The Board’s Fourth Imperative: Monitoring Culture

The reputations of Wells Fargo, Uber, Equifax, Weinstein, Fox News, the University of Louisville basketball program and many others are tarnished as a result of recent media attention to their acknowledged misdeeds and failures. Journalists have chronicled in detail the actions and decisions by their leaders that resulted in organizational cultures that appeared to have rewarded results above all else.

On Wednesday, October 4, the National Association of Corporate Directors released a report outlining 10 recommendations to corporate Boards to be more pro-active in attending to the culture in their organizations. Among NACD’s recommendations, it recommends that Boards develop a formal mechanism for measuring the healthiness of the culture in their companies. And the report suggests that the healthiness of the organization’s culture factor prominently in the performance reviews of top managers and in their compensation.

For Directors of publicly traded companies and for Trustees of private and not-for-profit organizations, the challenge to monitor organizational culture is tricky. In corporate governance, the Director’s role is three-fold: to set direction for the organization, secure adequate capital to support the strategy, and hire a competent CEO. Getting involved in day to day operations is inappropriate unless requested by the CEO. But monitoring the culture requires understanding how an organization achieves its results, not just the results themselves. As the Wall Street Journal’s Joann Lublin wrote “Corporate culture counts. But bad culture can damage a company’s reputation, results and recruitment.” (“After Uber and Wells Fargo, Boards Wake Up to Company Culture” October 4, 2017). So, given increased media attention to organizational culture and its correlation to performance, monitoring culture is now the fourth imperative for Boards.

I have served on four publicly traded board of directors and several not for profit boards. In each, attention to risks associated with regulatory compliance, cybersecurity and conflicts of interest have gotten significant attention. The CEO’s performance has been scrutinized in the context of targeted results and the Chief Legal Officer has played a key role in directing the Board’s attention to potential issues. And I have also worked in organizations where financial results justify acceptance of behavior by leaders that would otherwise be subject to disciplinary action. But the Boards were unaware.

In healthcare, many of our largest organizations—drug companies, device manufacturers, multi-hospital operators, post-acute providers, insurers—are publicly traded. Their Boards are usually composed on industry experts and their investors and compensated for the 200 hours they invest in committee and board responsibility annually. In some sectors, privately-owned companies are prominent: these boards are usually comprised of their founders, investors and senior management. And in the delivery system, most of our organizations operate as not-for-profit organizations serving local communities. Their boards are usually composed of community leaders and physicians who are not compensated for their service.

It’s understandable that publicly-traded boards and big companies are paying more attention to the cultures in their organizations: it impacts their financial performance and attracts often unwanted attention in media. But can Boards really monitor the culture in their organizations without interfering in day to day operations? It requires effort especially in three areas:

Education: Boards need education about the complex issues and challenges that face their organizations. Formal environmental scans and discussion of factors that threaten organizational effectiveness need greater time allocated on board agendas. And directors must be encouraged to study issues on their own. Boards must be prepared to address culture pressures with an informed, objective view of the context, issues and challenges facing the organization and the industry. It’s foundational to a healthy organizational culture.

Board Evaluations: Board member independence, competence and effectiveness is essential to a Board’s monitoring of the organization’s culture. Assuring that Boards bring independent judgement and subject matter expertise to their roles is necessary to appropriately assess and interpret the culture in the organization. Being a Director is an honor, but more importantly, a responsibility.

Independent Measurement: Boards must create a formal process for monitoring the culture in their organizations. Reliance on anecdotal information or over-dependence on pronouncements from the organization’s top managers might be misleading or incomplete. Most organizations conduct employee surveys and share these results with the board. Many of these include comparisons to other organizations and best practice recommendations. But boards must go deeper, understanding how their leaders behave, how they interact with peers and subordinates and the underlying values deemed most important to advancement in the organization. Boards must examine the mechanisms whereby the workforce is managed, promotions awarded, recognition and compensation given. While not interfering in day to day operations, boards must create mechanisms for understanding the views of current and former employees, and developing ways to interact with their leaders constructively. And Boards must commit time to discuss these insights in complete candor without the CEO’s participation: effective CEOs whose organizational culture is healthy will welcome the process.

Times are tough in healthcare. Straddling the fence between fee for service and value-based incentives is complicated. Managing compliance risks with ever-expanding rules and regulations is a daunting task. Reducing costs and doing more with less is a relentless pressure. And every element in healthcare is subject to unprecedented transparency in social media and media reporting.

An organization’s culture defines how it responds to these challenges. A healthy culture is not a guarantee of success, but an unhealthy culture is a guarantee of failure. That’s why companies like Whirlpool, CACI, and Citigroup have formed culture committees to surveil the climates in their organizations. It’s the Board’s role to make sure it’s healthy. That’s why monitoring culture in our organizations is the fourth imperative for boards.

Paul