Corporate culture is enacted and continuously created by every member of an organisation through their day-to-day participation. It provides employees with (largely unspoken) rules for how they should behave to gain and maintain social ‘membership’ in the organisation.
The board is the ultimate custodian of corporate culture in an organisation and has a responsibility to set the appropriate tone from the top.
Consequently, the team culture within the board itself is just as important as the culture throughout the organisation. Despite this, many boards continue to focus the majority of their time on process and governance related issues whilst ignoring or diminishing the ongoing effort required to cultivate an effective standard of board culture.
Governance and control structures are necessary and beneficial when applied properly. However, these factors are only part of an effective board performance program.
The board also needs to achieve a constructive means of interacting and performing as a team of peers, guided and facilitated by the Chairperson. This represents the quality of the team culture within the boardroom.
In this context, the best way to ensure optimum board performance is to combine comprehensive compliance measures with behavioural factors that enhance the performance of the board as a team and the value of each director’s individual contribution.
A performance culture emanating from the board is the critical determinant of its own effectiveness and the effectiveness of the organisation it oversees.
Whilst there may be exceptions where boards “float with the rising tide” or enjoy structural or technological advantages embedded within the organisation, boards that fail to address their own performance culture are ultimately failing their shareholders and stakeholders.
Whilst the term culture is often misused and overcommercialised, a good performance culture at board level imbues the organisation with greater reliance and flexibility than an organisation that focuses solely on the minimum corporate governance requirements.
In this context, culture refers to the team orientation of the board and its ability to collaborate and constructively challenge each other whilst still maintaining board cohesion and collegiality.
It also includes the role of the Chairperson as a team manager; a pivotal responsibility in terms of enhancing team effectiveness in balancing the skills, talents and ambitions of other board members, the relationship with management generally and with the CEO specifically.
Whilst the relationship and level of communication between the CEO and Chairperson are important, the power relationship is also critical.
There are countless examples of the CEO undermining the authority of the Chair, which effectively undermines the entire governance structure.
Current research would suggest without the right cultural dynamics within the board room, the performance and effectiveness of the board will be severely impaired.
A performance culture within the board enhances decision making and leads to more informed and effective outcomes.
The world is littered with public sector and corporate examples where governance structures have failed dramatically.
A recent US study on the impact of Sarbanes Oxley, arguably the world’s most stringent and costly governance regime; concluded that of 400 accounting scandals in the US in 2002, every single firm was Sarbanes Oxley compliant.
This point can be further illustrated by questioning whether firms like Enron, HIH, Babcock and Brown, Lehman Brothers and Bear Stearns had compliant programs, audited operations, accounts and risk management structures. They did and these systems did not ultimately protect them.
Clearly, a world without governance and control structures would not bear thinking about, but a total reliance on their ability to provide comfort over organisational operations is simplistic and perilous.
Governance and control structures are necessary and beneficial when applied properly. However, they are only one part of an overall solution.
Boards can become fatigued with surveys and questionnaires and banal benchmarking exercises, which many describe as a search for mediocrity.
Often the process of evaluating board culture is inadvertently overlooked as either too hard and confrontational, or too vague and esoteric in nature.
However, those boards that enjoy a good culture often link that culture to the character of the individual directors, and most importantly to the character and competence of the Chair, whom draws out the experiences of each director to add to the richness of boardroom decision making and debate.
Intuitively, nearly all directors rated culture as the number one determinant of organisational and board effectiveness in a recent study of 88% of the ASX boards by market capitalisation.
The key message from the table below is that whilst directors spend time on the compliance structures, they clearly believe the character of the directors and the culture of the board as a team is far more important than a sole focus on the prevailing regulatory regime.
A concern many directors raised was the situation that some board members view the regulatory standard as the maximum standard of behaviour, whereas it is the minimum and conforming to the minimum regulatory standards discharges or acts as a proxy for moral or ethical behaviour.
Whilst the controls, skills and composition of the board may be assessed through a large variety of historical reporting; culture must be uncovered through extensive dialogue with a large range of stakeholders from a variety of perspectives, to discern myth from reality.
A board with a bad culture appears obvious to many directors. The factors and behaviours that determine a good culture are less obvious. Some of those trace behaviours are:
The above is a guide to some of the critical markers which are used to assess board culture.
The culture of the board and the characteristics of the individual directors speak to their ability as a team to meet future challenges, strategic goals, unplanned risks and stressful events.
In this sense, their culture may be seen as a leading indicator of board effectiveness; whereas the control and composition categories relate to lagging or historical markers, which an organisation has previously experienced.