The Role of Boards in Aligning Corporate Strategy and Culture

Organizations have traditionally devoted considerable time and effort to developing sophisticated strategies to capitalize on market opportunities and mitigate market risk, but many have tended to pay less attention to the organization’s culture, which can be difficult to measure and manage and was often left to evolve on its own.

Today, there is a renewed recognition of the importance of culture in driving strategy and the board’s role in aligning strategy with an organization’s culture. A recent study published by the U.K. Financial Reporting Council concluded that, “The strategy to achieve a company’s purpose should reflect the values and culture of the company and should not be developed in isolation. Boards should oversee both.”*

Culture can be thought of as “the way we do things here” and influences people’s day-to-day behavior.  Culture includes the values and shared beliefs at a deeper and often unconscious level and the behaviors, artifacts and reward systems as some the most visible manifestations of culture. It has a pervasive impact on the organization because it defines the way employees serve customers and interact with each other, and the way they and the organization respond to challenges. And all of that impacts performance and shareholder value, and the consequences of misaligned strategy and behavior can affect all aspects of the organization.

Interestingly, just 19% of CEOs and human resource leaders who responded to Deloitte’s 2016 Human Capital Trends survey indicated their organizations had the “right culture,” and more than half noted that their companies were attempting to change the culture in response to shifting talent markets and increased competition. Only 28% of respondents indicated they truly understood their culture, although 87% believed that “culture is a potential competitive advantage.”

Driving Culture from the Top

Because culture has such a pervasive impact, the cultural tone of the organization needs to be set from the top; if it isn’t, a strong culture aligned with the organization’s objectives won’t evolve on its own. Setting the tone entails establishing a model for the behavior expected of all employees. Leaders must also be aware of the way culture cascades throughout the organization. A well-intentioned tone at the top will become disrupted if an employee’s immediate supervisor sets a different example and rewards different priorities.

Organizations also need to understand how performance incentives influence culture. A misalignment between culture and strategy may not only reduce the organization’s ability to achieve its strategic objectives, but derail the strategy altogether and significantly damage the organization’s reputation. For example, misaligned incentives were a primary factor behind the unethical behavior demonstrated during the 2008 financial crisis and are often cited for influencing corporate failures.

It’s important for leaders to understand the culture of their organization and its strategic limitations. For example, most talent surveys measure employees’ engagement and how they feel about “the way things work,” but they don’t identify the underlying reasons that drive those evaluations. To assess culture and determine whether it enables or hinders the underlying strategy, organizations need to go beyond the climate or engagement measures to really understand the underlying values and shared beliefs that have been developed as the right way to do things in the organization through a shared history of successes and failures. The organization should start with a culture diagnostic to set the base line of the type of culture that the organization currently has and the level of cultural consistency across functions and business units. Additionally, it should run periodic business case simulations to see how people react to different circumstances, such as the stress involved in meeting performance measures, pressure from a colleague to participate in unethical activities, opportunities to circumvent controls or the need to reassure unhappy customers. Sessions like these can help identify potentially risky behaviors that need to be addressed.

Finally, despite an increasing awareness of the importance of culture, few organizations discuss it in their annual reports. As organizations gain a deeper awareness of the power of corporate culture to help or hinder strategic and financial objectives, they may want to consider the benefits of greater disclosure.

Questions for Directors to Ask

Boards can ask a number of questions to understand and help address an organization’s culture issues:

—How well do executives understand the culture of the organization? Have they tried to measure it and, if so, does the organization track progress to see how the culture may be changing over time?

—What are employees and others saying about the organization on social media and elsewhere? How well does that match the organization’s understanding of what it represents and values?

—If the organization has undertaken a major merger or acquisition, does it understand the impact on culture? What is management doing to prevent the organization’s culture from being adversely affected?

—Is culture considered in how the organization evaluates and rewards the CEO? Do leadership succession strategies include culture and ethics as criteria when selecting a CEO?

—Does management understand the impact the organization’s culture has on its employment brand and ability to attract, hire and retain top talent?

—Does the organization clearly understand the specific behaviors it’s promoting through performance evaluations and rewards?

—Does the organization understand and track how those incentives may influence how its people interact with customers and suppliers?

—Is the organization at risk of encouraging unethical behavior by setting objectives that are too aggressive and short-sighted?

Millennials and Culture

Culture is particularly important to today’s workforce. The Millennial generation places considerable value on work/life balance, the organization’s purpose, and whether the company is aligned with their personal values and ideas. With the advent of social media, an organization’s culture is no longer confined by its own four walls. Today, Millennials discuss their employers, rate their CEOs and talk to each other online about their work experience. If the employee proposition is inconsistent with what people are saying about it online, that discrepancy will be exposed quickly.

Recent research by Deloitte has identified measures of culture that are valued by Millennials as well as others, as detailed in the following:

—Collective focus: How much does the organization emphasize collaboration and teaming over individual initiative?

—Risk and governance: How important is compliance, and how much structure is provided with respect to behavior? In some organizations, this is a continuum where levels of structure differ from one business unit to another.

—External orientation: How much energy is put into serving customers and dealing with the outside environment compared to the time and effort spent on internal dynamics?

—Change and innovation: How important is it for the organization to pursue new directions and opportunities?

—Courage: Do people have the courage to confront ethical dilemmas or failures?

—Inclusion: How accepting is the organization of people with different ideas and backgrounds?

—Commitment: Is it clear what´s driving the current level of employee commitment and engagement?

—Shared beliefs: What specific values and shared beliefs are important to the organization? Are people proud and do they feel ownership about the “right” values, those that the organization really wants to be accountable for?

An organization’s culture cannot change overnight. As the Millennials become the largest demographic group in most organizations, however, their new perspectives and values provide management and boards with an opportunity to refresh their organization’s culture.