6 Dec 2019

The whiplash pace of corporate governance evolution is hitting the world’s largest corporations. A recent case in point: the decision by the McDonald’s board to dismiss the company’s president and CEO, Steve Easterbrook, after he was found to have violated company policy by engaging in a consensual relationship with an employee.

As any board director knows, changing CEOs is highly disruptive, so the speed with which the McDonald’s board acted was impressive—three weeks from complaint to dismissal. Considering that Easterbrook was executing the board-approved strategic plan, including re-franchising 90 per cent of McDonald’s stores, it might have been defensible for directors to look the other way under strict corporate governance orthodoxy. After all, he was doing what they had asked and maximizing shareholder value.

But the orthodoxy is changing quickly. The board dismissed Easterbrook because he violated a policy they deemed integral to the company’s culture. In other words, the board recognized that their oversight responsibilities extended to company culture as well. This is not surprising considering that culture and strategy are two sides of the same coin: if strategy is what you are going to accomplish, then culture is how you are going to accomplish it.

Beyond its integration with strategic execution, though, corporate culture is also the bedrock of corporate reputation. The calculation is simple: good corporate culture equals a greater likelihood of a good reputation in the market and with your stakeholders.

It doesn’t take much to figure out the inverse to that calculation.

“Cultures drive (or stall) strategic execution and a good board should know when long-term strategy is being undermined by toxic behaviour. And it should know what to do in those cases.”

This is why board oversight of corporate culture is increasingly becoming a central tenet of good corporate governance. Directors can and should set expectations around the type of culture they believe should be lived by all employees, including by a profitable CEO. Cultures drive (or stall) strategic execution and a good board should know when long-term strategy is being undermined by toxic behaviour. And it should know what to do in those cases.

In The Culture Imperative, the ICD’s recently released guidance to Canadian boards on the oversight of culture, we recognize that the governance of corporate culture is an evolution not all directors will be comfortable with or understand. The transition from well-understood and traditional fiduciary duty to a broader mandate that includes how people behave at work is daunting, but it is also necessary.

The ICD’s guidance, shaped with input from some of Canada’s most experienced corporate directors, focuses on three specific areas where Canada’s boards need the most direction.

First, directors need to better understand the interdependence of culture and strategy. In the war for talent, younger and highly mobile workers want to be associated with organizations whose cultures reflect their personal values. An organization with a defined and transparent culture aligned to its strategy will face less resistance in fulfilling its objectives.

Second, boards need to better understand their organization’s current culture. To do so, directors should ask the same questions about culture across different levels of the organization—not just to senior management—and see if the answers they get are consistent. Importantly, boards should also understand how employees beyond management are compensated and incentivized in order to make sure the behaviours they want demonstrated align with the company’s strategy.

Finally, boards need consistent and fit-to-purpose ways of measuring their organization’s culture. Directors should have a clear line of sight to the culture metrics that senior management monitors (if any) and which ones are most meaningful. Boards can also monitor whistleblower hotlines and exit interview results, for example, and request a “culture dashboard” that includes absenteeism rates, turnover rates, net promotor scores, etc.

At McDonald’s, the board set the appropriate tone at the top in this instance. Not only did directors lay out clear expectations for employee behaviour—they also took strong action when an important policy was violated. The board’s response sent a clear message that the protection of the company’s culture was more important than one individual, even the CEO.

The McDonald’s board’s next—and even greater—test in the wake of Easterbrook’s firing will be to ensure that their desired culture can be reinforced across a retail network staffed by part-time workers. With increasing media scrutiny of the company, including allegations of sexual harassment within its franchises, this is no small task, but if the company intends to execute its long-term strategy, it is a challenge the board will have to meet.


Read the full article here.
This content was originally published by Ivey Business Journal. Original publishers retain all rights. It appears here for a limited time before automated archiving. By Ivey Business Journal

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