FEI Daily spoke with Paula Loop, Leader of the PwC Governance Insights Center, about the evolving boardroom and why, when evaluating corporate culture, going with your gut may not be enough.
FEI Daily: The report points out that a company’s culture can be hard to judge, especially for directors who may only be at the company a handful of times a year for board meetings. In your experience, do you think most directors have a good understanding of the culture or are they out of touch?
Paula Loop: We're finding a lot of directors being very engaged in the process. Now, I don't know that they would all say they have it completely right at this point, but I think that they are definitely paying attention, and they're working through it. But working through it can have a different definition depending on which company that you're at.
I also think that culture is becoming a bigger topic with investors, for the very same reason. Investors are talking to company personnel about this, the executive team. But I do think at some point they're going to expand that and want directors to weigh in. Which will, again, bring even more attention to the topic.
FEI Daily: Of the tactics board members mentioned in the report– which do you think are most effective for gauging company culture?
Loop: You need a combination of quantitative and qualitative metrics. Boards previously were relying quite a bit on gut feel, and I think now, given the spotlight on the issue and also the data available to companies and to boards if they ask for it, it provides an opportunity for boards to get a lot more metrics than they had in the past. It's going to be company-specific on what metrics are important. If you're a consumer-facing company, you might want to focus on insights from the employees, but also insights from your consumers.
If you're not a consumer-facing company, maybe more of a business to business type company, you might put a little bit more emphasis on hearing things from employees. Looking at exit interview debriefs and that sort of thing. You have to sit back and think about what's important to our business, what would be the best indicators? And I don't think there's one right answer for every company, but I think what boards are trying to do is develop some kind of dashboard of information that they can start to get on a regular basis that would highlight any themes or trends that they should know about.
FEI Daily: A significant majority (87 percent) agree that an inappropriate tone set by the executive team contributes to problems with corporate culture. But 79 percent say that the tone set by middle management is a contributor. I would think that boards would have more visibility into the executive team – are problems with middle management harder to address?
Loop: Absolutely. I think it's just more highly dependent on the CEO and thinking that the CEO really was the one that set the tone. Now they're obviously relying heavily on the executive team, and to your point, that's who they interact with. But I think what this insight is telling us about middle management is that it's really important the way the executive team communicates to the rest of the organization. And what's filtering down from the executive team to that middle management group. And we even talk about the mood in the middle and the buzz at the bottom. What we're all realizing is it takes all hands on deck to either get something done correctly, or potentially not get something done correctly, all hands play a role. You really need the messaging that comes from the top to filter down successfully, otherwise you have a problem. What directors are telling us, is that, yes, the CEO, the executive team, they play a significant role, but if they're not good at communication, you could still have a huge problem in an organization.
Not only are they not communicating correctly, but doing other things that wouldn’t set the right tone. It could be compensation. It could be a heavy emphasis on short-term results.
FEI Daily: Only 17 percent said their company has revised its compensation plans, even though two-thirds of directors agree that compensation plans driving bad behavior contributes to problems with culture. What are the specific ways compensation plans can negatively affect culture?
Loop: If you get rewarded for something… You may be doing something, or confused about how to do something because you're seeing this big reward that's sitting out there for you. So you want to be very careful about what kinds of things you reward, and making sure that those rewards don't drive bad behavior. We've seen that in some of the corporate scandals over the last couple of years. And I think that's an important topic for companies, and obviously directors have honed in on this as well.
I think the bigger issue that you're seeing here is that it's a fine line; it's a balance to make sure you get that incentive appropriately done. You want employees to drive towards meeting the strategic goals but you want to make it appropriate, so that they don't do something that they shouldn't do in order to meet those goals. Companies are still reassessing and thinking about if they've got the right balance.
FEI Daily: Almost half of directors said their company does a fair or poor job of developing diverse executive talent and even fewer say the same about the company’s recruitment of a diverse workforce. What are the different ways that directors can influence companies to focus on workplace diversity?
Loop: We're starting to see more and more focus on the board's role in oversight of talent management in general. Making sure that the company is presenting to the board what they're doing around talent management, and that should include anything from succession planning, to diversity, highlighting certain types of diversity. What are you doing to think about development for certain individuals that you want to excel at the company? All those highlights and a talent management oversight should be portrayed to the board, and the board should be engaged in that process.
When we talked about the gender gap, female directors are more critical than male directors about how their companies have developed their workforce, and done things around executive level diversity and succession planning. So I think another thing ... And this also goes to the culture topic a bit as well. The more diversity that we're seeing, either in the executive team, but then again at the board level, you're going to see these questions coming up more and more.
We’re seeing much more acceptance generally around diversity at the board level. I think one of the areas that we need to do some work on is ethnic diversity. Gender diversity getting a lot of play, but ethnic diversity, another element. So, diversity does have a wider lens and we need to just keep that in mind.