Culture is a crucial driver of any organisation's success and a critical lever in its performance. It shapes and influences an organisation’s internal environment, as well as its interactions with and success in the external environment. In an organisation, culture is the way people behave, what they believe, and the values they hold – on the whole generally without thinking about any of it. These behaviours, beliefs and values are passed through the organisation via communication and imitation, from one employee, volunteer or even director to the next. Get culture right and it can drive innovation and growth, promote ethical behaviour, increase customer satisfaction and create strong employee engagement. In essence, culture builds and makes it easy to maintain a healthy and strong organisation that can flourish – as the saying goes “Culture eats strategy for breakfast”. But get culture wrong and it can destroy organisational performance, kill employee engagement, provoke customers to leave in droves and worst of all cause key strategic initiatives to stall, fall short or outright fail. In time, a culture that is allowed to become toxic will cause an organisation to wither and eventually die.
Given the significant influence that organisational culture has on an organisation's performance, it is surprising that most boards have little to do with it; most boards are content to leave it to the chief executive officer (CEO) and executive team. Although this is something of an inaccurate overview as culture always begins with the board, they just don’t realise it. The single biggest impact that boards have on organisational culture is when they hire the CEO. When the board selects the CEO they select the culture of the organisation, however, most directors do not think of selection of the CEO in these explicit terms.
Given the shift toward boards that are more deeply engaged, proactive and taking on oversight of many key strategic levers of organisational performance, it is surprising that oversight of organisational culture has been neglected for so long by many boards. Since people make up an organisation, the board should ensure the culture is nurturing an environment where people and key strategic initiatives are aligned. When adding culture to the board agenda it should be a board priority alongside other key areas, not just another item to be addressed on an already jam-packed agenda. Culture degradation or the development of a toxic culture is a significant risk for any organisation that should be monitored and reviewed regularly by the board.
In a recent interview with the Australian Financial Review, National Australia Bank chairman Dr Ken Henry encouraged boards to “regularly talk about culture to staff throughout the company”. He went on to say “leaders have responsibility for the culture of organisations and they all kind of know it, but they're struggling with how to do it and how to be effective”.
While Dr Henry was talking specifically about the banking industry in direct response to the Australian Prudential Regulation Authority’s new risk management guidelines as well the Australian Securities and Investment Commission’s stance on toxic corporate cultures, it does raise an important flag for directors of non-profit organisations. That flag is, be proactive, get involved in culture oversight and shaping the culture. Do it today. Don’t sit around and wait for regulators to say this is an important activity for the board. Don't play catch up like the financial sector is doing after several financial institutions were caught out by either a whistleblower or their regulators.
The time honoured approach to organisational culture is that the CEO and executive team are responsible for shaping culture. This makes sense since they are on the ground, or should be, communicating the organisation's values, vision and mission, and ultimately shaping an environment that can drive the organisation toward realising that vision and mission.
As a management function, the logic goes that the board – which should be practicing governance and working to separate itself from operational concerns – has no role in shaping the organisation’s culture. This line of thinking has long been applied to both for-profit and non-profit organisations. Although, as noted above, the board does have a hand in setting culture when it appoints the CEO and the simple fact of the matter is that “when something goes wrong, the finger is going to be pointed at the board” and in Dr Henry's view, “given that we can't escape the responsibility, we should embrace the responsibility”.
As Dr Henry rightly points out, when something goes horribly wrong, as it has in several financial institutions with cultures that inadvertently promoted fraud, dishonesty and criminal behaviour, the buck ultimately stops with the board. This is where it should start as well.
But what should this involvement look like beyond simply appointing a CEO? And how can we ensure oversight of culture is done in a way that preserves the important separation between governance and management?
How the board can shape organisational culture
There are several key things that any board should be doing to ensure that the organisation's culture is healthy and actively supporting the vision, mission and strategies the board have set.
1. Define the board's role in culture
As with any area overseen by the board that converges with the role management plays, it is important that the board, CEO and executive team come together and engage in a discussion that clearly outlines the role that board will play in overseeing and shaping culture. A common vocabulary around culture should be established so that the board, CEO and executive team can engage in explicit discussions about organisational culture. If culture is typically the domain of the CEO and executive team, let the CEO know that the board wants to be in the loop on the current state of the organisation's culture. It is of great importance to also recognise that culture should not become a board-only discussion – it will always require that the CEO and executive team are involved.
2. Put Organisational Culture on the Agenda
The board needs should be having ongoing and regular discussions about culture and values both within the boardroom, but also with the CEO and executive team. Carve out time in board meetings, strategic retreats and planning days to have a culture discussion. These discussion should examine:
- The current state of the organisation's culture and the desired future state.
- Whether the values of the organisation currently match the culture.
- Ensuring that the culture is aligned to the current and future strategic objectives of the organisation.
- Culture in relation to exposure to various types of risks.
- How the current structure of the organisation can support the desired culture and cause it to flourish.
- Whether the board is setting the culture tone correctly.
3. Establish a culture dashboard to help you measure the culture
Just as the board should have a dashboard for measuring other strategic areas such as risk or financial health, it should also have a dashboard to help it measure the culture.
The dashboard should include internal and external measurements and metrics of the organisation's culture. These might include, but are not limited to:
- Employee satisfaction survey results.
- Reports to Human Resources.
- Management performance appraisals.
- Data from customer complaints.
Whatever information your culture dashboard comprises of the key, as with any reports or dashboards, is to ensure that the information contained in it is translated into measurable and decisive action. You want to avoid the trap where the report or dashboard is used as an excuse to only tick the compliance box and say yes we gave culture the time of day, rather than doing something meaningful with the information received.
4. Take the organisation's cultural pulse regularly (engage with internal and external stakeholders)
In traditional governance practice, directors are not encouraged to interact to heavily with staff in order to ensure that management and governance functions are clearly separated. Unfortunately, reports can only show directors a narrow view of what is going on in their organisation in terms of organisational culture. This creates a challenge as the only way for directors to really get beyond the reports is to experience the culture of the organisation and this requires site visits, speaking to staff, and interacting with volunteers and other key stakeholders.
So how can this tension between experiencing the culture and ensuring good governance practice be solved?
In the case of culture, the main risk of violating good governance practice is role confusion and it is a two fold issue. The first issue is caused by directors themselves and the second is caused by the people with whom the directors may be interacting. The solution is that directors must not only be exceptionally clear on their roles and responsibilities on the board, but they must also be able to translate this understanding of roles and responsibilities into the required behaviours and attitudes. This translation of understanding to behaviour is challenging. It is something even the most seasoned director may struggle with, particularly if they have had a long management career.
Anytime a director interacts with non-directors within the organisation, it is very easy, even unintentionally, to slip into the role that management should fill. To assist directors in becoming clear in their roles around culture, the board must take the time to create the correct policies and procedures which outline the when, how and why of these types of interactions. They should also include explicitly spelt out expectations about what behaviour and conduct is appropriate and what behaviour is not. It should be clear from this that directors must proceed with care when heading out to assess culture. Dr Henry’s point of view illustrates another part of what the board role is in going out and about to assess culture: “You should be open to criticism, you should welcome debate both internal and external. I think you should be tolerant of internal dissent and you should absolutely protect whistleblowers".
As a board trying to measure culture, be aware that if the culture is not right, the CEO or executive (in an absolute worst case scenario) might actively hide this from the board. There was such a case recently which was not made public where the CEO had hidden the dysfunction of the executive team from the board. The executive team was allowed to become dysfunctional primarily because of the CEO, their own personal issues and their failure to cultivate the right culture in their organisation. The organisation appeared to be thriving due to past performance and current market conditions, but ultimately it was headed for disaster because a toxic culture was allowed to form and the board failed in its oversight. This example drives home why it is critically important that directors get out of the boardroom to take the pulse of the organisation's culture, to be sure a situation like this can never arise.
5. Support whistleblowers
Whistleblowers reveal when something is seriously wrong in an organisation. Quite often, problems highlighted by whistleblowers point to fundamental cultural issues. Supporting any whistleblowers that come forward should be a key concern of the board and any reports should be taken seriously and investigated. The board must have very robust policies and procedures for working with whistleblowers as mishandling of this type of situation can lead to disastrous results that will almost certainly be aired in a public forum. If a situation identified by a whistleblowers is handled correctly it can help the board maintain a healthy organisation and also stem problems from any reputational issues that will likely arise in this type of situation.
6. Introduce culture into the CEO performance review
To ensure the CEO is forging a culture that is in line with the organisation's strategies and board expectations – include culture in performance reviews and make it part of any succession planning criteria when replacing the CEO. The board should include a section on culture and values in the CEO’s performance reviews and appraisals and always keep in mind how their selection of the CEO contributes to setting organisational culture. This gives the board a formal mechanism with which to ensure the culture is healthy and in line with what the board expects and provides a way to highlight when the CEO might need to course correct.
7. Establish a culture team
Establishing a team within the organisation that is responsible for monitoring culture and making recommendations to the board, CEO and executive team is good way to ensure that boards can effectively oversee the organisation's culture. A culture team can undertake deeper investigation of culture through one-on-one meetings, interviews, organisational surveys, analysis of customer satisfaction or complaints data and information and many other tools or techniques in a way that directors and the CEO cannot.
If a culture team is established it would be responsible for maintaining the culture dashboard for the board. Setting up a culture team is an activity that is more typically undertaken in larger organisations, particularly where they have multiple offices or service sites. However, with some modification a head of culture or culture coordinator might be implemented successfully as an addition to a human resources role in smaller organisations.
8. Get Professional help
Bringing in external professionals to audit the organisation’s culture can provide the board, CEO and executive with a perspective they may not be able to get on their own. Even if you have an internal team responsible for culture, having someone from outside the organisation can give you an improved perspective of the organisational culture. External consultants are more able to see the true state of an organisation’s culture as they are not enmeshed in it themselves. When dealing with any cultural issues your organisation might have, external professionals are likely to have already seen and solved similar problems in other organisations and can therefore jump straight to the best solution rather than wasting time and resources trying a variety of different solutions that may lead to mixed levels of success.
9. The Board should strive to set the culture tone
Take time to reflect on your board’s internal culture. Are directors modelling the desired behaviours? Do directors themselves match the organisational culture? The board models culture in the way that it challenges the CEO, conducts its discussions and handles dissent. Even as directors, people observe how you interact with your fellow directors, these interactions do set the tone for culture. When recruiting new directors the board should include criteria around culture and values alignment. New directors will contribute to setting organisational and board culture, they will also be the stewards of the organisation's culture in the future so making sure that new directors are aligned to the culture or at least to the future desired culture is important.
While it is possible for boards to have oversight and influence on culture, and they should, it is important to remember that culture cannot simply be overseen by the ticking of boxes. Culture is a living, breathing thing and it must be treated as such, it is not a simple black and white thing that can be put in a box and measured. Directors must be cognisant of this fact, as this is what makes it so difficult to get culture right. And yet, boards that manage to provide oversight on culture well can help their organisations truly thrive and perform.
Think of the board as Jiminy Cricket is to Pinocchio, there to tap him on the shoulder and ask the questions that need asking. Is this right? Does it align with who you want to be or are? Are you heading in the wrong or right direction? The board is the conscience of the organisation. It can provide a more high level view of the organisation’s culture, measure whether it is healthy and if it isn’t, make adjustments and improvements that will get the culture to where it should be.