Need: Board Proactivity on Culture

Andrew Goldberg, EVP of Makovsky's Corporate Advisors practice, led a Directors + Boards Magazine webinar last Thursday, for more than 100 directors and other relevant influencers, on boards' role in sustaining and strengthening corporate cultures. I interviewed Andrew for this blog, which touches in a summary fashion on several of the points made in that webinar.


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.

Goldman, Wall Street and A Culture Crack-up

Andrew Goldberg, EVP and Head of the Change Management Practice at Makovsky + Company is today’s guest blogger.

The recent allegations of a mid-level banker at Goldman Sachs, Greg Smith, that the firm relegates client needs to its search for quick profit is only the latest in a number of events since before the financial meltdown that highlights a culture of greed. For Goldman, what seems to be the expression of heartfelt emotional pain of a long-term employee conflicted over ethics, this places it at a reputational crossroads.

Goldman has weathered and rather successfully survived outside criticism from regulators and the media, even as it fends off legal challenges from the SEC and others. But when your own people, occupying critical positions in your core trading business, begin to lose faith or react in anger against the firm, it is an indication that the internal system is cracking. And when your people lose confidence in your business model, your clients will also. The survival of the firm is then put at risk.

The question for Goldman now is how to contain its reputational damage.

The first step was a letter from CEO Lloyd Blankfein and President Gary Cohn to their employees which was on its face self-contradictory. The letter first makes the critic and his claim seem unimportant—as just one of thousands of employees rather than one who worked his way up over twelve years with long-term client relationships—and his experience unreflective of the larger culture of the bank. But then it goes on to say that the senior Goldman executives would now examine Smith’s claims of callousness toward client interests. This indicates the claims might have some credence. These language contortions raise doubts as to how thoughtfully Goldman is addressing what could be similar concerns on the part of others at the bank. Nor does it seem that Goldman was considering how outsiders, including the media, would interpret the letter.

Such an ambivalent approach cannot work easily, given the pounding Goldman has already taken. A clearer direction is needed:

First—the company should avoid acting in a punitive way toward an employee who on the face of his claims actually has the interest of the firm at heart. Although it is reported that the company has tried to reach Smith, it is not clear how and under what circumstances. Instead, he should be publicly invited in to meet with top management and speak frankly regarding his concerns—along with the knowledge that the company will hold him harmless from legal action arising from his open letter to the Times.

Second—and a much bigger challenge to address, is creating internal structural barriers to the embedded conflicts that face many trading houses. One step would be contracting with a prominent outsider such as a former Justice Department executive, who can dispassionately assess potential conflicts and has the ability to go directly to the Board of Directors with any findings of abuse.

Finally—the Goldman board itself needs to take an activist role in sustaining its reputation. Since the financial meltdown and subsequently the recent boom years of record profits, Goldman’s board has played a quiet role despite continued reputational hits. Taking the lead in a thorough audit and correction of cultural risks and conflicts at Goldman is an essential role for Goldman’s board at this critical time.

What happens now is a test-bed not only for Goldman, but for Wall Street. As the biggest player, how it handles its suggested cultural crack-up will be benchmarked by its peers. It can be hoped that Goldman will act with the health and integrity of its industry in mind.