The proposed revisions to the UK corporate governance code call for boards of directors to be more active in overseeing company culture and employee engagement.
First, it is proposed that boards should monitor and assess company culture to satisfy themselves that behaviour throughout the company is aligned with company values. Second, they should devise a method for gathering the views of the workforce, and a means for the workforce to raise concerns in confidence and anonymously, and make arrangements for an independent investigation when warranted.
But how should boards fulfil these new responsibilities without straying into management territory? There are 10 best-practice actions that boards are now taking to oversee corporate culture and employee concerns.
Good boards insist that a proper system for whistleblowing is in place. Many existing programmes are flawed: they are neither anonymous, protected, independent, rewarded nor remedied. That is the board’s fault. Not surprisingly, employees (especially women) do not come forward for fear of retaliation and career harm. If directors think that conduct risk is not occurring within their organisation, then they are entirely wrong – it is just a question of degree.
In good organisations, bad news rises to the top: there is a channel for bypassing management when need be and going directly to the boardroom. If bad news does not rise up to the board, then it does not go away, it gets worse. Good boards insist on proper channels that lead directly to them.
Good non-executive directors ensure they receive ‘disconfirming’ information on company culture and executives. If they get all their information from management, then they are hearing only one side. Good non-executives receive their own social media analytics, enter chat rooms themselves, hear directly from employees, use Google alerts, read what reporters and analysts think, walk around, and listen to what they hear and observe. This does not mean that board directors are meddling or running the company, but that they have their eyes and ears open for themselves. If management tries to block or dominate a board’s information flow, that is a red flag.
If directors think that conduct risk is not occurring within their organisation, then they are entirely wrong – it is just a question of degree
Good boards have sessions without executives in the room. This is a fairly regular exercise now in North American boardrooms, and it often happens twice per board meeting. It is the practice that has had the single greatest impact on board effectiveness, according to directors. By removing board-level management from a portion of each board and committee meeting, good boards create a safe space for independent, non-executive directors to speak confidentially. These ‘in camera’ sessions are the main opportunity for non-executive directors to voice their concerns out of earshot of management. This does not turn the CEO or any other executive directors into second-class board members, it means only that they are accountable to the board.
Good directors act at the first sign of an ethical lapse. The standard a director observes is the standard that is accepted by the company. One audit committee chair asked the board to fire the CFO after observing him fail to declare alcohol at airport customs. When good directors see wrongdoing, discrimination, disparagement or unfair treatment, they call it out. If necessary, they fire the CEO or senior manager at the first sign of a lack of ethics. If they do not, they are signalling to the entire organisation that such conduct is acceptable when it is not. Boards have suffered by failing to act when they should have. Moreover, if a board does not act when it should, good directors resign.
Good boards receive employee feedback unfiltered by management. They retain external consultants to conduct employee morale surveys that are then delivered direct to the board without management influence. They review qualitative exit interview results, staff turnover rates and litigation compared to peers. A good board does not want to be the last to know, and the rule of thumb is that there should be no surprises.
Good boards refresh themselves regularly. Excessively long-serving or ‘overboarded’ directors are not permitted. The average director puts in 300 hours a year, and all hands are needed on deck for a solid, engaged board. New non-executives may see things that long-serving directors may not or may have become inured to, and they are more likely to speak up as they are not assessing their own past decisions. Homogeneous boards also engage in groupthink and do not ask tough questions.
Ethics and incentives
Good boards link behaviour to pay. Incentive-led pay can drive unethical behaviour, so good boards benchmark management contracts for conduct and ethics clauses. They define just cause for dismissal to include ethics. They demand that fair treatment form part of all employment contracts. They also ensure that incentive pay is made conditional upon compliance with the company code of ethics and diversity policy, and see that pay is clawed back if misconduct ever occurs.
Good boards conduct rigorous interviews and background checks when hiring a new chief executive and nominating other directors. Personalities are generally stable, and a company or boardroom can be wrecked by the wrong hire. Background, references, social media, personality, criminal and financial checks and testing are now standard in ethical companies.
Good directors ask good questions. If a director has a question or concern, most of the board may share it. I have interviewed over a thousand directors over my career. The most common regret that directors have, often after a scandal, is twofold:
- I didn’t speak up when I should have.
- I didn’t fire the CEO soon enough.
Good directors are not afraid to raise issues. And if they do not like the answers, they press further. Where there is smoke, there is often fire.
Good non-executives demand that company culture be tested to ensure correct behaviour and integrity. Complaints, reaction time, investigation protocols, record-keeping and non-retaliation should all be examined by the internal auditor, who should report directly to the audit committee and full board on the findings. The management team may push back, saying it shows the board does not trust or have confidence in them, or accusing the board of micro-managing. However, many conduct failures and scandals have occurred where auditor access to the board was blocked by senior management.
In summary, boards are becoming far more active and investing significant time in their duties and responsibilities. There will be occasions when even their best efforts are not enough, but for the most part, conduct failure can be avoided if boards eschew complacency and take action when they should.