#5 April 2019
Corporate culture and values. How can the board of directors set the tone?
by Professor Jordi Canals

A growing body of research highlights the importance of corporate culture and ethical values in developing companies for the long term. Senior managers understand that good values are an important source of trust and engagement among employees. They help shape behaviors and convey authenticity to shareholders and customers.

A key emerging question in corporate governance is the role of boards of directors in fostering a positive corporate culture. Key regulators such as the UK Financial Reporting Council and large asset managers, such as State Street or BlackRock, are asking boards to engage in assessing and monitoring corporate culture or purpose. Their intention is good, but if boards do not understand how corporate cultures emerge and develop, turning culture into one more area to be monitored with some KPIs is an initiative doomed to fail.

The experience in many companies highlights that a corporate culture has a great value when it helps engage people, fosters cooperation, places customers first, drives positive behavior across the organization and enhances values such as professionalism, integrity, transparency, accountability and trust. Over the past years there has been an explosion of statements about corporate culture and values that describe good intentions, but without real effect on the daily work of the employees. Many of them are void statements, words that mean nothing because organizations are led by senior managers who do not care much about them.

This observation has several implications. The first is that statements on culture and values that do not truly reflect the daily behavior of senior executives are completely useless. Moreover, they foster cynicism and tend to erode the firm’s reputation. The second is that a corporate culture is set by myriads of small decisions, not just a speech or a text written on the wall. Among those small decisions, leading by example is essential.
If corporate culture is so important, boards of directors need to take the lead in setting the tone of it. Unfortunately, some recent suggestions for boards, such as “assessing” or “monitoring” culture may be insufficient or, even worse, misleading. There are two areas where the board can have a great impact on corporate culture. The first is the personal example of board members. Their professionalism, integrity, service and positive example –including moderate executive compensation- set the tone for the culture of the company. Board members may destroy a corporate culture by taking small decisions in the wrong direction. Good example in those areas comes first. The second is to foster a culture of respect for each person, each customer, each shareholder and each stakeholder in any board discussion. Too many decisions at the board level are made taking into account only financial considerations. It is time for boards to think about the qualitative dimensions in board decision-making and consider the impact of their decisions on corporate culture and reputation. 

Professor Jordi Canals
IESE Center for Corporate Governance

Corporate Governance News

In Case You're Interested...

Unleashing the Power of Purpose

This article co-authored by IESE’s Prof. John Almandoz reveals five practical steps for putting purpose into practice, achieving higher levels of motivation, commitment, engagement and fulfillment in your company in the process… read more

IESE's Recent Publications on Corporate Governance 

Creating Common Ground: A Communicative Action Model of Dialogue in Shareholder Engagement

Refereed article (November 2018)

This article contributes to the literature on shareholder engagement by integrating communicative and strategic action, thereby offering a new interpretation of how reputational threat and dialogue come together to create common ground between activists and companies… read more

The Effect of Enforcement Transparency: Evidence from SEC Comment-Letter Reviews

Working Paper (March 2019)

This paper studies the effect of the public disclosure of the Securities and Exchange Commission (SEC) comment-letter reviews (CLs) on firms’ financial reporting… read more

Common Ownership, Market Power, and Innovation

Working paper (January 2019)

This paper examines the effects of overlapping ownership on market power when there are external effects across firms… read more

Upcoming Events & Programs

Executive Program: “Value Creation Through Effective Boards”

IESE Barcelona campus, May 20-23, 2019

A New Role for Boards of Directors in an Age of Transparency and Investors’ Activism

Prof. Jordi Canals and founding partner of Wachtell, Lipton, Rosen & Katz Martin Lipton will discuss how boards of directors should innovate to adapt to the business climate of today.

IESE New York City campus, April 10, 2019

What does it mean to lead a multi-stakeholder company? The case of Unilever

Prof. Jordi Canals and fomer CEO of Unilever Paul Polman will discuss the introduction of a multi-stakeholder company approach at Unilever and its implications on the company’s culture, strategy and organization.

IESE Barcelona campus, April 26, 2019

A Way to Learn. A Mark to Make. A World to Change
Barcelona    |     Madrid     |     New York     |     Munich     |     Sao Paulo