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Company culture…who is responsible for it?

Posted: October 30, 2018 at 8:52 AM

Culture is in the news, and there seems to be a view that boards are responsible for it. Metaphors abound …the ‘tone is set at the top’, ‘the fish rots from the head’…’water flows best downhill; all a way, I believe, of saying leadership matters. And it does matter; the propensity for humans to form groups whose members conform to certain behaviours, rituals, and procedures is universal. Observing leadership behaviour and interacting with the leader is a critical element in groups. Leader decisions demonstrate what is truly valued, what will be tolerated and what will be punished in pursuit of objectives.

So, the question of who is leading is important. Who actually is the top, with the tone setting power? Is it the board, the CEO, the shareholders/owners? Well it depends, which sounds like a cop out but it’s not, despite the fact that the law does not make distinctions among types of director roles, they are not all the same.

In government organisations, sometimes the Minister can override a board decision. So, who is leading, who has the right to make the decisions that demonstrate what is valued, the board or the Minister?

In many non-profit organisations, the CEO is not a board member, yet the CEO is the person who is responsible for major decisions and interacts consistently with staff, members and volunteers.

In private companies, where there is no separation of ownership from control, a business can operate with no board at all. An executive owner/director will be the person on record with ASIC. They will set the tone and run the company as they see fit, and wear the consequences if they break the law or harm their customers.

Some owners of private companies do establish boards, but in practice they may be more of a management committee with one or two trusted external advisors as board members, often an accountant or a lawyer. Most of the directors are likely to be working in the business day-to-day, and the CEO, shareholder is calling the shots.

This can even be the case for some listed companies. Look at the board of Facebook. There are nine directors, including the founder, CEO, Chair and major shareholder, Mark Zuckerberg; the COO Sheryl Sandberg; five venture capitalist investors and two directors with technology backgrounds. I think it would be safe to say that Mark Zuckerberg is making the decisions that set the tone at Facebook rather than the board.

In complex, mature listed companies where ownership and control are separate, traditionally directors have been seen as the guardians of shareholder money. They are meant to act in the best interests of the company and keep management focused on the interests of all shareholders. There is debate about whether directors’ duties in Australian law allows directors to act in the interests of stakeholders other than shareholders. The non-executives holding director roles in large listed companies do not work in companies on a daily basis. Who sees them, who hears what they say and observes how they make decisions on what matters to shareholders? It’s likely to be mainly the CEO and some of the senior executives. Their influence on culture may not extend much further than a handful of people.

The estimates I hear of the time a director spends on company business across the course of a year range from 12-40 days. On this basis directors are not able to consistently observe the interactions of the CEO with those below the senior management level, or interact with or observe employees below the senior level. If and when they do observe, their presence may be stage managed which can obscure reality. At the risk of being controversial, CBA has 50,000 employees, wouldn’t CBA board members interacting mainly with an intelligent, capable and well-respected CEO think the tone being set was a positive one?

It seems to me there is a question to be asked about setting the bar higher and higher for company directors despite the fact that the law focuses their duties on the interests of shareholders who want a return on their investment. Directors must not only ensure performance, but they must be beacons of virtue, able to give an account of all their decisions, while fielding complicated compliance regimes which can tie them in knots. It’s an environment where the threat of personal liability is never far from top of mind, which given what we know about the human brain, only serves to shutdown the open-minded, positive thinking that sets a positive tone.

In a recent interview with Stephen Moss in HRM Magazine, Charles Handy expressed the view that it’s dangerous for shareholders to call all the shots. He sees shareholders not as the owners of a business, but as suppliers of capital being rented by an organisation. The people who really matter are managers, the workforce and the customers. He makes no mention of boards.

Provided non-executive directors have hired a high-quality CEO to lead, inducted and remunerated that person properly, can they really be held accountable for the way culture is being transmitted and maintained in the organisation? Maybe we need to question whether there are other models of governance, which can uphold the rights of shareholders without encouraging behaviour that is detrimental to other stakeholders.