Need: Board Proactivity on Culture
Q: You recently gave a presentation on why boards of directors of public companies need to be more proactive in addressing culture problems at their firms. What led you to this conclusion?
A: Culture is shorthand for the embedded behavior, rules and relationships in a firm. A healthy culture is critical for innovation, market changing ideas and ethical practice. We have seen many firms crack up because of failing cultures—Kodak, RIM, and Lehman brothers, to name a few. When management isn’t paying attention to culture (not unusual), boards need to step in.
Q: Do you think what you are calling “culture issues” are happening more lately?
A: Perhaps. I do think a tough global economy winnows out firms that don’t have adaptive cultures. I also think that activist investors, attentive Wall Street analysts and a 24/7 news cycle bring culture failures to our attention more. But historically, dysfunctional firms don’t live long, and most firms that fail have dysfunctional cultures.
Q: What is a dysfunctional culture?
A: There are a variety of warning signs to describe cultural dysfunction. Let me flag three of the big ones. First is a CEO or top management team that is disconnected from the innovative thinkers in the company—in some companies, the CEO may not even know who they are. A second factor is where top management and employees are severely out of alignment as to who the best “go to” people are in an organization. It is difficult for a company to execute on strategies when there is a lack of respect or credibility in operational management. The final warning sign: a lack of creative collaboration—people working actively together to innovate.
Q: So when should boards step in?
A: Let’s remember that boards rely heavily on management for information. So in most cases, boards only know the culture is deteriorating when balance sheet performance erodes drastically. Of course, by then it may be too late for meaningful action.
Q: Does that mean boards face an uphill battle?
A: Not necessarily. Directors need to be proactive in conducting independent surveys and audits that gauge cultural health— there are a number of tools for this. But to do this type of independent assessment, Directors need to level with CEOs and say: “attention to culture, and having early warning is better for the company and you. We do this to benefit shareholders and management.”
Q: What is the likelihood that most companies will adopt this path?
A: It is hard to say. Based on Makovsky's experience working with boards and management in this area, it's a learning process for both. But it’s a powerful mechanism for staying competitive, and for convincing shareholders you are operating in their interests.