The board’s oversight role in corporate culture definition


Financier Worldwide Magazine

March 2019 Issue

If one thinks about some of the landmark corporate breakdowns in recent years, no matter how disparate the causes may be – whether it concerns a company besieged with negative publicity and allegations of accounting fraud, or certain institutions impacted by misappropriation of clients’ private data or policy failures in protecting such data in cyber space – the majority of cases had one thing in common: ultimately, all of the questions about these companies’ various failures consolidated in the marketplace into a singular question about the breakdown of these companies’ culture, ethics and corporate governance accountability. Investors invariably asked these companies: Where was the board oversight? How could the audit committee have missed the warning signs if the board had proper oversight of management and had ‘robust’ internal controls? What kind of corporate culture allows a path for, and even perversely incentivises, such bad behaviour to occur systematically? Franz Kafka wrote a paragraph-long story called ‘A Message from the Emperor’ about a dying emperor who whispers a secret message into a messenger’s ear which never gets delivered as the messenger gets lost in the labyrinthine courtyards of the palace for thousands of years. The response that the market received from these companies, whether through press releases, government hearings or investor engagements, might as well have been the non-message in Kafka’s tale that never arrived – ‘We are terribly sorry that this occurred, but though regrettable, this is a case of a few ‘bad apples’, not a failure of our corporate culture’.

In early 2019, the chief executives of both BlackRock and State Street Global Advisors published their annual letters to public companies. It has been some time now that the ‘Milton Friedman-esque’ imperative of shareholder value maximisation fell out of favour in recent public discourse. Both BlackRock’s and State Street’s letters not only reinforce this current trend, but go one further. The central thesis that serves as a forceful impetus behind BlackRock’s letter is the claim that corporate purpose is ‘inextricably linked’ to a company’s pursuit of profits and corporate strategy. State Street’s letter sounds a similar note, and explicitly calls out corporate culture as one of the ‘intangible value drivers’ that has an impact on how a company carries out its long-term corporate strategy. When we analyse the premise of these two letters, especially in the context of both BlackRock’s and State Street’s prior messaging and stewardship principles, two simple commonalities emerge. First, corporate purpose and culture are tied to the execution of corporate strategy, and second, the particular corporate leadership group directly accountable to shareholders in overseeing corporate strategy – and by extension, purpose and culture – are boards of directors.

One of the most readily visible symptoms of a board that may not have a proper oversight of corporate culture, insofar as corporate governance experts are concerned, is the observable presence of wider-than-expected information asymmetry between the board and management. Given that a board is not involved in the daily operations of a company, there will inevitably be natural asymmetric information between the board and management. There are reams of governance literature and peer-reviewed academic research pointing out this informational dissonance as a source of challenge for boards in overseeing corporate culture, but most of these articles, nevertheless, recommend a predictable suite of correctives, namely ‘zero tolerance’ compliance policies, improving internal audit hygiene and systematic oversight of reputational risk and so on. Of course, these are important matters for every company to address and improve. But if we assess the major cultural and ethical breakdowns in recent years that led to shareholder value destruction and the ignominious expulsion of board members and executives, we might note that these company boards did indeed maintain and oversee state-of-the-art charters and zero tolerance policies, and were comprised of expert luminaries who possessed requisite skill sets, managerial experience and acumen. Hindsight is 20/20, but one other thing that we might note, however, is that what most of these boards might not have done proactively, is ask management the kinds of difficult questions that could have ferreted out the red flags, provided, of course, that management was not deliberately obfuscating in these cases. Extrapolating further, we may ask ourselves two simple and reductive questions, to which there are equally simple answers: First, what kind of a board member would challenge the company executives with difficult questions? The answer is a director who is truly independent. And second, what kind of a director could be said to be truly independent-thinking, free from the management’s influence? The answer is a director who operates and thinks like an owner.

A board member who possesses this kind of an independent ownership mindset ‘buys into’ a company. This could literally mean a director who buys into the company’s stock with his own cash. This model of interest-alignment is, of course, commonplace in private equity, and there are public companies which encourage or incentivise their directors or employees to buy company shares with their own money. ‘Buying into’ may yet mean creating an ownership mindset in directors through a more programmatic and less pecuniary means, and State Street’s annual letter provides a framework by which a board of directors can effectively ‘own’ the corporate culture setting process. In a straightforward chart, State Street Asset Stewardship recommends each board and management first describe the corporate culture necessary to achieve their long-term strategic objectives, then through the cyclical and self-reinforcing process of identifying key drivers for perpetuating and promoting such a culture, and reporting the impacts of the company’s work in aligning culture with strategy, centrally involve the board in playing an integral part in overseeing and ‘owning’ this perpetual process of aligning corporate culture with strategy. Among all the correctives out there recommended to address the corporate culture issue, State Street’s approach seems to be not only practically implementable across all public company boards, but also uniquely commendable in that it is a process designed to instil in each board a sense of ownership mentality in setting the corporate culture.

Time will tell, but it is likely that there will be proxy voting implications in the board’s role in overseeing corporate culture in the not-too-distant future. But rather than using State Street’s framework as a defensive measure, each company board and management team would be wise to proactively assess how to customise such a framework to collectively set, oversee, and continuously refine the kind of corporate culture that is most complementary to their company’s long-term success.


Lyndon Park is managing director and head of ICR Governance Advisory Solutions. He can be contacted on +1 (646) 677 1831 or by email:

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Lyndon Park

ICR Governance Advisory Solutions

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