Insights Blog

By QLK Team
on Aug 2, 2018
  • Blog
CEO vs. Board on Culture Impact

Who is responsible for shaping the culture of an organization – its board or its CEO?  Most likely, the answer lies somewhere in between.

A company's culture evolves over a long period of time, driven by many factors including the company's purpose, values, goals, metrics, strategy, industry, competition, structure, employees, leadership philosophy of the CEO, collaborative environment, and reward systems, among others, and is a strong driver of company performance that touches every aspect of the organization – strategy, business processes, and employees.

Some would argue that because of this overarching reach of culture and its impact on the interests of all stakeholders, it becomes the responsibility of the board.  In fact, in a survey of over 410 directors of public companies, 70% said that culture is an important concern for the board, and 60% said that culture should be independently monitored by the board.  The board could be seen as the "conscience" of the company; if boards are responsible for ensuring that their companies engage in ethical behaviors, they will address not only the way the company works with others, but also the way its own employees are treated, in order to avoid risk, high turnover, and long-term detriment to the company.

The benefit of the board taking on this role is that it can provide more of an "outsider's" view of issues.  Also, directors may serve on the board longer than the average CEO tenure; if culture resides with the board, this longer-term focus can help the culture remain sustainable.  In essence, the board serves to protect the culture as CEOs come and go.  In addition, Sarbanes-Oxley obligates boards to demonstrate that their corporations are free of fraud and malfeasance, requiring controls to be in place for compliance.

Who is responsible for the creation of the organization's mission, values, vision, and goals?  In some cases, it is the board, and in some cases, it is management.  This may affect the level of accountability for culture.  The board, in collaboration with management, may explicitly define the company's values and then empower the organization to ensure that its employees operate by them.  These values influence hiring, promotion, recognition, and termination of employees.  The company's culture is set by the definition of the company's reason for existence, in terms of who it serves – whether the emphasis is on maximizing value for shareholders over the long run or creating value for all stakeholders.

The board is in a position to role model culture for the company in the way that it handles its own operations.  The board culture should ensure that communication is open and respectful, proper independence is honored, board members are being evaluated, independent advisors are available, access is provided to key stakeholders, agenda topics are collaboratively set, sufficient preparation time and information are provided for meaningful discussion, and directors are willing to accept being on the "losing" end of a vote, thereby setting the tone of the culture from the very top of the organization.

Perhaps the most important tool the board has to change its company's culture is the hiring, firing, and compensating of the CEO and senior management.  The CEO's leadership on a day-to-day basis has a profound impact on culture, so assessing values and cultural fit is as important as metrics when hiring a CEO.  Does the culture need to change?  If so, hire an outsider; sometimes when there is a longstanding CEO, the culture can become stagnant and the board will have to step up and bring in new management to effect cultural change.  It may be the board's responsibility to define the desired culture and then hire a CEO who will implement it.

If the board has control of compensation for management below the CEO level, this can be used to reward individuals who are embodying the desired culture, or to encourage those who are not complying to do so.  Integrated annual reports that include such metrics as customer loyalty, employer rankings, employee engagement and retention, and other indicators of company culture are reported to the outside world, which breeds greater accountability.  These things can be linked to compensation, as well.  The board can take responsibility for ensuring that the company does not get complacent about culture, keeping it top-of-mind by asking management about it often; it is a constant process that requires continuous discussions with the CEO.

In this view, although there is no dispute that the board should be involved in culture to some extent, it is seen as an agenda issue for board meetings in the same vein as financial performance.  Cultural change is considered to be too difficult and time-consuming for boards to undertake.  Additionally, it may be important for boards to remain apart from the organization's culture in order to more objectively observe and judge management; in the case of the Enron scandal, the board had become too enmeshed in the company's culture and lost its ability to provide independent oversight.

It is also more difficult for boards to oversee culture because they are not physically present in the company on a day-to-day basis; the largest influence on culture may be day-to-day leadership.   However, board members should keep a finger on the pulse of the culture by making regular site visits and talking to employees.  Often, their only contact is with top-tier management; it is useful for them to talk to line managers or other who may be more open to discussing concerns.  Board members can also shadow workers to get more of a feel for the company's culture, ensuring, though, that this does not breed a sense of the board micromanaging, second-guessing, or undermining the management of the organization.

In the end, different strategies for addressing culture may be a better fit for different organizations.  In all cases, though, collaboration is required between the board and management to ensure a strong culture that will positively impact the company into the future.