When it comes to an organization prioritizing ethics and compliance as part of its corporate culture, it starts at the top with the board of directors. That is the focus of Activating Culture and Ethics from the Boardroom, our new report developed in partnership with Tapestry Networks, a professional services firm focused on boards’ key roles in corporate governance. The ACE report examines the impact that boardrooms have both on overall corporate culture and on building an ethical environment. Created from in-depth interviews with 40 directors at global public companies, the study is a window into the board of directors perspective on the intersection of culture, ethics, and compliance at their specific organizations. There are many unique insights about what culture means to boards and how it relates to E&C, but the report also reveals four key themes that resonated with each board member.
Which boardroom members contributed to the report and why it matters
To compile the report, LRN and Tapestry Networks conducted detailed interviews with 40 directors occupying 80 seats on public company boards with a combined market cap in excess of $4.8 trillion, operating on six continents. More than 25 industries were represented—including retail, banking, finance, pharmaceuticals, insurance, manufacturing, and entertainment. Some of the major corporations with board members participating included:
- Coca Cola
- John Deere
- Kaiser Foundation
- Union Pacific
- United Airlines
- Wells Fargo
Especially worth noting is that 25% of participants were either currently serving or had experience as chief ethics and compliance officers. This is the first report of its kind that provides the unique perspective of board members and how they perceive the way they shape ethical corporate cultures.
What does “culture” mean to a board of directors?
In a corporate setting, culture can be a broad concept with multiple meanings. It typically refers to a company's shared values. It can also extend to the accepted company-wide practices, norms, habits, language, and expectations.
The ACE report focused primarily on the ethical component of company culture, though directors acknowledged that the board should tie its culture to an overarching business strategy. Directors offered several shorthand definitions of corporate culture:
- "Culture is 'how we do things around here.' Not so much the rules and policies, but an informal collective understanding of how we do things."
- "I always think of culture as the way things get done at a particular company. It's the rules of engagement, it's authority, it's decision-making processes. It's the way things actually get accomplished in a company."
- "Culture is who you hire, who you fire, and the behaviors you tolerate."
- "It's about people doing the right things for the right reasons when no one's watching."
How does corporate culture relate to ethics and compliance?
The relationship between ethics, compliance, and corporate culture remains a tough road to navigate. It's readily apparent that ethics and compliance heavily influence culture, but how to manage oversight of that is where many boards differ.
Numerous board members interviewed for the report shared their point of view on the convergence of ethics, compliance, and culture:
- "Compliance is different than ethics and culture. The chief compliance officer can oftentimes focus on programmatic elements rather than culture, which is more about people. They are connected, but I wouldn't say that a compliance person would necessarily be your culture person."
- "Ethics and compliance has been a relatively well-trodden path for some time, with a lot of established best practices. Culture is a much less well-trodden path. Most boards seem to be just beginning to try and get a handle on it—how to define it, how to engage with management on it, and how to try to understand what exactly is going on at the company how you monitor and provide oversight for it."
- "Some companies struggle to provide good information about ethics and behavior policies or adequate regulatory processes and reporting."
4 key themes from the ACE report
The interviews conducted for the report revealed four key themes around the role of the board in shaping ethical corporate culture.
- Measurement. Board members understand the importance of creating an ethical culture, but at times doubt their ability to grow and measure it. Many directors shared the concern that they're not in a good position to interpret corporate culture. One contributor noted, "There are barometers you can read and statistics you can see, but I'm not sure you can measure culture without [also] feeling it." It's hard to identify trends, but that doesn't make it any less necessary and important for boards to encourage management to do so. Directors also feel that despite receiving data, they may not be seeing the patterns that reflect an ethical or cultural problem developing.
- Oversight. Another challenge for boards is developing a structure to support oversight of culture and ethics. Boards struggle to find an internal source of oversight for their company's culture, ethics, and compliance. Directors are in agreement that these topics are worthy of time and effort, but have trouble getting them onto packed board agendas. That said, it's crucial—and the responsibility of the board—for them to make time. One director for the study noted that, "There is nothing more important than giving the board enough time to address culture." “Culture oversight is less about positioning the board for culture, than positioning culture for the board,” said another director.
- Accountability. It is the responsibility of the board of directors to hold executives accountable for guiding the company's culture and reinforcing the importance of ethical compliance. The ACE report found that while all were in agreement about this need for accountability, directors varied in how they would approach it. "Boards have no reservations about holding top executives responsible for business performance, but they also need to be held accountable for the culture they're establishing," said one contributor. Some directors diverge in their opinions on how culture and ethics can be tied to compensation. Demographic makeup of the board can also impact how culture is prioritized.
- Trust. In order for employees to feel safe in reporting challenges related to ethics or compliance, there needs to be a bond of trust established between them and leadership—whether that leadership is management or a chain extending all the way to the boardroom. Many boards fail to measure areas such as trust, fear, and organizational justice, even though these can be measured. One director summarized it best: "I'd rather have a lot of speak-up calls than have employees not trust us and take complaints outside the company." Boards that don't prioritize trust place their company at significant risk. Many companies are turning to an emerging cadre of public board members with previous experience as chief ethics and compliance officers, relying on their expertise and experience dealing with cultural, ethical, and compliance-related issues.
The key takeaway
When it comes to corporate culture and ethical compliance, boardrooms understand that they must:
- Identify a way to measure them.
- Establish a structure to provide oversight.
- Hold people accountable for maintaining these ethical and cultural standards.
- Build trust with the entire organization, empowering everyone to speak up when they notice a problem.
You can explore more findings from this breakthrough study by downloading the ACE report. For more insight on how to instill ethics and compliance training that will inspire your employees and promote a better working environment for all, contact us today.