Hot Topics: Navigating the Board’s Role in Establishing Corporate Culture

Copyright © 2010 Deloitte Development LLC. All rights reserved. Hot Topics—May 2010 • 1

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A strong and positive corporate culture is a critical element in an organization’s ability to succeed in today’s business environment. The foundation of corporate culture is the set of values that drive actions; therefore, the basic understanding of a culture should begin with its ethical foundation. But culture goes well beyond an organization’s ethics and compliance programs. For example, culture affects a company’s ability to attract and retain employees and customers. A well-defined and robust culture has quickly become an imperative for sustained business success.

The meaning and significance of corporate culture and the role of the board in establishing and managing it were discussed in a recent Dbriefs webcast titled “Corporate Culture: The Foundation Starts at the Top.” More than 2,000 financial executives and directors from a variety of industries participated in the session, which was moderated by Ray L. Lewis, managing partner of Deloitte’s U.S. Center for Corporate Governance. Speakers included Todd G. Hartman, associate general counsel and chief compliance officer at Best Buy, and Timothy T. Lupfer, director at Deloitte Consulting LLP.

During the webcast, corporate culture was defined as “the set of enduring and underlying beliefs and assumptions within the organization that influence how things actually get done.” While this concept may seem fairly straightforward, one of the most significant challenges for organizational leaders, as evidenced by the accompanying table, is thoroughly understanding their company’s unique culture and the various factors that influence it. Hartman said that this task becomes even more daunting when there are multiple global business locations, or when trying to ensure that the culture of the organization’s corporate office has relevance with its numerous retail outlets, as is the case at Best Buy.

Understanding and influencing corporate culture is one of the board’s core responsibilities. Hartman offered the following key actions that boards can take to influence culture:

• Accurately assess the existing culture and subcultures. Often, the biggest obstacle to success is an incomplete or overly optimistic view of the existing culture. Leaders must strive to understand the existing culture, for better or worse. This can be accomplished through the use of surveys and general observation.
• Take actions to reinforce or to modify the existing culture(s), including considerations for unintended consequences. Because of the visibility and symbolism of its actions, the board can significantly influence the way business is conducted in their organization. For example, in its oversight role, the board can collaborate with management to build and sustain the desired culture over time by clearly defining and communicating the organization’s values to both internal and external stakeholders.
• Emphasize leadership behavior and dialogue that rewards the open discussion of compliance and ethics issues. It is critical for the board to facilitate an environment of candid and honest communication across all levels of the organization, without fear of retaliation.

Lupfer elaborated on these suggestions by providing key questions that boards can consider in monitoring and assessing the organization’s ethical culture:

1. Do the members of the organization grasp that ethical behavior often leads to positive business results?
2. Are the principles for ethical conduct—not just the rules—well expressed and communicated, such as through a code of conduct?
3. Are there effective processes in place to support ethical behavior (e.g., a helpline)?
4. Do leaders reflect and embody the values of the organization? If the leaders’ actions are not consistent with the organization’s values, what are the consequences?

How do you currently assess your organization’s ethical culture?*
Very rigorously and deliberately 33%
We focus on a few specific items 27%
We only make general observations 17%
We don’t expend any energy on this area 7%
Don’t know/Not applicable 16%

The basic values of an organization comprise its ethical foundation—the bedrock of organizational culture. This is the best place to begin to understand the existing culture, and to develop actions to reinforce the desired culture. While culture can be a difficult concept to understand, let alone measure, it can make the difference between success and failure. Therefore, overseeing, assessing, and influencing culture should be strong priorities for the board.

The following resources regarding the role of management and the board in managing corporate culture are available on the Center for Corporate Governance Web site: Managing the Bad Apples and Protecting the Barrel and Questions That Boards Should Consider Asking Regarding Ethics and Compliance Programs.

As used in this document, “Deloitte” means Deloitte LLP and its subsidiaries. Please see www.deloitte.com/us/about for a detailed description of the legal structure of Deloitte LLP and its subsidiaries.

Hot Topics articles are featured in each issue of Corporate Governance Monthly, a newsletter with the latest information for boards of directors and their committees from the Center for Corporate Governance website (www.corpgov.deloitte.com).

* Source: Deloitte Dbriefs webcast, “Corporate Culture: The Foundation Starts at the Top.” May 5, 2010. 2,026 participants.