Cultural Risks Panel

Cultural Risks: SVDX & Rock Center

Cultural Risks: As Advertised

Cultural risks were the topic of a recent Rock Center / SVDX event.

The spotlight often shines on cultural risks only after an organizational crisis or incident. But forward-looking leaders are shifting to a proactive approach to cultural risk management. Macro business issues—cost and regulatory pressures, digital disruption, cyber threats, talent shortages, and others—have clear cultural implications. Corrosive cultures can pose significant challenges, making the organization more vulnerable to a wide range of potential risks. So is assessing an organization’s culture the responsibility of the board? If so, how can they be a change agent? Where does the board’s role end and management’s begin? And finally, how can a board objectively examine its own culture?

It was a well-attended event that began at 7:30 a.m. and ended about 9:30 a.m. at Stanford Law with many of the usual directors, advisors, academics, and students in attendance brining excellent questions and additional points.

Cultural Risks: Panelists

Cultural Risks: My Notes

Below are my cryptic notes from this Rock Center / SVDX event. They operate under the Chatham House Rule, so no direct quotes and I may have omitted company specific examples.

Cultural risks and risky behavior can be costly. Reputations that took years to build can be destroyed in a few seconds. Survey employees and clients at least on annual basis to determine trends. [I would like to see shareholders added to that list.] Speaking up to protect brand and reputation; that is the 1st tool to avoid insider tereat. Tracking attributes and actions on day-to-day basis is advised. Monitored data can be discussed in a masked fashion but you should be able to drill down to discuss and course correct.

A 2nd tool should conduct risk assessments of groups. What group measures are not being meet. See pockets of bad behavior and cultural risks. You can then send targeted messages to those groups and/or require specific training. Pointed to a group, individuals often find such criticism less threatening.

Corporate culture needs to be strong. There’s a competitive advantage in the marketplace in seeking great talent. Values, behaviors, norms are important but focus should be much more around the how it is manifested. The higher leaders get, the more they need to listen harder because communication going up is typically filtered. Reinforcement is needed in how culture is manifested. Structuring the right incentives is critical. Be sure to get perspective from directors who have served on other boards. How are they doing it?

Public and private differences. Norms are different in Silicon Valley and Wall Street. Much depends on the stage of a business. The culture of pre-IPO companies will be substantially different from that of a mature company. Age and stage. How has cultural risk changed through CEO succession?

One idea was to sends out an email on the culture of the organization to all new employees. Six months later, ask new employees if we are living up to those core values. Similar when leaving… exit interviews can reveal a lot about cultural risk. Once a month, another executive sends a note on the good, bad, and ugly.

Ask employees to comment on people who have been most helpful once a year. Recognizing good behavior can be even more reinforcing than addressing bad behavior. A lot is baked into company culture DNA from the founder and early employees. Most do not pause to think about the culture they are building. Getting their first is at odds with pausing and thinking about culture. It can have a disproportionately positive impact if the conversation happens earlier.

Every company has a dominant culture. Good to be aware of what it is and how it is manifested. How is it lived and breathed? Values must be lived from the top down in the corporate hierarchy. Some companies are spending a lot of time on generational issues.

M&A transactions and cultural risks. Cultures around risk can be very different by company. Left alone with own sense of purpose can help avoid shock. It is hard to know what is going to be important to people. Manage the antibodies that try to kill the spirit of the company we are bringing in. What are you going to integrate and what are you going to let grow? Cultures often clash. Get to know the other company’s culture before the deal is sealed.

Overlooked fiduciary duty questions around how to make acquisition successful. Paying founders of acquired companies too much money to incentivize them staying can be a disincentive to others and can dry up capital better used for other purposes. Most would do better to shift more from retention packages to shareholders. Consideration needs to be fairly distributed. Leaders sometimes cast too large of a shadow.

Sometimes are avoided companies that have too much swagger. We have walked away from some deals because of cultural risks. Glassdoor, Linkedin, and other social media sites offer clues to company culture. Many metrics lag. One leading indicator is people leaving the company. Asked if matching compensation would keep them. If only half as many women would stay as men, you know there is another problem.

Performance reviews need a major revolution. How they are done (or not) is a good indicator of how the culture manifests itself. What are the processes, data point to see how culture is playing out? Do not ignore external sources. Succession planning is part of culture analysis. Look at how the data points interact.

Subcultures within a company can also vary. Sales can be very different than production or other functions. It is too easy to let slide the brilliant jerks. Continue to lean in on culture.

Weak culture vs strong cultures. Uber was strong, but not good.

Using culture during crisis… that’s when true culture emerges. Tension between sales and product. How those questions and interactions are resolved can be an early indicator. How is blame handled? How are board meetings handled? Are they totally scripted? If too scripted, the board may not have adequate breaks. The single best moment can be ensuring you have an executive session without the CEO.

Board environment. If directors insist #MeToo is not a problem, what is the evidence? It is important for board members to have opportunities to meet with senior management in informal ways. They need to demonstrate they are available for a “reach out.” If a company is looking only for people that fit the culture, likely result will be mediocre. To be innovative, we need a broader bell curve. Great organizations inspire. We do need to get rid of under performers.

CEO evaluation must include support of culture. Mature company boards are generally more independent. Startup boards are often made up mostly of investors with a more narrow focus. The half-life of director skill sets is getting shorter and shorter. Can companies dual track? You may need to develop a compelling digital strategy while simultaneously reinventing your core business. Genome to innovate is critical. Capital allocation must be mapped to overall strategy. It may be more of a challenge for brick and mortar to innovate than for digital but rewards could be even greater.

Companies need to be paying attention to employees with families stressed by special needs. That population is exploding. Creating environments where people feel like they belong is important. Too many managers and employees spend too much energy hiding characteristics often seen as problematic.

Boards need to be fit for the next phase of the company’s evolution. They need that before they can get there, so nominating and governance committees need to bring those diverse skills and experiences to table.

It is easier to ask board members not to stand for reelection than to quit. Having annual elections is important. At most companies it is good to add new members every couple of year. Therefore, an equal number must be stepping down. On the flip side, many board members take too long to get integrated into the board. If turnover happens too quickly, boards are less likely to challenge the CEO when appropriate.

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