The Board, CEO Misconduct, and Corporate Culture

Laurie Hays is Managing Director for Special Situations at Edelman. This post is based on an Edelman memorandum by Ms. Hays.

More than 400 business executives and employees including prominent CEOs have been accused of misconduct including sexual harassment in the last 18 months. In many instances, the resulting crises have fallen squarely in the lap of boards of directors. Clearly, it is time for boards to play a more active role overseeing corporate culture and conduct.

Investors increasingly view corporate culture as a risk factor. A new survey by Edelman finds that investors recognize the impact of a healthy culture and engaged employees on corporate performance. Nearly two-in-three investors surveyed believe maintaining a healthy company culture and enforcing a corporate code of conduct at all levels of the company impact their trust significantly in that company.

And an online poll by the National Association of Directors (NACD) revealed that almost half of directors said their board’s tendency to focus on known risks—those management already has identified—creates a major barrier to the board’s ability to oversee disruptive risks. Less than 20 percent expressed confidence in management’s ability to address such disruptive risks.

CEOs own company culture, to be sure. Case in point: When Lou Gerstner took over IBM in 1993, he sought to inject new thinking into the staid workforce. He sported blue rather than white dress shirts and growled at long presentations. Jerry York, his irascible CFO, used the F-word a lot. Almost overnight, IBMers discarded their white shirts and their use of transparencies (pre-PowerPoint). Several of their wives wondered why they started using profanity.

In this age of #MeToo, the stakes are higher than shirt colors and the F-word. Directors have every reason to worry about whether they are asking the right questions about culture and getting the full picture. “Boards need to be very clear about what they want to know,” maintains Margaret (Peggy) Foran, Prudential Financial’s chief governance officer and an advisor to several boards.

She says management increasingly must be held accountable for issues of corporate culture, whether it’s sexual harassment accusations, turnover rates, exit interview themes from departing employees and the like.

For part of her edification, Ms. Foran looks at Glassdoor, the website where current and former employees anonymously review companies and their management. There, she gets an unedited view of the middle ground and sees what types of complaints make their way online.

For most boards, asking a CEO whether they or other senior management have any conduct vulnerabilities proves uncomfortable. Hiring a private eye to spy on the C-suite doesn’t seem appropriate. Plus, loyal board members tapped by the CEO or friends on the board aren’t apt to identify problems. And many directors distracted by day jobs don’t have time do the work.

Certainly, some companies manage to figure out what’s going on without the media telling them. A recent example: Intel dismissed CEO Brian Krzanich after a probe into a relationship with an employee with the curt explanation that he violated the company code of conduct, and very little media attention has emerged since.

Other situations play out in the media because executives, including directors, don’t pay enough attention or take complaints and accusations seriously enough. A corporate press release that contends a company is seriously looking into a situation has to demonstrate action or the situation won’t be credible to employees, shareholders or customers.

Here are 10 best practices that can be embedded into a company playbook for turning the #MeToo moment into constructive reform before it turns into a major governance crisis for the board:

  1. Insert into the CEO’s performance and compensation metrics the need to cultivate a healthy, diverse culture where employees feel respected and real opportunities exist for promotion irrespective of gender or race. A summary at year-end of progress on the culture front should be included in the annual report for investors. It’s not personal, it’s mission-critical.
  2. Expect the board’s risk or audit committee to oversee culture just as it would oversee cybersecurity. The committee can receive quarterly reports on behavioral misconduct issues, pay and review promotions, and separation agreements with particular attention to “boy’s club” patterns. Also important: Diverse membership on the board’s risk committee.
  3. Establish a culture ombudsperson who reports to the board with a dotted line to help oversee Human Resources. As a credible resource for employees, many HR departments have been seriously damaged by #MeToo revelations because they didn’t act unless the CEO was on board. The ombudsman can receive complaints if victims are too afraid to talk to HR or management.
  4. Retain third-party experts to conduct regular and anonymous “climate” surveys that seek to determine how employees feel they are being treated. Make the survey results available internally and discuss them. If allegations arise, the outside parties should investigate them and report back to the board. Listen for any “rumor” mill because often where there’s fire, there’s smoke.
  5. Mandate in-person training for all employees on respectful conduct at work and decide how management will address issues that surface in the climate survey. Incorporate bystander training/peer feedback to thwart offensive behaviors. Bystander reporting can help directors grasp the extent of an issue, especially given what often is significant underreporting by victims.
  6. Provide directors, managers and the workforce with training into unconscious biases in the workplace—those learned stereotypes that are unintentional, deeply engrained and able to sway behavior—to address behavioral misconduct and to adjust their own lens.
  7. Employ strategic employee communications that don’t dance around the facts and that make clear management actually is addressing a situation seriously. Explain in detail how complaints are handled, including protections for victims and complainants, the range of disciplinary actions that can be taken and why outcomes generally are kept confidential.
  8. Provide confidential counseling services to employees who believe they can’t perform at their best because of what they are experiencing directly or observing around them.
  9. Listen carefully and consider outside help if the organization lacks women and/or minorities in senior management. While executive coaching is often provided for women and minorities to help them advance, coaching of white men and managers as well as a genuine desire to determine where star talent lies are even more essential for change to happen.
  10. Deeply implant the realization that a respectful workplace is the best step toward organizational success. If this is hard to appreciate, pretend a whistleblower has brought to the board’s attention the theft of millions of dollars from company coffers. That’s how much losing talented employees will cost in today’s tight labor market and fierce war for talent if such promising employees depart because they can’t bear to come to work or they file lawsuits for alleged discrimination, harassment or misconduct.

#MeToo is not vanishing. So, if boards don’t take heed, that reputation-damaging news article about a company’s or executive’s claimed misconduct could land in your inbox any day.

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