The board of directors is responsible for corporate governance, and therefore determines the integrity and prosperity of the organisation. In recent times, although structural changes have been made to the way many corporations are governed, most of these changes have not led to a more basic cultural change. For some, tackling poor corporate governance can be embarrassing, and in the process of looking at its culture a board of directors may discover all sorts of questionable practices. For the politically inclined, the very possibility can act as a deterrent to championing sound corporate governance in a way which will cascade positive ethics through all levels of the organisation. For those championing integrity, how bad practices are dealt with will be important. If incompetent or unethical individuals remain in their posts without renouncing past behaviour, or worse if they are rewarded for negative behaviour, it undermines the message of the corporation’s governance campaign and will result in directors and executive management paying but lip service to strategic directives. Written policy and procedures, forumulated to support ethics and good governance, will be open to exploitation.
Fundamentally, corporate governance impacts share price and the cost of raising capital. Consequently, the time has come to move beyond mere structural changes, to implementing a board culture of corporate governance. The Chair will need to find the right balance between the need for culture change being driven from within and the need for an external, neutral party to appraise the situation and facilitate the change process. Insiders tend not to trust outsiders and can fail to give them the necessary power to facilitate change, but without fresh eyes and outside experience insiders will not be able to achieve much on their own.
In this article, a holistic definition of corporate governance is put forward to enhance understanding of a blurred subject and facilitate discussion across boundaries. Also, a ground-breaking strategy for implementing a board culture of corporate governance is outlined. The methodology was developed through extensive research of major international organisations which have been involved in corporate governance scandals, together with considerable industry experience implementing successful corporate culture change. Lessons learnt have been consolidated into an actionable model. The author implemented the award winning1 corporate culture change management programme, "Together, We Win!", for HSBC Holdings Hong Kong plus 5 subsidiary companies.
Ask any ten industry leaders what `corporate governance’ is, and they are likely to give ten different answers. To strengthen Hong Kong’s status as a leading financial centre, the marketplace needs a holistic definition on corporate governance. This will enhance individual understanding of the topic, create a common language and facilitate discussion across boundaries regardless of which industry one is engaged in:
Corporate governance is an internal system encompassing policies, processes and people, which serves the needs of shareholders and other stakeholders, by directing and controlling management activities with good business savvy, objectivity and integrity. Sound corporate governance is reliant on external marketplace commitment and legislation, plus a healthy board culture which safeguards policies and processes.
The perceived quality of a company’s corporate governance can influence its share price, as well as the cost of raising capital. Quality is determined by the financial markets, legislation and other external market forces plus the internal organisational environment; how policies and processes are implemented and how people are led. External forces are, to a large extent, outside the circle of control of any Board. The internal environment is quite a different matter, and offers companies the opportunity to differentiate from competitors though their Board culture.
To date, too much of corporate governance debate has centered on`legislative policy’, to deter fraudulent activities, and `transparency policy’ which misleads executives to treat the symptoms and not the cause. The former encourages a reactive climate, while the latter puts the weight of the burden on CFOs when the Board needs to share the burden collectively. The latest trend is for companies to invest in process software, which is said to facilitate compliance with Sarabanes-Oxley and other legislation. While this software most definitely fills a gap, it must be introduced by professionals with proven skills in navigating the `people’ part of the transformation equation. This will ensure that the workforce is brought onboard and the full benefits of the software implemented are realised. Whenever there is a battle between technology and corporate culture, culture will win. To achieve a reputation for sound corporate governance, we need to balance external and internal policy on `legislation’ and `transparency’, and process driven software with a healthy Board culture.
The Board exists to be accountable that its organisation works and is the voice of shareholders, so it plays a critical role in enhancing corporate governance. Greater effectiveness in the governing role requires Board members to firstly understand governance in a new way, and then to be disciplined enough to behave in a new way. Therefore, the Board which can go beyond loose statements of integrity in press releases and company reports, to implement a culture of corporate governance, will rise above the norm and truly demonstrate to key stakeholders their leadership and commitment. A corporate culture management professional can facilitate sound corporate governance to achieve outcomes and benefits, which include:
- An enhanced company image and enhanced perception of internal corporate governance
- Facilitation of a holistic strategic plan
- A measure of the internal board culture
- Quantifiable results which improve the bottom line
- Buy-in to change and the overcoming of internal resistance
- Implementation of key policies and processes to support Board efforts
- A Board culture which embraces change and learning
- Quality directors who nurture their relationship with the management team
- Enhanced communication and transparency
- A stable Board culture which remains healthy and true as faces change
- Workforce alignment with strategy so all are working to a common goal
Implementing a culture of corporate governance is a strategic initiative which requires the full commitment of the Board. As the culture of every Board is unique, a project to facilitate sound corporate governance must be custom made to suit internal needs. Some organizations will need to change a toxic culture to something new, while others will need to reinforce an existing healthy culture, which is susceptible to going off-track as faces change.
Developing a Culture of Corporate Governance
A project to implement a culture of corporate governance must be sponsored by the Chair with a Steering Committee overseeing the strategic development of the initiative. The committee will comprise of the Chair, the CEO, the Compliance Officer, the CFO, at least two independent directors, the project manager, plus a change-orientated member of the top management team with a track record for integrity and results. The latter will be responsible for driving the values with the management team and communicating new ways of doing things. The project manager will be the Chair’s implementation champion. This corporate culture management professional will have a successful track record of designing and implementing strategic culture change in partnership with the senior administration. To be positioned for success, the project manager must report to the Chair, with a dotted line to the Steering Committee.
Once the management team has been set up, the project manager will develop a communications plan for directors and management, to gain buy-in and solicit views on the way forward. Steering Committee members can share the implementation of this to demonstrate their support for the initiative.
Identify Desired State
To identify the end goal, directors and the management team need to work together to create a vision for the future. They will picture what sound corporate governance will look and feel like for them in practice, and pin it down so that progress can be measured and tracked. The output can be integrated into an already established strategic plan, if necessary.
Lessons learnt from those organizations which toppled because of poor corporate governance suggest the following critical areas must be considered, to embed core values. Each underlined point acts as a Lever for Change, which can be actioned during the project implementation stage.
- Leadership & Congruency: leadership must come from the Chair of the Board, not the CEO, to avoid a conflict of interest. The Chair’s job is to see that the Board gets its job done, and this includes the hiring and possibly firing of the CEO. The CEO’s job is to take direction from the Board, lead the workforce and see to the business. The Chair must role model the Codes of Ethics, demonstrate passion for corporate governance and be able to champion and defend the `board culture’ initiative. The Chair should find the time to meet directors and members of the management team on a 1-1 basis, particularly key `change agents’ who may be meeting with formidable resistance when actioning their remits. Directors should also have mentoring responsibilities and coach individuals on the management team. Board members must "walk their talk".
- In recruitment, passion and commitment to sound corporate governance must be evident. Passionate individuals will care a lot about the company and will not be driven primarily by self-interest. Beware the `policy-driven’ recruit who hides behind procedure manuals and cannot demonstrate how they have gone the extra mile to support sound corporate governance. A passionate individual does not believe in half measures and will give the organisation their full commitment.
- Diversity: in a global environment increases team problem solving ability and the "old boys’ network"; - if evident, must take its place in historical archives. The diversity issue goes beyond gender, culture and business schools cliques to include personality types plus individual thinking styles and abilities.
- Teamwork: The relationship between management and the board must be nurtured so that they are united in vision, values and purpose.
- Stakeholder Focus: directors must act in the best interests of not only shareholders, but customers, staff and other stakeholders.
- Adaptability: It is impossible to effect successful culture change unless the senior administration is willing to make changes to how the company is run. A Board must demonstrate adaptability if their business is to survive long term. Looking back at the `evolution of the species’, the Neanderthal became extinct because it could not adapt to a changing world climate. The Homosapian, which emerged from Africa and learnt to live in colder climates, continues to thrive to the present day.
- Board Constitution must be continuously reviewed. At least two board members will be independent directors (in HK it is the law, although the definition of `independent’ is quite loose and can include the company’s banker or a major supplier!).
- Vision and Mission must include all key stakeholders and corporate culture management (which will encompass core values), most particularly if the company is operating globally or is involved in mergers and acquisitions. For the Board, corporate culture management will be driven by the Chair. For general staff it will be driven by the CEO as leader of the workforce.
- Code of Ethics: Increasingly, American corporations are introducing a Code of Ethics. While the Board defines end results expected, but not means to the end (to allow for lattitude, innovation and freedom) the Board is still responsible for means employed. Means that are effective, but unacceptable, include the improper treatment of people of assets i.e. means which are imprudent and unethical. The Board is responsible for advising the CEO on those means which are unacceptable.
- Transparency: Very important, but perhaps over-emphasised at the moment to the detriment of more fundamental issues. Necessity is the mother of invention and the unethical will find creative `smoke and mirror’ tactics to deflect from subversive activities and protect their own power bases and self-interests (in highly political environments this can evolve to a form of art!). Transparent company reports do not equal sound corporate governance.
- Remuneration packages should be performance related and reflect local market value encouraging new recruits to stay, particularly in an environment where quality directors are at a premium and are susceptible to being poached. Internal incentive structures must drive behaviour that is consistent with sound corporate governance. The acid test for any corporate culture is quite simply, `what behaviours are rewarded?’
- Accountability: The Board exists as a unit, and no single voice has the authority to speak or act independently of the Board. This prudent policy can, however, encourage a lack of personal accountability. There is an old adage "when everyone is responsible, no one is responsible". Policy should reinforce a sense of ownership for one’s actions.
"Punish and ostracize those who do not live up to the desired standards. Very rarely can a single employee engage in unethical behaviour without other employees being `in the know’ or at least suspicious. A corporate culture, communicated and spread throughout the organization, that exhibits zero tolerance for unethical behaviour and that it is intricately tied to the corporate image, is management’s best form of assurance against this toxic disease."1
- Recruitment: should be managed by a committee, which includes unrelated directors. Recruits must be seasoned professionals who are financially literate, with strong strategic planning and general management skills, the ability to understand and execute the specific responsibilities of the board, and the ability to negotiate risks and opportunities. They must have a sterling reputation for integrity. In response to recent actions on corporate governance issues, companies in the US are making significant changes to their Board of Director programmes, plans and policies, according to a recent Hewitt Associates survey.2 The survey found that 29% of 70 large publicly listed organizations plan to increase the percentage of outside directors in 2003, compared to 12% of companies in 2002.
- Succession Planning: is a complex and challenging process. It requires continuous planning to ensure a successful transition to meet the future leadership and governance needs of a company. As Boards evaluate themselves, they need to ask, "Is our succession planning preparing us for the future?"
- Performance Management: The contribution of directors must be regularly evaluated. This will ensure that a balanced and complete skill set is present, and that individual directors are performance driven. Directors should come up with their own objectives for their own development, and be assessed on them. They must be judged on how they live the corporate values.
- A Board Competency Framework should be developed and introduced by change management experts, with continuous group and 1-1 coaching provided by accomplished facilitators and coaches over a minimum of 12 months.
- Board meetings must be an outlet for directors concerns with upward communication truly valued. Participation must be encouraged with directors contributing to agenda setting, attending meetings frequently and actively participating. Also, if a board meeting runs longer than the allocated time, the Chair should make it clear that all are expected to continue on, if possible, so that the quality of communication and decision-making is not regulated by the clock and "expensive executive time". Meeting outcomes must not be pre-determined, to allow for healthy debate and dissent if necessary.
- Continuous Learning: It is vital that directors approach their responsibilities with professionalism and up-to-date knowledge and skills. A continuously changing business environment requires changing knowledge, skills and attitudes.
Identify Current Reality and Levers for Change
Once the `desired state’ has been identified, the next step is to measure the prevailing board culture. Common measurement tools and approaches include observation (of conscious and unconscious processes), survey questionnaires, interviews and focus groups.
The "Board Culture Profile" [B.C.P.] tool of the `Pacific Change’ consultancy Hong Kong is the first of its kind globally, designed specifically to measure the culture of the Board of Directors. Based on extensive research, the tool provides individual organisations with personalised snapshots of the current operating culture of the Board and those Levers for Change (as outlined above) which need actioning to facilitate sound corporate governance.
Board Culture Profile®
Triangulation, the use of multiple tools and methods, gleans the best results and gets the insider and outside perspectives. The face-to-face processes are crucial for ensuring that values are properly defined and that everyone takes them seriously. Once the Board has clearly outlined their own plan of action, the CEO can then go about leading an organisation wide culture alignment programme, which will cascade the desired values and align the workforce in a common direction.
Implementation: Bridge the Gap and Navigate the Pitfalls
Bridging the gap between the desired future and the internal current reality will involve action planning based around those specific Levers for Change which have been identified as key focus areas. Action Planning is the most powerful intervention to transfer learning to the workplace, and allows directors and the Board collectively to decide how they are going to achieve their objectives in the workplace and share responsibilities. Tackle specific Levers for Change over agreed timeframes (e.g. 3 months each) and identify short-terms performance measures to track progress. Changing attitudes and behaviours of well-seasoned executives is the biggest challenge of the process, but focusing on a few key problems can radically reshape perspectives.
As with any change management programme, the biggest potential pitfall is resistance to change resulting in derailment, or completion without realization of the full benefits. Each strike serves as a "Moment of Truth" and every time the Chair comes to these crucial crossroads they must decide whether to pay the true price of change, or face the consequences existing in maintaining the status quo. Martin Luther King’s words of wisdom provide guidance in the decision making process:
Cowardice asks the question – is it safe?
Expediency asks the question –is it political?
Vanity asks the question – is it popular?
But conscience asks the question – is it RIGHT?
And there comes a time where one must take a position that is neither safe, nor political, nor popular, but one must take it because it is RIGHT.
The Levers for Change fall into two categories; hard and soft data. Hard data includes output, quality, time and cost. Soft data includes work habits, work climate, attitudes, initiative, new skills and promotions and advancement. Results can be measured by tracking key performance indicators over time. Positive outcomes and benefits will emerge long before the completion of the project and will result in an enhanced perception of internal corporate governance. Culture change is an ongoing, organic process, so once results are collated the cycle is completed and the process of renewal begins.
The high priest of capitalism, Adam Smith, believed that for a market economy to work, there must be a code of morality amongst those taking part. While the Board will not control the means employed by management to ensure results are achieved, it must control the means employed to safeguard ethics and a healthy Board culture. Therefore, the organisation which can go beyond loose statements of integrity in company reports and press releases, to implement a culture of corporate governance, will rise above the norm and truly demonstrate to key stakeholders their commitment to sound corporate governance.
A culture of corporate governance must be championed by the Chair for the Board and driven by bona-fide `change agents’. Once the Board has decided on their plan of action, the values can be cascaded through the organization by the local CEO and their own implementation champion. Only when the fibre of an organization reflects integrity in all facets of operation will it be able to claim sound corporate governance.
"In the end, an organization is nothing more than the collective capacity of its people to create value. I came to see in my time at IBM, that culture isn’t one aspect of the game – it is the game."3
Footnotes1 Best Practices Award 2003
2 Howard Steven, Corporate Ethics, Corporate Culture and Corporate Image, 2001
3 Timely Topics on Corporate Governance, Hewitt Associates, 2003
4 Lou V.Gerstner Jnr, "Who Says Elephants Can’t Dance?", Harpers Business, 2002