Boards Paying Closer Attention to Culture
Boards say they are getting a better handle on understanding culture, and not just at the highest levels of the organization, according to a survey of around 500 directors by the National Association of Corporate Directors.
Eighty-eight percent of directors said they have a solid understanding of the tone at the top; 45% said they had their finger on the mood in the middle, up 10 percentage points from 2017. Twenty-seven percent said they know about the buzz at the bottom, up nine percentage points.
Boards are trying to make sense of the disruption taking place, and the stakes are high as the convergence of new technologies and political instability is creating unexpected consequences, said Friso Van der Oord, NACD’s director of research and editorial.
“Disruption always has been there but cultural forces make it more difficult for fiduciaries, who have an obligation to bring all these pieces together” to understand what is happening, he said. “And the questions they are asking, there aren’t always answers for them, or the right strategy or the right leaders to take them through. The right leadership knows how to change-manage the corporation through this.”
Because they have some distance from the day-to-day running of the enterprise, board members are more apt to notice patterns management may not see, especially since many previously worked as chief executives, said Van der Oord. “They read a lot, they can talk to managers that a CEO may not have time for, they can absorb external trends and ideas because they are so distant” from daily operations, he said.
On the downside, many board members served in the executive suite 15 or 20 years ago or longer, and the skills they have and knowledge they possess--especially when it comes to today’s fast-changing industries--may be obsolete, said Van der Oord. And the skill sets they developed don’t always translate to their board roles.
“They may not possess the right spirit of inquiry, the ability to ask skeptical, tough questions because in their past life they were so operationally focused,” he said. “They may not have the ability to effectively challenge where management is going.”
Some of that is caused because management doesn’t always report to the board all of its issues and vulnerabilities, said Van der Oord. “The right boards see that quickly and demand more meaningful information about vulnerabilities and performance issues that could drive the next activist challenge,” he said.
Wanted: Higher-Quality Information
Directors questioned for the survey said they spent nearly twice as much time in the past year reviewing materials from management as they allocated to reviewing relevant information from external sources. That shows an over-dependence on management views and analysis, and 53% said they wanted the quality of management reporting to the board to improve.
Strong, effective boards are demanding more forward-looking reporting from management on leading indicators and performance vulnerabilities across different business lines, said Van Der Oord.
“They do not necessarily accept management’s view of the next strategy. They are asking management to demonstrate how the current assumptions about the business still are valid,” he said. “They also are spending more time reviewing information from outside sources, they are bringing outsiders to present where the industry is going at board dinners where management is not present so they can have the right contextual outlook. Laggards still are relying significantly on management information.”
Van der Oord suggests boards set expectations for what good information looks like, and he wants more boards to think like activists because activists understand performance vulnerabilities much better than most boards. “They have direct staff at hand, more information available to understand where companies are going to be challenged in the future,” he said of activists.
Another area boards are facing a challenge in is diversity, as NACD reports women hold 16.5% of board seats of companies in the Russell 3000. The survey found 53% said their boards now have a formal goal to diversify their composition, driven by the need to enhance cognitive diversity or the fact it's just the right thing to do.
“I don’t see boards challenging themselves fast enough to significantly increase the level of diversity,” of either gender or race, said Van der Oord, who expects regulators and lawmakers to seize on the issue.
This is further shown in a new study from advisory firm Egon Zehnder, which found all but one of the countries where large public companies have three or more female board members are required to do so by law. California recently passed a law requiring companies with headquarters in the state to have at least one woman on their board by 2019, and three by 2021.
While more boards are talking about diversity, Van der Oord said many still put self-imposed barriers in front of them, such as saying they don’t see enough qualified candidates, or refusing to change the size of their board to make it more diverse.
“They ought to change that,” he said. “Let’s see who on the board is performing, who is delivering. If the CEO doesn’t perform, the company gets a new CEO; that mentality needs to come through at the board level.”