I recently had the chance to visit with Rakhi Kumar, Senior Managing Director, Head of ESG Investments and Asset Stewardship, at State Street Global Advisors (SSGA). We discussed the firm’s recent initiative around corporate culture and Board of Director engagement on this issue. Today, I will post the first of a two-part series based on this interview and SSGA’s recent letter (Letter) from its President and Chief Executive Officer (CEO), Cyrus Taraporevala, in which he called upon corporate Boards to place a greater emphasis on corporate culture, which SSGA says is a top asset stewardship engagement priority for the asset manager in 2019. But more than simply laying out the problem around Board’s assessing and monitoring corporate culture, SSGA laid out a framework for Boards to do so. In Part I, we consider the issue of corporate culture and the Board’s role in oversight. In Part II, we discuss the SSGA framework for doing so.
As an investment advisor SSGA sees the long-term investment value of an entity focusing on its culture. It is this focus on long-term investment values which has driven SSGA to engage the investment community around effective, independent Board leadership; Board quality, including cognitive diversity enhanced by better gender diversity; and environmental sustainability. The firm also values transparency in its asset stewardship practice. All of this has led SSGA to focus on corporate culture as “one of the many, growing intangible value drivers that affect a company’s ability to execute its long-term strategy.”
I find this to be significant because it is a different focus than having Board oversight as a mechanism to prevent negative reputational damage. SSGA sees Board oversight of culture as a way to foster long-term growth and enhance long-term investment. This is similar to my views of compliance, which, when properly operationalized in an effective compliance program, will make businesses run more efficiently and in the long run more profitably.
Obviously, culture is important with the well-worn phrase that culture eats strategy for breakfast. Yet as SSGA notes, a recent Ernst Young (EY) study found that “intangible assets such as culture average 52% of an organization’s market value”. Unfortunately, and even troubling, is that SSGA has found that “few directors can adequately articulate their company’s culture or demonstrate how they assess, monitor and influence change when necessary.” Moreover, many Boards do not even attempt to ensure alignment of corporate culture and corporate strategy.
Kumar defined corporate culture as encompassing “a broad range of shared attitudes shaping the behaviors of individuals as a group across an organization. It allows employees to identify with their organization and differentiates companies from competitors. It is closely associated with human capital management.” To enhance culture there must be effective leadership from, and incentive to, senior management, yet the Board must engage in appropriate oversight.
Obviously, regulators are interested in the involvement of the Board. Kumar noted, “In June 2018, the UK Financial Reporting Council affirmed the importance of culture by formalizing the Board’s role in aligning corporate culture with the company’s purpose, values and strategy in the revised UK Corporate Governance Code. Boards in the UK are now expected to assess and monitor culture and seek assurance that management has taken corrective action to fix any misalignment.” US regulators such as the Securities and Exchange Commission (SEC) and prosecutors at the Department of Justice (DOJ) are also interested in Board oversight (or lack thereof) in matters as diverse as the Wells Fargo fraudulent accounts scandal to corruption under the Foreign Corrupt Practices Act (FCPA).
Based on all of these, Kumar said that SSGA will focus on corporate culture “as a priority engagement in 2019”. SSGA will focus on three key areas: (1) educate Boards on the need for both involvement and oversight of corporate culture; (2) provide a framework for Board’s “to evaluate the alignment of corporate culture with its long-term strategy and for directors to guide senior management in its implementation”; and (3) suggest best practices related to culture that SSGA has identified. By following these three general prescripts a company can have something in place if the regulators come knocking.
From the business perspective, focusing on corporate culture can be important during times of not only crisis but strategic change. These include mergers and acquisitions (M&A) or strategic turnarounds. Kumar noted, “The lack of focus on culture can delay or even derail important strategic objectives and pose unanticipated challenges for management. For example, potential employee turnover and operational impacts associated with changing corporate culture can lead to challenges for management teams trying to implement strategic changes. Even in relatively stable times, culture can shift and fall out of line with strategy undetected if it is not actively monitored.”
Kumar recognized that changing corporate culture does not come easily or quickly. This is why SSGA sees this initiative as a multi-year project. She acknowledged that the results of Board efforts may be “difficult to monitor” but this is why Boards must “proactively consider culture in the context of strategy. SSGA has laid out four areas of inquiry which Boards can use to monitor and assess their progress in aligning their culture with long-term corporate strategy. They include: (1) Can the directors articulate current corporate culture? (2) What does the Board value about the current culture, strengths and weaknesses? (3) How is senior management both influencing and effecting change in the organization’s culture? (4) How is the Board monitoring the progress?”
The Letter ended by stating, “Ultimately, better understanding how businesses across the globe are aligning corporate culture with strategy will improve how we analyze our portfolio companies in the years ahead. We believe that at a time of historic disruption, increased focus on corporate culture and how it supports strategy is essential to sustainable, long-term value creation. That is good for investors, good for the quality of the indices on which so many investment portfolios are based, and good for our shared prosperity.” This view aligns with compliance and ethics being seen as assets to improve corporate culture. When businesses see the value of using the techniques to increase efficiency and enhance profitability and not simply as a legal prophylactic, it will certainly be a step forward.
Tomorrow I conclude with the SSGA framework for assessing and monitoring corporate culture.
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