Corporate governance should drive organizational culture

(Mr Thomas Abraham, K&K Alumni and Partner E&Y)

Organizations are required to transact fairly with all stakeholders including its shareholders, creditors, customers, employees and regulators. Businesses are no longer viewed as providers of goods and services, but as organizations that have a vital role to play in solving humanity’s greatest challenges. Capital (including human capital) constantly shift from organizations that create value only for their shareholders to those that create value in the long term, across a broader group of stakeholders, including employees, consumers, society and shareholders. The history of corporate businesses is littered with organizations which have sought to deceive and profit in the short term, only to be destroyed by its own greed; ruining not only itself but also various stakeholders who have engaged with it. It has consistently been proven that organizations which have placed trust and fairness foremost in its dealings have prospered in the long run and created value for its stakeholders.

Underpinning trust and fairness are the entity’s corporate governance philosophy which sets the ethos and culture of the organization. While each member of the organization is responsible for embodying and reflecting the culture of the entity; the tone and direction is set by those charged with its governance; whether it is the Board of Directors, Trustees or even the Family Board depending on the form and legal structure of the organization.

The Board of Directors is the most common form of governance board, given the prevalent nature of the organization in the business world. In a complex world; it is important that this apex body of governance is staffed with the right level of competence; bringing together specialized knowledge and diversity to ensure that the organization is guided appropriately. It is even more important that Directors are people of integrity and ethics; with sufficient independence and authority to ensure that they do not function as a rubber stamp of powerful Chief Executive Officers. In several corporate scandals in the recent past; post-mortems have demonstrated that there was minimal understanding of the business by those tasked with its oversight.  Shareholder activist organizations and director trainings have sought to improve the general level of awareness of the Directors of their responsibilities. However, a review of director board compositions across several corporates still produces extensive examples of Directors who have been selected for their acquiescence rather than value to the entity.

In an age when the scale and breadth of information dissemination is instantaneous and global and when a tweet of 280 characters can destroy entities which have taken decades to be built; the importance of corporate governance and the cultural ethos of entities has never been more omnipotent and entities can only ignore this at their own peril. Stakeholders are now able to keep tabs on companies like never. Sustainability and ethical standing are as important as traditional measures of financial strength and market share; as factors that are indelibly tied into investment decision-making.

Regular reviews of the corporate governance framework and how the entity measures itself on the key principles of trust, transparency and accountability must be critically examined. Boards should constantly evaluate if they have ensured that they have effective oversight over the internal controls, performance measurement, accounting integrity and management of the external and internal risks on the organization. Directors should ensure incentive structures that encourage behaviors that fit in with the stated culture. Vital cultural metrics and insights should be collected, reported to and analyzed by the board. These should include various datapoints including social media, employee review sites, turnover rates and exit interview data.

Board members should continuously be questioning themselves on how:

  • The organization is generating and measuring long-term value for multiple stakeholders?
  • Are they re-evaluating executive remuneration to incentivize long-term value creation?
  • What opportunities are they overlooking to redefine the culture the business should aspire to?
  • Were they truly living their business’ culture and purpose? With hindsight what would they do differently?
  • Do they receive reporting on HR and cultural issues from the business? If yes, are they enough to facilitate strategic dialogues and decision-making?