?” While there isn’t one single measure of culture, advanced data analytic techniques can be used analyse a range of data sets to look for trends as well as anomalies. Boards can use these as proxy measures to help with their monitoring of and oversight over culture.

Governing culture puts forward that each of the board committees must have an active role in examining the decisions they make and oversight they exercise through the lens of culture. Starting with the nomination committee – it has a vital role in attracting and hiring leaders who will instil and exemplify the desired culture, or bring about a much-needed change. In overseeing the executive talent pipeline it should gain some assurance on how senior talent “live” the culture and values and, where there are issues, how these impact an individual’s progression.

Culture also has consequences. Misalignment between the desired and actual culture, and between desired and actual behaviours, has clear implications for risk management. Do audit committees consider the potential underlying cultural issues when assessing internal control deficiencies?

Forward-thinking audit committees should consider how culture impacts risk and risk mitigation strategies and ensure that cultural issues are examined as part of their root cause analysis of internal control issues. Equally, when looking at triumphs, such as sustained high profitability, audit committees should try to understand the cultural context of these accomplishments. For example, how is this high performance being achieved and what is the trade off with risk? In the current ‘big data’ age, I believe that it is incumbent on audit committees to harness the power of data – both structured and unstructured – to create a composite picture of the culture throughout the company and then use this analysis to drive its’ assurance efforts.

Executive remuneration has been a hot potato, with a significant emphasis on the amounts paid to top executives. Remuneration committees should reflect on whether reward schemes are sufficiently long-term to incentivise a forward-looking culture and how remuneration structures might impact behaviours and culture. Including metrics in variable pay schemes that measure “cultural improvement” - such as progress on resolution of conduct issues, improving employee engagement, encouraging cooperation across divisions - can also help drive cultural change.

All this to say that we need to shift the conversation; culture should no longer be just a corporate buzzword. Boards and board committees should include cultural considerations within their governance frameworks. A corporate culture will always exist in any organisation regardless of whether or not it is a topic on board agendas. The only tool boards have is to shape and monitor that culture; either to their benefit by aligning it to their business ambitions, or to their detriment by inaction. The questions we suggest in Governing culture should help spur some governance action.

Mala Shah-Coulon, executive director, corporate governance, EY UK


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