The Roles and Responsibilities of the Board of Directors
For Corporate Culture
The Center for Corporate Change
Second Annual Changing the Game Forum
June 10 - 12, 2004
Beaver Creek, Colorado
The Center for Corporate Change, a component of the Vail Leadership
Institute, is devoted to substantially raising the standards
of ethical conduct of American business. One important medium
for accomplishing this goal is the Center's Annual Changing
the Game Forum. At this Forum the Center invites leaders from
the business and academic communities to identify, discuss and
debate key issues affecting the ethical conduct of business
and its leaders.
The Forum discussions are based on a list of seven "Root
Causes" of corporate malfeasance as identified by the Center
founders in 2002:
- Corporate Valuation
- Board Governance
- Leadership and Corporate Culture
- Competitive Practices
A team of nationally recognized researchers from the Daniels
College of Business of the University of Denver presented an
update of the base line research they did in 2003 regarding
the seven root causes of corporate malfeasance as identified
by the Center for Corporate Change. In 2003, the research team
gave the general business / regulatory community a grade of
D for their performance on these issues. For 2004, while the
research team identified some progress especially in the area
of regulation, they also saw some deterioration in terms of
Leadership and Culture. In sum, however, there was not enough
improvement from 2003 to 2004 to move the needle from the D
grade of last year.
The 2003 Forum identified three issues to be researched and
debated at the 2004 Forum: The separation of the CEO and Chairperson
positions; the roles and responsibilities of boards of directors
for corporate culture; and multiple stakeholder valuation.
Each of these topics was assigned to an independent organization
for study and presentation to the Forum. A panel of experts
was assembled at the Forum to provide alternative perspectives
on the issue. Finally, the Forum audience of another 80 participants
was invited to discuss and debate the issue further. The Center's
intent was to provide a well rounded examination of the topic
and from this examination to form a perspective which reflects
the recommendations of the Center and its constituencies and
the best interests of the American social / economic system.
This paper reflects the summary of the position paper and debate
on the second of these issues: the roles and responsibilities
of the board of directors for corporate culture.
The Position Paper
Mr. Rand Garbacz presented the position paper prepared for
the Forum by ATKearney, a leading strategic management consulting
practice headquartered in San Francisco. Mr. Garbacz first reported
on a series of research statistics demonstrating a strong and
positive link between quality governance and company performance
and shareholder value. Specifically, he noted that firms that
had very high GMI (Governance Metrics International) scores
tended also to show very high total shareholder returns. These
included firms such as Coventry Health, Sunoco, ITT, 3-M and
Harley Davidson. On the other hand, companies that demonstrated
very low GMI scores also tended to show quite low total shareholder
returns. These corporations included such firms as Lucent, Qwest,
Xerox and Williams.
Linking good governance with corporate culture, Mr. Garbacz
noted that "culture impacts the interests of all other
stakeholders, and thus derivatively has a direct, measurable
impact on shareholder wealth". Therefore, he said, culture,
as a governance role is neither optional nor tangential. He
than stated that corporate culture starts with the board and
identified a number of board issues that significantly influence
- Independence: Objectivity
- Committee structure: Agenda
- Nominating process: who selects / what criteria
- Time dedicated: Time really available?
- Compensation: cash or stock
- Philosophy: CEO "rules" or CEO the hired hand
The culture set at the board level then gives cues to executive
management in such issues as:
- Accountability: To whom? What basis? What metrics?
- Transparency: clear or opaque?
- EPS or cash flow: "hit" targets or create value
- Executive style: participative or autocratic?
- Promotion path: dictatorial or meritocracy?
- Succession: hold the course or fresh ideas?
- Reality of conduct and ethics: as preached or as practiced?
Mr. Garbacz reported on the results of a survey of over 410
directors of public companies regarding a wide variety of corporate
governance issues. Several of the questions dealt directly with
the question of the responsibilities of the board for corporate
culture. Some 42% of the directors queried said that culture
is an important concern for the board and ought to be monitored
by the board independently of the CEO. Here are some more of
the key statistics:
- Culture is an important concern for the board: 70%
- Culture should be independently monitored by the board:
- Culture should be monitored through:
- Existing committee structure 70%
- Other means 30%
- What should be monitored?
- Employee indicators 70%
- Market/customer indicators 60%
- Incident indicators 100%
- Financial indicators 100%
ATKearney takes the position that boards need to take action
in five critical areas of governance:
- Monitor corporate performance with forward-looking and non
financial business indicators
- Strengthen business strategy through diverse perspectives
and ongoing attention
- Improve risk monitoring and mitigation
- Shift from succession policy to successor readiness
- Foster a constructively challenging culture, engaging as
owners vs. as reviewers.
Taking off from the last of these items, Mr. Garbacz suggested
several steps that a board can implement in order to foster
such a corporate culture:
- Set the agenda
- Challenge assumptions and monitor progress
- Ensure all voices are heard - formal and informal exchanges
- Take advantage of today's technology for effective communication
- Alternate self-reviews and independent reviews
The Panel Discussion
The panel for the discussion of this position paper consisted
of Mr. Ed McVaney, former CEO of J. D. Edwards; Mr. David Nadler,
Chairman of Mercer-Delta, Mr. James Sprayregen, partner with
Kirkland and Ellis; and Bethany McLean, Senior Writer with Fortune
magazine. The Moderator of the session was Ms. Ellen Heffes,
managing Editor of Financial Executives magazine.
Ms. Heffes led the session with some opening remarks noting
that while it is obvious that not all boards of directors have
neglected their responsibilities, the general business press
has included boards among today's culprits in the spate of corporate
malfeasance. As moderator of the panel, she indicated that this
panel will look into the board's role and responsibilities for
shaping corporate culture. Ms. Heffes said that it's not perfectly
clear that the board has or even should have a role in shaping
the culture of the corporation. A critical question she posed
in this regard was: What was the culture and ethical behavior
like at companies like Enron, Worldcom, Healthsouth and Adelphia
that allowed the malfeasance or misguided judgments to happen
and, where were the boards?
Mr. Sprayregen said that in his experience board culture and
activity, or inactivity is a major driver of company performance.
In its most malignant form, such a culture can lead a company
through three levels of poor performance: (1) A long process
of decline caused not by malfeasance but by non-feasance; (2)
denial of a problem associated with the rejection of unpleasant
corrective action recommendations; and (3) crisis management
requiring extreme measures. Throughout this process he said
that people in the role of independent and responsible directors
make an enormous difference and that governance processes are
an important and powerful tool for the board. Further, the addition
of effective board processes add even more value to the company's
Mr. McVaney, relying on his many years as a very effective
CEO of a very successful company, said quite emphatically that
corporate culture is the responsibility of the CEO, and not
a responsibility for the board of directors. Bringing the issue
to a sharp point, he said, "any board that tries (to manage
corporate culture) will find itself and the CEO frustrated".
Mr. McVaney said that "
your corporate culture runs
your business 90% of the time - especially when you're not there"
and is therefore a very important ingredient to the company's
performance. It is important to the company "way before
the board ever gets there". To a point, Mr. McVaney said
the culture of a company is essentially the demonstration of
the company's work environment and that is certainly the CEO's
job. He also noted that changing the corporate culture is very
difficult and time consuming and therefore not an appropriate
job for the board.
David Nadler also took the position that while board culture
is critical, corporate culture is not the responsibility of
the board. He noted that a great deal of data shows that corporate
culture is a very profound driver of a business. Agreeing with
Mr. McVaney, Mr. Nadler also stressed the difficulty of changing
corporate culture. He noted also that the largest influence
on corporate culture is the company's leadership, both institutional
leadership and day-to-day leadership. He indicated that the
board should not try to shape the culture of the company, but
it should be very concerned about it. Culture should be addressed
as any other key issue on the board's agenda such as financial
performance or risk assessment. Therefore, he said, the board
should gather information about the company's culture and review
the firm's strategy and execution as it impacts the culture
of the organization.
Ms. McLean, relying on her extensive knowledge as a reporter
and author studying and writing on the rise and the fall of
Enron, observed that the corporate culture of Enron was one
of the most important factors in the company's apparent success
and dramatic demise. She said that rather than the board shaping
the Enron culture, the executive management of the company shaped
the board's culture. The Enron board became too much a part
of the Enron culture and therefore lost its ability to provide
any independent oversight. Ms McLean noted that the board of
directors should stand apart from the corporation's culture
so as to not loose its ability to observe and judge management's
behavior objectively; that is, they must resist being seduced
by the company, its power and its success.
The Audience Discussion
This very active panel discussion spurred a very energetic
debate among the audience participants and the panel. Doug Sims
clearly agreed that the CEO should set the corporate culture
but that the board has a responsibility to monitor its effects.
They must assess the actual culture as it is exhibited in the
behavior of the organization compared to what has been written
on paper. In order to do this, the board, according to Mr. Nadler,
must get information that goes beyond what management presents
to them including formal outside assessments, internal data
and informal contacts with non-executive personnel. Also, the
board must look at the processes that are in place to effect
the expression of the corporate culture.
A very active discussion developed around the often-unanticipated
cultural consequences of incentive compensation plans. The old
saw that "you must reward what you expect because you have
to expect what you reward" was cited as a reflection of
the causes of a lot of the executive malfeasance of the past
Bob Vanourek offered an impassioned perspective regarding the
ultimate responsibility of the board for the behavior and therefore
the culture of the organization. He said that if 95% of what
happens in a company is a function of the company's culture,
the board must be directly concerned about that culture. Mr.
Vanourek said that the board is responsible for the purpose
or mission, the values, vision and goals of the corporation
and it is up to management to execute against these ideals.
Further, said Mr. Vanourek, the board is responsible for protecting
the culture beyond and across various CEO's that may come and
Mr. Nadler took equally impassioned exception to this position.
He said that the CEO, not the board was responsible for formulating
the corporation's purpose or mission, values, vision and goals
and that if the board does not like the positions taken on these
issues by management, they need to "take out the management".
Mr. Nadler noted also that the board needs better performance
measures, especially for corporate culture than lagging financial
Hal Logan noted also that the board should carefully assess
the company's culture in light of the particular strategy the
company is pursuing.
The Center for Corporate Change Perspective
The Center for Corporate Change believes that corporate culture,
indeed, has a profound impact on the performance of any corporation.
Expert opinion from many experienced business leaders attests
to the impact of corporate culture on company performance. As
the old adage goes, "It's not what they do when you are
here that counts; it's what they do when you're not here."
And "what they do when you're not here" is driven,
very often, by the organization's culture.
This impact of culture on company performance has not yet
been statistically proven, nor has the impact of good Board
governance on company performance been directly linked to corporate
culture. But the Center for Corporate Change believes there
is a very strong indirect link at least between culture and
Therefore, the Board of any progressive company will want
to take a keen interest in the culture of that company. This
interest by the Board is not to usurp or interfere with the
proper role of management in the area of corporate culture,
but it is to ensure that the proper culture is set and implemented.
However, for the Board to assume some role for setting corporate
culture is new territory. This responsibility has not been delineated
before. What specifically should a Board do vis-a-vis management
in the area of corporate culture? And how can the proper roles
of the Board and management be protected in this fuzzy area?
If a company's culture can be defined as "how we do things
here," then culture evolves over time from a very complex
set of drivers. These include the company's defined purpose
for being, its explicit or implicit values, the specific goals
it strives to achieve, the key metrics to which it pays attention,
its strategy and tactical action plans, its economic, industry,
and competitive environments, and, most of all, its people related
aspects----the organization structure, the type of people at
the firm, especially the leadership philosophy of the CEO, the
amount of collaboration or teamwork encouraged, the leadership
styles valued and utilized, and the reward and punishment systems
to name just some of the drivers. Culture results, generally
over long periods of time, from the impacts of all of these
complex and interrelated factors. Culture is not easily changed
and can clearly have a powerful impact on what people do.
No Board can or should get involved in managing the details
of how things are done in a company. That is management's responsibility
under the leadership of the CEO. And management's actions will
clearly have a huge impact on the culture of the company. Management
defines the strategy of the company and the detailed action
plans; management hires and terminates certain kinds of people,
writes the policies, and sets (either consciously or unconsciously)
the leadership styles used in the company; management decides
who to reward and punish; and management is responsible for
many other culture setting aspects of the firm.
So then, does a progressive Board just say "We can't
get involved in this corporate culture stuff; we don't have
the time, nor the mandate to do so; we have to leave that to
management"? The Center for Corporate Change believes that
position will become increasingly untenable for a progressive
Board wishing to be successful in the 21st century. Witness
the Enron Board with impeccable credentials in most areas, but
woefully unaware of what was really happening on the trading
floors and in the company operations. That Board presided over
one of the most massive corporate implosions in history. Will
any responsible director now assert that we have to leave those
issues exclusively to management?
Most directors probably serve much longer tenures than the
average CEO. Most CEO tenures are probably 4-6 years, and culture
change in larger companies can really take hold and be sustainable
over longer periods.
For a Board to leave culture to the CEO exclusively is to abdicate
a key responsibility.
The Center for Corporate Change believes effective Boards,
progressive Boards, the leading Boards of the 21st century can
have a profound impact on corporate culture in several critical
ways. None of these are completely effective in and of themselves.
Rather, they interact to set and sustain a corporate culture.
These critical influencing factors are:
- Setting the "tone at the top" for the culture
of the Board itself.
- More broadly defining the Purpose of the company, i.e.,
whom it serves.
- Defining the desired Values by which the company should
- Setting the strategic Goals to be achieved.
- Carefully considering the Values and corporate culture
beliefs of the CEO to be hired.
- Monitoring the activities inside the company to ensure
the results are being achieved in accordance with the defined
Purpose and Values.
The progressive Board needs to start with its own Boardroom
culture. Frequently this is done through a proactive Governance
or Executive Committee. Are communications open and respectful?
Is proper independence being honored? Are periodic evaluations
of Board and individual directors being conducted? Are independent
advisors available? Is access being provided to key stakeholders?
Are agenda topics collaboratively set? Is sufficient preparation
time and information provided for meaningful discussion? Are
directors willing to be a "voice of one" when in disagreement?
A good Board culture will evolve from these and other progressive
governance practices. That good Board culture will then cascade
down the whole company.
Directors at the progressive Board should consider and define
the company's reason for being. Whom does the company serve?
The summary choices are (1) to serve the shareholders by maximizing
their value over the long run, or (2) to create value for all
stakeholders. The former way treats other stakeholders as "means"
to the "end" of shareholder value. (Immanuel Kant
would frown at that approach.) The latter way acknowledges the
legal, moral, and fiduciary responsibility the company has to
all stakeholders, as does the famous Johnson & Johnson Credo,
attached. J&J has enjoyed over 100 years of double digit
sales and earnings growth with this Credo and the philosophy
that came even before the Credo was written.
The Center for Corporate Change endorses this stakeholder
model and feels its acknowledgment by the progressive Board
in the company's Purpose will help set the culture of the company.
By defining the Values by which the company should operate in
collaboration with management, the progressive Board will greatly
influence the corporate culture. The Values embody the principles
by which people will treat each other both inside and outside
the company. Explicitly stated and scrupulously paid attention
to, these Values will influence who gets hired, promoted, recognized,
and separated from the company. No one will be perfect all the
time, but by empowering the organization to put peer
pressure on its members to operate by the defined Values, the
Board can have a profound impact on how results are achieved
in the company.
The Board must clearly set the intermediate key Goals that it
wishes the management of the company to achieve. Management
cannot set its own goals. By picking the few key Goals which
are to be achieved and which, presumably, would be rewarded,
the Board "puts its money where its mouth is." If
the Purpose and Values speak to lofty ideals involving customers,
and community, and employee associates, but the Goals (and associated
incentives) focus only on the year's earnings, then the culture
will drive toward an exclusively financial focus. So, Goals
for shareholders (i.e, earnings) and for other stakeholders
need to be set to properly influence the corporate culture.
One of the greatest influences a Board can have on the culture
of a company is through the CEO selection. This is true because
the CEO's leadership style and decisions on a day-to-day basis
will have a large impact on what people do. Over time, this
collective action of what people do will drive the culture.
A progressive Board in the 21st century will pay as much attention
to the demonstrated and documented Values by which an executive
operates and the culture which he or she seeks to foster as
to the results which they have achieved in their prior positions.
It is one thing to achieve excellent results; it is wholly another
thing to achieve them in ways that cut ethical corners, foster
undesirable practices, or which model unacceptable behavior.
For these reasons progressive companies are more and more
requiring that a company's internal performance and leadership
review systems incorporate some measures of an executive's practices
in this area of Values and management practices. When noble
Values are espoused and codified on the wall, but shabby executive
behavior is condoned or overlooked, the message sent to the
firm's employees is unmistakable.
Finally, the progressive Board can greatly influence corporate
culture by monitoring how things are being done in the company.
Access to senior executives, other employees, key business partners,
important shareholders, and other stakeholders needs to be openly
provided . The literature is scarce on how progressive companies
are doing this today without undermining, second guessing, or
micro-managing the CEO and the management team. The Center for
Corporate Change is researching this subject and will be providing
suggestions to our associates about how to build this capability
into a progressive Board.
Corporate culture is a strong driver of company performance.
The Center for Corporate Change believes that a progressive
Board ignores culture only at its own peril. Clear separation
between the management role and the Board role in setting corporate
culture is needed.
The Board's role is to define the culture desired with
management's collaboration. Then the Board's role as steward
is then to hire a CEO who will implement that culture and to
monitor selected activities to ensure that the desired
culture is being implemented by management.
Management's role is to offer collaborative input to
the Board on culture and then to implement that culture
as defined by the Board.
The Center for Corporate Changes welcomes thoughtful input
from interested parties on all aspects of our work to progressively
reform American business.