Archie Dunham has some drilling down to do, and it’s not just about selling off assets to staunch a cash-flow problem. The new non-executive chairman of Chesapeake Energy is part of a reconstituted board that replaced almost half of its members after an implosion of precarious performance and scandal.
Around the world, boards are fighting to survive amid challenges never seen before. GlaxoSmithKline owes $3 billion in fines for illegal marketing. Barclays is accused of manipulating key interest rates. BP faces billions of dollars in penalties over the Deepwater Horizon disaster. Boardroom focus may be on balance sheets and cost structure, but many are unintentionally sabotaging results because they ignore the biggest driver to performance—culture.
Culture isn’t just the “soft stuff” of the company that HR should handle behind closed doors. Culture is the heart of any organization, and it’s more than a yearly company picnic or creative workspace—it’s how people perceive their work, make decisions, innovate, handle risk, succeed, and communicate. Culture, as much as any board, is the actual governing driver of the enterprise.
Compliance, earnings, and productivity are all end results of corporate culture. Employees are one of the most important stakeholders in any organization, yet many boards neglect them.
Boards are monitoring regulatory compliance and earning reports, but who’s accountable to the people tasked with making the results happen?
A global retailer facing stagnant growth and insufficient margins analyzed their problems and found that corporate culture was at fault. Employees perceived that success was related to internal contacts and champions, not performance. As a result, people maintained silos because they thought there was conflict between senior executives. How could any board not be interested in that?
Every single aspect of enterprise performance relies upon a human being and how they think about their work. It’s the middle manager that notices a breach of IP security, the assembly-line worker who knows how to fix that design flaw, or the team that devised the business strategy that could make or break the company. They all have managers who give them tasks and priorities, but ultimately corporate culture influences their decision-making because it influences their perception of their jobs.
When the balance between governance and cultural issues is off-kilter, the results can be devastating and even dangerous. Transparency and accountability are essential values when you’re driving performance. The aftermath of the 2010 Toyota recalls made it clear that the automaker’s safety problems were a decision-making issue rooted in the corporate culture. No one wants to tell the boss no, and this corporation was particularly vulnerable to that fear.
A European company was having issues with its team members at an industrial site. The company had scaled back its investment in the site, so workers believed the company would eventually close the plant. They became negative and complacent, and performance went down. What did the company do? It cut back its investment in the plant even more, and performance went down accordingly. It was a vicious cycle of decision-making affecting culture, which then damaged performance.
So how can the board be accountable when they can’t investigate every trade or micromanage every decision? As the environmental crisis unfolded at BP, I remember asking myself how the CEO or board of BP could know what’s happening at every oil rig. It is not possible for one person or group to monitor all the details and aspects of an enterprise. There is a fine balance between governance and management.
However, just as CEOs should be held accountable for the conditions that affect how their people react, the board can be accountable for the underlying culture that drives those reactions. A.T. Kearney reported that 42% of directors say that culture is an important concern for boards to monitor, even separately from the CEO. Now BP is facing billions of dollars in penalties in their settlement with the U.S. Justice Department over the Deepwater Horizon spill. How much of the disaster could have been avoided, or at least mitigated, had the culture of BP (and thereby the CEO and board members) primed employees to react and operate differently?
While BP settles up, Chesapeake has spent the past few months cutting to the heart of their problems and making the tough decisions to rectify them, even when that meant shaking up the entire board and cutting a controversial compensation plan for the CEO. In a post-Sarbanes-Oxley world, board members cannot afford to divorce themselves from anything that is critical to performance and integrity. Boards should consider not just monitoring culture, but helping to set culture from the top down in order to generate the value their shareholders expect. Value is a direct product of performance, and nothing affects performance more than corporate culture.