The E&C Pulse - December 13th

December 13, 2018 Ben DiPietro
 
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TOPICS OF CONVERSATION
 
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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.”

 

Ben DiPietro
@BenDiPietro1
ben.dipetro@lrn.com

 
A CLOSER LOOK
 
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Defining Compliance Means Moving Beyond Rules

For all the talk about compliance and the yeoman efforts taking place to elevate the profession, seems many people still don't understand the basic tenet that a compliance program consists of more than rules and regulations, and is fundamentally based on behaviors, values and culture.

If it were just about rules and regulations, companies that were deemed to have strong ethics and compliance programs wouldn't have made headlines for their serious breaches of conduct, LRN's Emily Miner said during a panel discussion last week in Philadelphia at a Society of Corporate Compliance and Ethics conference.

"Yet, that wasn’t enough to stop systemic unethical behavior," she said.

Miner pointed out regulators want more than policies that spell out what is acceptable and what isn't, citing a Department of Justice official who said in 2017 that "compliance is a culture, not just a policy."

Despite that, Miner said most companies don’t know what their culture is--even if they think they do--in part because most ethics and compliance programs are operating from a strategy informed by lagging indicators such as employee reports and training completions without understanding relative performance.

"LRN’s research and experience supporting organizations for 25 years shows us that companies with strong, values-based cultures outperform across all traditional metrics of organizational performance: financial results, customer satisfaction, levels of innovation, as well as lower levels of misconduct," said Miner.

Research from LRN into ethics and compliance program effectiveness also shows the strongest programs undertake regular evaluation, including of cultural factors such as trust, respect and transparency.

So what should you measure, and how can you leverage those insights to foster ethical culture, promote ethical leadership, and scale ethical behavior?

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Kim Urbanchuk (left), chief ethics and compliance counsel at Parsons, joins 
LRN's Marsha Ershaghi Hames last week at an SCCE conference in Philadelphia.

Whether by employee surveys, focus groups or other touchpoints, measuring across all dimensions enables companies to develop a deliberate E&C strategy, prioritize training, proactively address risks, and demonstrate effectiveness to business leaders, regulators, and audit committees or boards, she said.

Undertaking such efforts, she said, sends a clear signal to employees the company truly cares about and is invested in fostering an ethical culture, creating a catalytic wave that is felt even after the assessment process," said Miner.

#LISTENUP

Following Miner's panel, LRN's Marsha Ershaghi Hames was joined by Kim Urbanchuk, chief ethics and compliance counsel for Parsons, to discuss the importance of learning how to listen, and why it is important to remember your audience by putting people first.

The session opened with a candid, personal set of reflections around their own experiences with microaggressions, many of which we "rationalized over time to tolerate, or due to workplace cultural norms we suppressed our reactions, dealt with our own concerns with retaliation, or the view that there is a lack of organizational justice and inaction is inevitable, so why bother speaking out," said Ershaghi Hames.

As Urbanchuk put it, "People quit their boss, not their job.”

The pair said sometimes as women they succumb to the pressure of a double bind, where women only are viewed as competent or likable, or powerful or weak, but not both. "Therefore, speaking out had been socialized as a sign of weakness," said Ershaghi Hames.

They discussed organizational shifts and how the barrage of headlines around abuse of power are awakening corporations to the necessity to rebuild trust, the need to introduce a dialogue led through frontline management, and making it the responsibility of leaders to demonstrate visible accountability and ownership for building corporate culture.

"Frontline leaders are the gatekeepers to culture and need to be coached, developed and measured around their level of activity in building an ongoing dialogue," said Ershaghi Hames. "Learning how to #LISTENUP is critical. Learning how to listen without judgment and bias matters."

 

Ben DiPietro
@bendipietro1
ben.dipietro@lrn.com

 
MIND NUMBERS
 
 
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Some 500 board directors were asked by NACD about disruptive risks: 82% said such risks are much more or moderately more important than they were five years ago. Forty-seven percent said artificial intelligence was the biggest disruptive force in technology; still, 49% saw AI as the biggest enabler for  business. 

 
WHAT'S NEWS
 

Public officials who accepted bribes from businesses based in the wealthiest countries rarely incur any punishment, WSJ reports, citing a report from the Organization of Economic Cooperation and Development.

A report from Morgan Stanley cites investor bias for not funding businesses led by women and people of color at the same levels of companies run by white men, Bloomberg reports.

Trading algorithms often are unable to discern between real news headlines and fake ones, contributing to stock market volatility and risk, ZDNet reports.

Workers more and more no longer are interested in giving notice and are just leaving their jobs without telling their employers, The Washington Post reports.

A report in Nature says the dire predictions in a recent United Nations report about the impact of climate change actually underplayed the dangers.

A report in The New York Times exposed how easy it is for someone to take anonymous data being compiled by apps people use, and then link it to the specific person, raising questions of privacy and ethics.

A Pew Research survey of nearly 1,000 technology experts, policy makers and activists found most expressed concerns about artificial intelligence and other emerging technologies and the impacts they will have on what it means to be human.

Opponents of an energy company's plan to locate an oil and gas pipeline in a mostly black neighborhood contend it is a form of environmental racism. A key vote on the Virginia project is set for next week, Atlanta Black Star reports.

 
FROM THE
WORLD OF LRN
 

Top Perspectives of 2018

This past year, we released a number of new reports including The State of Moral Leadership in Business and The Role of Boards In Overseeing E&CWe also launched The E&C Pulse, an newsletter offering insights on ethics, compliance, corporate culture and reputation, and the #How Matters Series, a collection of discussions between our CEO Dov Seidman with some of the world’s most prominent leaders. 

To view our most popular reports, guides, case studies, thought leadership articles and webcast replays from 2018, please click here.

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