New study finds a disconnect when it comes to the rank-and-file level

Do directors have a good read on the culture at the organizations they oversee? Turns out, many do not.

Only 50% of directors say they understand “the collective behaviors, norms, and values at the front lines of their organizations, among their rank-and-file employees,” according to recently released research from the National Association of Corporate Directors.

The study also found that “less than half of directors reported that their boards assess the alignment between the company’s purpose and values and its strategy.”

That’s bad news if Corporate America is going to avoid cultural breakdowns that impact business, such as fake accounts at Wells Fargo, sexual harassment at Fox News and Amazon, and price gouging at EpiPen.

“Too often, culture is mistakenly dismissed as a soft issue,” says Helene Gayle, who co-chaired NACD’s Blue Ribbon Commission on Culture as a Corporate Asset.

“The fact is, it’s concrete and has real business impact, so as directors we need to bring more clarity and rigor to our discussions with management about culture,” explains Gayle, who is CEO of the McKinsey Social Initiative and director of The Coca-Cola Co. and Colgate-Palmolive. . “It’s time to move beyond an ad hoc or compliance-focused approach to one that is much more proactive, and based on the notion that culture is a core competitive asset.”

There was some positive news in the NACD findings. About 80% of directors surveyed said they understood the health of middle management’s culture, while nearly all directors polled said the same for the top leadership ranks.

The full NACD report, which will be published in late November, was conducted between mid-June and August. Respondents represented more than 520 boards.

The study’s authors outlined best practices for cultural oversight.

Here are their 10 recommendations:

• The board, the CEO, and senior management must establish clarity on the foundational elements of values and culture—where consistent behavior is expected across the entire organization, regardless of geography or operating unit—and develop concrete incentives, policies, and controls to support the desired culture.
• Directors and company leaders should take a forward-looking, proactive approach to culture oversight in order to achieve a level of discipline that is comparable to leading practices in the management and oversight of risk.
• Because of its significant interdependencies with strategy and risk, active monitoring of the organization’s culture is a full-board responsibility, with specific oversight activities housed in committees as appropriate. The nominating and governance committee should ensure that board policy documents and committee charters clearly delineate the allocation of such responsibilities and explain how culture oversight is embedded into the ongoing work of the board.
• Directors should review the culture of the whole board and its key committees on a regular basis, both formally (via the evaluation process) and informally (by making time for reflective conversation in executive sessions). The results of these reviews should inform board composition, succession planning—especially for leadership roles on the board—and continuous improvement efforts in board operating processes.
• Directors should assess whether the chief legal officer/general counsel and other officers in key risk-management, compliance, and internal-control roles are well positioned within management and in relationship to the board to support an appropriate culture.
• Culture should be integrated into the board’s ongoing discussions with management about strategy, risk, and performance. How results are achieved is as important as whether or not a given goal is met.
• Boards should set the expectation with management that regular assessments of culture will include both qualitative and quantitative information and incorporate data from sources outside the organization.
• Directors should make culture an explicit criterion in the selection and evaluation of the CEO, and set the expectation that the CEO and senior leaders do the same in their own leadership development and succession-planning activities.
• Boards and compensation committees should review the company’s recognition and reward systems (including incentive compensation as well as promotion decisions and other nonfinancial rewards) to ensure that they reinforce the desired culture and avoid unintended outcomes that could undermine culture.
• Shareholder communications should include a description of how the board carries out its responsibility for overseeing and actively monitoring the company’s culture.

For more details on the recommendation, you can see the full report here.