Boards Struggle With Culture Metrics

By Amanda Gerut

September 23, 2019

As boards grow increasingly aware of the importance of gauging and understanding company culture, directors are working with management teams to determine which data points can best unearth and root out culture problems before they can fester and thwart strategic initiatives.

Recent research published by Russell Reynolds Associates identifies at least 30 credible culture metrics that can be used in dashboards, such as hotline complaints, internal upward advancements, flagged pulse survey comments and exit interview summaries. However, boards — in collaboration with chief human resources officers and other senior executives — are digging deeper to determine which metrics will be the most meaningful to their specific companies. They are also pairing culture dashboards and reports with in-person observations by board members derived from visits to locations outside headquarters, investor day meetings and interaction with key employees.

Raj Gupta, lead director at Arconic and a board member at DuPont, says boards have to rely on management teams to set the right tone at the top and to monitor, investigate and implement appropriate outcomes for issues that arise. However, boards can use data and in-person oversight to validate management’s approach. That helps to close the loop with employees inside the company and investors and stakeholders outside the company to make sure compliance and misconduct issues are seen, reported and resolved, says Gupta, who is chairman of Aptiv plc and Avantor Inc.

“The board needs to reinforce that there are certain things that are just not acceptable, all the way from vice presidents to plant managers — even in countries where policies and practices might be overlooked. Sexual harassment exists in the Philippines, Japan, China and everywhere,” says Gupta. “But there is only one set of policies and one code of conduct.”

Anthony Goodman, managing director at Russell Reynolds and a co-author of the firm’s recent report, points out that investors, and in particular State Street Global Advisors, have focused on board oversight of culture. SSGA is often “two steps ahead” in terms of the issues the firm raises for board engagement focus, and more investors will likely follow suit in 2020.

SSGA sent letters to independent chairs and lead directors at all S&P 500 companies and other similar indexes in countries around the world in 2019, detailing its expanded focus on culture and the board’s role in overseeing it. In its latest stewardship report published this month, SSGA included culture and human capital management as a thematic area of focus that it will report on in 2020, which means boards should expect an influx of inquiries from SSGA and other investors asking for descriptions about the board’s approach to culture oversight.

“This is a softer topic that is harder to define, and there aren’t as many agreed-upon metrics that you can look at,” says Goodman. “Boards are hearing all these questions being asked of them and are, naturally, responding by saying, ‘OK, if I do want to go down this road, what do I do?’”

Goodman estimates that over the next 12 to 18 months, more oversight practices are likely to emerge as boards hash out the topic in committee and potentially full board meetings.

Data Points

Having a “clear line of sight” into employee satisfaction on a quarterly or monthly basis can help companies establish a culture baseline, says Stuart Levine, director of Broadridge Financial Solutions and the chair and CEO of strategy consulting firm Stuart Levine & Associates. Once the baseline is established, board members can use their judgment to ferret out cultural weaknesses or strengths in particular regions or business units, he says. Moreover, Levine says there’s a “critical linkage” between employee satisfaction and client satisfaction. For example, if employees feel productive, respected and engaged, client satisfaction figures should reflect that, he says.

“As a director, I see employee satisfaction and I see client satisfaction, and those two points lead me to some predictable financial performance,” says Levine. “If you have high turnover rates in your organization, you can bet that the cost of recruitment and the cost of loss of brand strength is going to impact your brand negatively and it will show up very rapidly in your financial results.”

He suggests that companies provide those data points to compensation committees on a regular basis and that the full board should consider the information in annual CEO performance reviews. Still, Levine, who has served on 10 boards, emphasizes that there isn’t a one-size-fits-all approach to finding data points that lead to cultural insights. Boards have to determine the most appropriate metrics for their companies and should consider which committee is best positioned to review the information.

In Gupta’s experience, audit committees generally receive quarterly reports on employee hotline tips regarding misconduct, financial irregularities, expense account violations and many other issues. The reports include high-level data, summaries of significant issues, the status of ongoing investigations and the outcome of reported issues, including warning letters issued, system changes, terminations or other actions.

If there are significant issues, the reports typically include more detail, he says, including the number of employee complaints about an issue — for instance, the profile and relevant data about employees who complained, how long it took for an issue to be resolved and the outcome.

Gupta notes that data on outcomes is critical in ensuring that employees understand that companies are holding themselves accountable for finding resolutions to issues and that they’re taken seriously. “Unless you have closure on these things, people think they are forgotten,” he says.

He suggests that companies provide more transparency to employees on issues, if possible. For example, when Gupta was CEO of chemicals manufacturing firm Rohm and Haas, the company’s monthly publication for employees included stats on the types of code of conduct violations at the company, the number of hotline complaints, the number of cases that emerged as a result of complaints and general information on the resolution of the issues that arose, he says.

Another critical piece in ensuring strategy is coupled with culture is clearly communicating with employees the reasons for a strategic initiative in a way that engages and encourages them, says Levine. “When we assess an organization, if we don’t see a strong embrace of strategic communication, you can sell short on that company,” says Levine.

Similarly, Gupta, who was previously chairman at Delphi Automotive, recalls that, when the company was split, there was a sense among senior and legacy employees that they were undervalued. After hearing those sentiments, the management team began a significant program for employee training and leadership to address the situation rather than “just letting it simmer,” says Gupta.

Boots on the Ground

Still, the data and presentations alone aren’t enough to sufficiently oversee culture, says Kathy Zwickert, a director on the board of tax-software company Avalara.

“You’re only halfway there if you have a dashboard with metrics,” she says. “You can use that as a first level to see some red flag data in the dashboard, but you need to get out there and talk to employees and management and walk around if you want to find out the truth.”

The metrics are often backward looking, she explains. For example, if a company has issues with absenteeism in a certain role or region or employees aren’t taking vacations, a pulse survey can help a company identify what might be underlying those issues. But at that point, Zwickert says, data only helps identify a problem.

Indeed, in-person insights are necessary to give context to the data boards get, yet they are often overlooked or fall by the wayside, says Zwickert. They’re also the piece that’s the easiest to correct, she says. Zwickert, a former senior HR executive, recalls that, when a new CEO was hired at one of the companies where she worked, he ended the board’s habit of holding meetings at Four Seasons hotels. Instead, he began holding board meetings at different company locations.

“He said, ‘No way. Come to headquarters and be here with employees. Have lunch in our cafeteria,’” she recalls. The board also held meetings at factories in China and other facilities. “He was a true believer in getting the board out there to see the environments we were operating in,” she says.

Levine suggests that boards, in collaboration and in cooperation with CEOs and general counsel, ask management to compile a list of the top 50 employees based on a set of criteria the board sets forth.

The CEO can then ask board members over the course of a year to have coffee with those on the list, says Levine. Those hour-long conversations can provide the board with indications about culture, the development of a diverse workforce, the need for additional training and development for employees and insights into succession planning, he says.

“That’s data driven, and it’s eyes and ears that can help the CEO — and I think the board — affirm that we are recruiting some really sharp people,” says Levine.

Outsiders

Gupta notes that, in his experience over time, significant violations occasionally come from employees and internal audit. But the most egregious issues involving bribery, fraud or side agreements come from those outside the company, such as suppliers, he says. It may be an issue in which a supplier thinks it’s not being paid enough or is trying to benefit from a transaction. Anonymous reports from outside can often prove the most crucial to internal auditors and to board audit committees. Ensuring that the company is collecting data through hotlines or surveys can also provide critical information about cultural norms.

“The hotline really ought to be promoted as something that is accessible easily to any of the stakeholders in the company,” says Gupta.

Indeed, he says one of the practices that isn’t common but has been helpful is when companies survey suppliers and investors — outsiders, generally — about how they perceive the company as a client and as an asset they’re invested in.

While surveys of employees are common and surveys of investors are becoming more common, Gupta says suppliers, investors and other stakeholders should be queried on what they hear or experience in terms of the practices of the company.

“These questions don’t get asked,” he says.