blackstroke

08/08/2023

Two core responsibilities of boards are performance and risk management. A strong, positive board culture helps both. But too many boards don’t make the links. As expectations rise — for corporations and their boards — that has to change.

The term “board culture” has become something of a buzzword. However, just because this term is thrown around with little regard, doesn’t mean it’s not without immense meaning and impact to a company.

Plus, whether the company itself has a grasp of it or not, culture is going to cultivate and grow no matter what, as research proves that healthy culture establishes a basis for aligning, motivating, and securing good performance.

TOP-DOWN COMPANY CULTURE

Fostering a healthy board culture comes directly from leadership. Among the key drivers of company culture is the leadership style of the board chair and/or the CEO.

That said, instead of simply discussing board cultures, board members must dedicate time and effort to teaching the core principles of building such cultures.

So, how can boards of directors ensure their cultural values are absorbed into the lifeblood of their teams?

Before answering that question, let’s look at a working definition of company culture.

WHAT IS BOARD CULTURE?

The culture of a board is a set of implicit guidelines that impact the interactions and decisions of board members.

These unwritten rules encompass mindsets, underlying assumptions, group norms, beliefs, values, and tangible elements like the board agenda. They influence the way in which individual directors participate in discussions, the level of trust and engagement, and the decision-making process during each board discussion, which often leads to a more thoughtful and productive resolution.

Establishing clear parameters of a culture a board of directors should build increases chances of successful governance, financial stability, and constructive partnership.

Now, let’s explore two critical functions of a board’s culture:

  • It should create opportunities to address poor board behavior, combine strong values and attitudes, and assess board culture to make board members thoughtful and more successful in governance.
  • It should turn the organizations into more attractive potential employers, boosting their brand image for all shareholders, employees, customers, suppliers, and the wider community.

Unless there is a significant change in board composition — such as a merger, assignment of a new director or new CEO, or the addition of a new board member — company culture tends to evolve gradually due to the intermittent nature of board meetings and interactions.

COMMON BIASES IN COMPANY CULTURE

Now, let’s discover key common biases putting company culture at risk.

1. Groupthink

Groupthink is challenging for boards as they often prioritize harmony over dissenting views. In fact, 38% of directors struggle to express dissenting opinions due to a desire for collegiality.

To address groupthink, boards can use the assessment process to determine if dissent is discouraged. If necessary, board leadership should have difficult conversations to change the dynamics and consider bringing in outside advisors for diverse perspectives. Recruiting directors with varied viewpoints is also essential in minimizing groupthink.

2. Authority Bias

Authority bias in the boardroom occurs when one director’s expertise or opinion dominates decision-making, disregarding others. Expectedly, power structures and perceived hierarchies can contribute to this bias.

To address this, board leadership should actively seek input from all directors, encourage experts in one area to contribute to other areas, and have the dominant director initiate board deliberations. Providing specialized education opportunities can prevent excessive reliance on a single director’s expertise and encourage unbiased decision-making.

3. Confirmation Bias

Confirmation bias is a common trap where people seek evidence that supports their beliefs while disregarding contradictory information. Directors in the boardroom are prone to confirmation bias, making objective decision-making challenging.

To counter this, it is crucial to foster diversity on boards of directors. Seeking consensus and shared viewpoints only reinforces confirmation bias. Instead, promoting rigorous debates among directors with different perspectives can help overcome this bias and lead to better decision-making.

4. Status Quo Bias

Boards often resist change due to fear and a preference for the familiar. This status quo bias can hinder innovation and strategic shifts. Dominant companies may dismiss ideas that challenge their proven strategies. Slow board turnover and lack of succession planning further indicate a resistance to change.

To counter this bias, boards can incorporate activities that promote thinking from a competitor’s perspective or seek outside expertise to challenge the status quo.

CHANGING COMPANY CULTURE TO CULTIVATE GOOD GOVERNANCE

There are various instances when a culture board foster may need to be changed or improved. These include underperformance, board chair or CEO succession, changes in composition or shifts in the business strategy.

Once the target culture is identified, you should use specific questions for facilitating the transformation and ensuring the happiness of your employees. Below are the questions to ask to promote a healthy board culture.

Questions to Consider for Promoting a Healthy Board Culture

  1. Does the board pay sufficient attention to culture as a critical driver of purpose and strategy? Does the board itself follow and support all company values?
  2. Has the board engaged in comprehensive and specific discussions about the importance of culture and actively contributed to defining the desired culture?
  3. How does a strong culture feature on the board’s agenda? Is it a focused agenda item addressed periodically or is it integrated into all board decisions?
  4. Is the company’s culture fully aligned with its strategy, and is there a unified understanding of culture throughout the whole organization? For multinational organizations, have leaders in culturally diverse regions been consulted to overcome language and cultural barriers?
  5. Can the board properly communicate the company’s cultural strengths? Can the board identify areas for improvement and clearly articulate them? Are there necessary changes to manage behavioral risks and align culture with strategy?
  6. Has the board explored relevant metrics to monitor cultural fitness? Should management’s reporting to the board be adjusted to provide better data on culture-related matters?
  7. Does the board consider the cultural context when evaluating key performance indicators (KPIs)? For instance, if KPI targets are consistently met or exceeded, does the board inquire into potential cultural pressures influencing the metrics and associated risks?
  8. To what extent has the board, or its committees, discussed the impact of corporate risk culture, and the internal control environment?

These questions should help board directors identify actions for building a more positive board culture.

STEPS IN CHANGING BOARD CULTURE

1. Decide on the Type of Company Culture Desired

Identifying an effective board can be challenging due to numerous contributing factors and the need for flexibility. However, four well-known board models can provide guidance:

  1. Inquisitive — emphasizes idea exchange and exploring alternatives.
  2. Decisive — values measurable results, focused agendas, and outcome-oriented decisions.
  3. Collaborative — builds a sense of consensus on values and a greater purpose.
  4. Disciplined — emphasizes risk management, consistency, and adherence to protocols.

Most boards work with a combination of these characteristics, but it is important to regularly assess board culture and its role in the organization's well-being. These models assist boards in determining when to place more emphasis on specific governing types based on their own results.

Board members must practice what they preach. Or else, any directives about company culture will fall on deaf ears.

Part of this notion means stepping up when top-level management and other non-board leaders aren’t embodying the desired culture. It’s up to the board to ensure that a thriving company culture emanates through every facet of the organization.

It’s all too easy to get caught up in the bottom line and what kind of profits are coming in. And, unfortunately, it is possible to make money as a company with a less-than-stellar culture.

Focusing too much on the bottom line is short-term thinking at its finest. Whereas company culture is something that can help sustain success for years to come. Also, when something’s rotten within the state of an organization, eventually, it’ll come to light with disastrous consequences.

Two significant signs of positive company culture are transparency and accountability.

Boards with sound governance practices will focus their efforts on strategies that ensure those two concepts emanate throughout every facet of the business.

This kind of openness will be on full display when companies conduct business, as well as when they interact with and report to stakeholders.

It’s unfair to expect employees and suppliers, alike, to display the culture of an organization if they’re unaware of its specificities.

Boards need to teach these behaviors and establish firm expectations. Successfully doing so necessitates HR, internal audit, ethics, compliances, and risk function teams being empowered and equipped to integrate and continually assess culture productively. Furthermore, these departments should have a more distinct voice in the boardroom.

The only way to accomplish the desired outcomes is through indicators and metrics. These should be aligned with goals and objectives within the company.

Primarily, the board must focus on developing an insightful grasp of behaviors within the company. This expertise helps them pinpoint value-based discrepancies.

In a nutshell, the board should be willing to spend significant time and money on developing relevant metrics so that culture can be efficiently evaluated and reported.

The board is responsible for explaining to shareholders, employees, and other stakeholders – in-depth — about the connection between its values and performance incentives.

Reward systems and other such mechanisms must promote actions that align with the company’s purpose, ethics, strategy, and business model.

It’s this manner of consistent messaging that positively reinforces the culture into the mindset of a workforce. When employees aren’t given a pat on the back for good practices, they’ll get discouraged and become a negative cultural force.

If the board aims to promote more aggressive challenges to past approaches or adopt a more deliberate approach to risk assessment, it can establish a structured process to incorporate these approaches into committee assignments or specific meeting agendas.

This could involve assigning a board culture committee or individual to explore and present alternative strategies or risk assessment methods.

It is important for the board to reflect the company’s commitment to diversity and inclusion, innovate its own structure and processes, and align its culture with the values against which senior executives are assessed. Investors also recognize the value of board diversity in reflecting the company’s inclusive view of talent.

Boards should dedicate sufficient time and attention to culture matters, potentially assigning related responsibilities to committees such as the compensation committee.