Center for
Issue #40
November 2022
Professor Jordi canals
The Influence of Culture in Corporate Governance
The role of culture, values and behaviors in corporate governance is on the rise. For the past two decades, the quality of boards of directors has been associated with structural board factors, such as the number of independent directors, the separation of the roles of the board chairperson and CEO, and the organization of board committees. These variables may be relevant, but do not guarantee per se better decision making and governance. In fact, in several major recent corporate governance crises, the boards involved had many of the structural characteristics of effective boards. Yet their companies crashed.
Currently, there is a growing consensus on the positive role of corporate culture on effective governance. Institutional investors are demanding that investee companies disclose indicators of the firm’s culture. In some recent corporate governance guidelines, regulators refer to the positive role of culture. The main problem is that there is neither a shared definition of culture, nor a reference on how to measure it.
The 2022 IESE Center for Corporate Governance Survey on Boards of Directors(1) included a chapter and questions about corporate culture at the board level. Board directors were able to identify a number of qualities that reflect a firm’s culture. The top factors identified were trust, transparency, compensation, employee development and work collaboration. There is no doubt that these factors have a significant influence in shaping the culture of any organization. The paradox is that participant board directors expressed that there is a low correlation between culture and certain board decisions. In other words, culture seems to be important but is not always reflected in a board’s actions. A possible explanation of these results is that the translation of culture into corporate decisions is not easy to pin down. Moreover, culture is just one more factor affecting decisions, together with the concern for improving performance or addressing a potential crisis. Culture is important for boards but is not the only relevant factor.
There is a huge need to better understand the role of culture in corporate governance. This was the theme of the 2022 IESE ECGI Corporate Governance Conference(2), held on IESE’s Barcelona campus on October 3rd. The conference program featured five dimensions of culture and their relationships with governance and board effectiveness. The dimensions directly connected with the 2022 IESE survey mentioned above.
The first dimension was the culture of boards of directors and how board members interact, as well as their effects on performance. Paul Healy (Harvard Business School) presented evidence that a board’s effectiveness is shaped by the directors’ engagement, interpersonal relations and board meeting management.
The second dimension was the connection of culture with the notion of purpose and a pro-social orientation that is pursued by the board, together with financial performance. Rodolphe Durand (HEC, Paris) discussed the conditions under which firms with a clear culture support a purpose and can achieve better performance. The main mechanisms described were employee engagement, customer appeal and support from other key stakeholders.
The third dimension was the role of executive compensation. Alex Edmans (London Business School) presented the results of a large survey on how CEO compensation has evolved over the years, the level of pay, role and form of variable compensation, and the relevance of long-term performance-based incentives. In his presentation, Edmans discussed how compensation also shapes the notion of fairness inside an organization and influences corporate culture.
The fourth dimension centered on organizational design, boards and senior managers – what Harvard professor Alfred D. Chandler defined as “the visible hand”. Robert Gibbons (MIT) presented a model of organizational design – with the visible hand of governance leading the organization and where culture becomes very influential in organizational design effectiveness. Culture affects how people work and perform in organizations. Consequently, culture can derail good strategies. Nourishing corporate culture and caring about its interaction with governance and management are key for effective organizations. 
The final dimension focused on the presence of women on boards of directors and its effects on organizational performance. Jillian Grennan (Santa Clara University and University of California, Berkeley)  presented empirical work highlighting the positive effects of board diversity on employee diversity and improving the culture of community building. In particular, she noted that an important outcome of board diversity is cognitive diversity, a quality that helps improve decision-making effectiveness.
While the papers presented at the conference are still works in progress in the field, they share two major features. First, they discussed and confirmed the role of key dimensions of corporate culture in effective decision making at the top. Board dynamics, executive compensation, corporate purpose, organizational design and diversity are features of a corporate culture that can have a positive impact on the quality of board decisions. Second, boards of directors and institutional investors should reflect more deeply on the dimensions of each firm’s culture that may impact the quality of decision making and, eventually, performance. 
The rising role of culture greatly expands the monolithic lens of financial dimensions through which shareholders and boards look at corporate performance. The conference underscored that culture variables have a considerable influence on the quality of decision making and should be taken seriously in corporate governance.

(1) See Y. Kasai, G. Ormazabal and J. Canals (2022):  IESE Survey on Boards of Directors: Corporate Purpose, Culture and Strategy. IESE Publishing.
(2) Visit the 2022 IESE ECGI Corporate Governance Conference Website here.
Corporate Governance Trends and News
Last September came into effect a new rule approved by the Securities and Exchange Commission related to board director elections that will give a major boost to activist investors willing to remove board directors. In the past, when shareholders wanted to nominate a new board director, they had to vote for a slate with their nominees against those supported by the board. Mixing names from the two slates was not possible. The new so-called “universal proxy” ballot cards will give shareholders the option to select nominees to the board from all parties. Instead of a slate of candidates, some shareholders may want to vote for the individual candidates that they like.
Dual-class shares that allow some founders to retain tight control of the company through special voting power are a major obstacle when a company is facing a crisis. This is the main governance challenge behind the deep problems that Meta (Facebook) is facing. The company has lost 74% of its market value since early January 2022. Many shareholders are angry at Mark Zuckerberg, Meta’s founder. He uses his dual-class shares to control the company and continue its bet on the metaverse, despite heavy losses and criticism from many shareholders. The value of this type of share is in jeopardy in the face of Meta’s inability to change despite a crisis.
The 2022 proxy season shows a record number of companies in the S&P 500 and Russell 3000 failing to receive majority support for say-on-pay resolutions, according to a recent report issued by PwC. Due to the uncertainty of the global economic outlook for 2023, we may expect more scrutiny of boards in the coming season.
The International Sustainability Standards Board (ISSB) has continued to move forward with its first two proposed sustainability-related disclosure standards (IFRS S1 General Requirements for Disclosure of Sustainability-related Financial Information and IFRS S2 Climate-related Disclosures). The ISSB has agreed to require company disclosures of the full scope of greenhouse gas (GHG) emissions (i.e., Scope 1, 2 and 3, although the ISSB will develop relief provisions to help companies apply the Scope 3 requirements).
Climate-related disclosures, particularly the disclosure of Scope 3 GHG emissions, have been highly controversial and there is growing concern that an international baseline of climate disclosures may not be reached. 
The Spanish National Stock Market Commission has recently published its annual report on corporate governance and remuneration of board members of Spanish listed companies for 2021 (based on data published by 121 companies). The report shows that the degree of adherence to the Good Governance Code recommendations was 86.4%. Among others, the recommendations followed by all listed companies stipulate that boards of directors should be guided at all times by the company’s best interest and boards should express their clear opposition when they feel a proposal submitted for approval might damage the corporate interest (i.e., Recommendations 12 and 23). The least followed recommendations are the ones related to board remuneration (i.e., large-cap companies having a separate nomination committee and remuneration committee (Recommendation 48); and variable remuneration of board members being linked to the delivery of shares (Recommendation 61).
Climate change, the COVID-19 pandemic and geopolitical conflicts have deeply impacted corporations and have raised questions about whether current corporate governance frameworks remain fit for their purpose. These circumstances have led the OECD to review the G20/OECD Principles of Corporate Governance and launch a public consultation process that has recently ended. The priority areas for the review refer to crisis and risk management (with a special focus on ESG risks) and digitalization, among other topics. We may expect the OECD to issue the reviewed version of the principles in 2023.
Throughout 2022, global shareholder activism activity has been growing and is approaching full 2021 levels. Lazard has compiled data on the Q3 2022. The report is based on data for campaigns conducted globally by activists at companies with market capitalizations greater than $500M.
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