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This blogpost was first shared at abexcellence.com and is an excerpt from an article published in Spring 2019 at Ethical Boardroom. _____________________________

 Independent external board reviews 

By 

IDN President Helen Pitcher, OBE 

Independent external board evaluations emerged in parallel with the general development of the governance code for companies. The question now arises whether their current shape is fit for purpose in the modern corporate environment, where society/CSR and employee engagement are playing an increasing part in the context of a company’s right to operate and accumulate numerous benefits and advantages from society?

As the code of governance became more formal, so the question arose of how the effectiveness of the board would be monitored. While the legal aspects of operating a company has a built-in ‘monitor’ through the courts and regulatory agencies, governance monitoring has emerged as a voluntary process, over which the company and board have significant discretion and control. Best practice has been led in the UK by the FTSE 100 companies and influenced by the governance compliance indexes, which inform the investor communities of the ‘governance footprint’ of a company.

The emerging code and evaluation

Under the FRC (Financial Reporting Council) Governance Code in UK, the use of independent external board evaluation has staggered into existence in the form it has today. Emerging from the Higgs Report in 2003 the combined code suggested good practice to be ‘an annual evaluation of board performance’ with the suggestion that ‘use of an external third party will bring objectivity to the process’. The 2006 code retained the annual performance evaluation, but the reference to external facilitation disappeared!

It wasn’t until 2010 that an externally facilitated review at least every three years became part of the code in UK for the FTSE 350, this included a statement of the facilitator’s connection to the company. The following year the FRC produced a ‘Guidance on Board Effectiveness’, which set out a detailed approach to the ‘independent externally facilitated board evaluation’. This started a process of creating a board evaluation standard, but which was still voluntary under the ‘comply or explain’ doctrine.

Since 2011 the ‘independent external board evaluation’ process has meandered on, with various failed attempts at a code of practice, including ABExcellence code of Advanced Boardroom Excellence published in 2014, which sought to advance the discussion. All these endeavours called for greater formalisation of what would be covered by a board review. Consequently, the interpretation of what should be covered in an independent and externally facilitated review was, and still is, at the discretion of the board and covers a wide range of standards applied to supporting the effectiveness of the board.

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This blogpost is shared as part of a series of insights from INSEAD Directors Network, based on webinars run for IDN Network members exclusively, and invites shared via mail. For more about our webinars, becoming a member or a partner with our network, see further down in blogpost.

On March 19 IDN Directors Network held a webinar on the topic Bords role in guiding corporate culture and diversity for strategy alignment. The expectations on boards to guide and monitor corporate culture and diversity and align it to desired strategic outcomes are increasing. In the webinar we listened to experiences on managing and influencing corporate culture and diversity, how it can be guided and monitored by the board, and shared and discussed experiences. 

We listened to Magali Depras, Chief of Strategy at TC Transcontinental, MBA, IDP-C, President Insead NAA Canada, sharing experiences on the topic and Kay Formanek  CEO KAY Diversity & Performance, INSEAD faculty on Diversity topic, Leadership Coach and Speaker, sharing approaches used and related trends.  

This is a follow up guest blog post shared by Kay de Gier on this important topic, and relating some of the insights shared at the webinar.

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Why Should Boards Care About Culture?

By Kay Formanek

Let us tackle this question by first having a robust understanding of the term culture. Culture in a corporate context is defined as “a combination of the values, attitudes and behaviours manifested by a company in its operations and relations with its stakeholders. These stakeholders include shareholders, employees, customers, suppliers and the wider community and environment which are affected by a company’s conduct.”

Photo: Unsplash

Boards are starting to care deeply about culture and this is anchored in 2 primary reasons:

1. The impact on total enterprise value when a reputational crises occurs has increased dramatically. This can be explained by intangible assets as a percentage of total corporate value increasing from 20% to 80% from the 1980’s to today.
2. A positive culture has been shown to deliver higher engagement, higher financial performance and long-term sustainability.

These factors have resulted in an examination of the role of boards in setting and monitoring culture. The UK Corporate Governance Code specifically ascribes to boards the responsibility for setting the company’s values and standards, while the preface to the Code states:

‘One of the key roles for the board includes establishing the culture, values and ethics of the company. It is important that the board sets the correct “tone from the top”. The directors should lead by example and ensure that good standards of behaviour permeate throughout all levels of the organisation. This will help prevent misconduct, unethical practices and support the delivery of long-term success.’ – UK Code. (1)

The reading of the UK Code sets out expectations from the board at the strategic level and also at the operational level.

At the strategic level the board is expected to set and monitor the company’s culture, in terms of values and behaviors, so as to deliver best value creation and ensure that incentives support the desired culture.

At an operational level the board is expected to obtain assurances that the desired culture permeate throughout the organization and that there are not pockets within the organization where values are undermined and at risk.

Not all countries have issued a Code, like the UK Code where the role of boards in culture setting and monitoring are defined. Yet increasingly boards are applying time and attention to setting out their role and actions in both setting and monitoring the culture of their organization.

Yet how do boards influence culture in practice? As a first step a board needs to support the development of a clear purpose of the organization and to describe the values by which the organization conducts its business.  Stakeholders will read much into the behavior of the board itself and thus the board needs to behave in a manner that is consistent with the espoused values and the desired culture. The CEO is probably the most important role in articulating and translating the desired culture within the organization and its operations. Thus the appointment and removal of the CEO is one of the most important levers of a board in influencing culture.

And yet, the difficult part for a board is to monitor and assess the culture within the organization. How is this done considering that culture may be considered intangible and difficult to measure?

The reality is that there is no one measure or instrument that will provide an answer to the board on the state of their organisational culture. However there some great hints (lets us call them the litmus test of culture) that boards can use as a proxy for a positive or negative culture.  In the interesting article “11 Toxic Tell Tale Signs of a Noxious Culture”, Forbes 2018 (2), eleven indicators of a potentially sick culture are listed and serve as a reminder to boards on what they can be looking for to yield an answer on the state of their culture.

The 11 Toxic Tell Tale Signs of a Noxious Culture include:

• Not enough talk about innovation, indicating a potential lack of focus from the leadership on the innovation agenda of a company
• Employees fear retaliation, indicating that leaders are not subscribing to values of respect and transparency and teaming
• Cross-department collaborations stall, indicating that departmental incentives may be mis-aligned and that there may be an absence of a common purpose
• Fear, apathy, exhaustion and over-politeness, indicating lack of engagement and avoidance of raising issues that should be discussed
• Microaggressions in the form of bias, indicating the presence of stereotypes and a none-inclusive environment
• Low employee retention rates, indicating that employees may not feel a sense of belonging and being valued
• Aversion to taking risks, indicating that there may be a fear to make mistakes
• Something does not feel right (instinctive knowing), when observers have a “gut feel” that something is awry and “things do not add up”
• “No” isn’t an option, indicating that top down orders may need to be fulfilled without discussion
•  People seek reassurance outside meetings, indicating potential issues of distrust and second-guessing formal communication channels
•  Silence or defensive communication, indicating that there is resistance and a fear of speaking up

In addition to these tell-tale signs, there are a number of instruments that offer a great view of the culture of an organization. Let me share three examples, out of a multitude of tools that are present in the market.

Glassdoor (3) is a website where current and former employees anonymously review companies and their management. The site collects comments and averages scores posted under headings such as CEOs, salaries, hiring process and what it is like to work in jobs in general at each company. Glassdoor offers boards a unique window on what is being said about the organization and the company leadership.

There are also assessments that offer a measure of the alignment of values throughout the company.  The Cultural Values Assessment (CVA) of Barrett Values Centre (4) provides a clear view on the overall values alignment within an organisations and points to the factors that get in the way of people doing their jobs and prevents customers from experiencing the full potential of the organization.

The Hairball Social Network mapping tools, graphically represents the degree of interaction and collaboration within an organization and can provide clues on whether cross-department collaboration has stalled.

In conclusion:

The role of the board in setting and monitoring culture is critical in an environment where a positive culture is directly linked to organization sustainability and corporate value. While there is no “one-stop-shop” assessment of the culture in an organization, there are a variety of indicators and tools that offer the board an excellent view on the state of the culture of an organization. These tools are for the plucking of any board, but require a board to register the importance of culture and to undertake the strategic and operational interventions that are required to sustain a positive culture in the organization.

References:

1.

https://www.frc.org.uk/getattachment/88bd8c45-50ea-4841-95b0-d2f4f48069a2/2018-UK-Corporate-Governance-Code-FINAL.PDF

2.

https://www.forbes.com/  11 Telltale Signs Of A Toxic Company Culture — And What You Can Do To Start Fixing Things; Forbes Coaches Council

3.

https://www.glassdoor.com/index.htm

4

https://www.valuescentre.com/our-products/products-organisations/cultural-values-assessment-cva

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Other relevant information shared

INSEAD Research: Corporate Culture Alarmingly low priority for boards

https://knowledge.insead.edu/leadership-organisations/corporate-culture-is-an-alarmingly-low-priority-for-boards-7676

Identifying and responding to a Dysfunctional Culture (incl interview of IDN Board Member Liselotte Engstam) https://www.mmc.com/insights/publications/2019/feb/identifying-and-responding-to-a-dysfunctional-culture.html

Focus on Corporate Culture to prevent the next scandal

https://www.strategy-business.com/article/Focus-on-corporate-culture-to-prevent-the-next-scandal?gko=57b60

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Read more about becoming a member and about previous webinars. For upcoming webinars see our event calendar.If you are an IDN Member or IDN Partner, or like to become an IDN Partner, with a questions or suggestion on contribution to a future IDN Webinar, contact [email protected].

More insight from INSEAD Directors Network webinars will be shared – Lookout for more upcoming blogposts!