A New Call to Shape and Adapt Boardroom Culture

In a significant corporate governance development, the National Association of Corporate Directors (“NACD”) has released a new report addressing the important role that culture plays in promoting effective governance discourse.

NACD describes the report as a “call to action” for corporate leaders to explicitly use culture to drive board excellence in the current complex business environment. Though the importance of culture to the boardroom environment has long been acknowledged generally, the NACD report, “Culture as the Foundation: Building a High-Performance Board,” represents the first substantive effort from a recognized board development organization to address the impact of culture on effective governance.

Most notably, the report adds precision and clarity to a concept that has historically been viewed as soft and amorphous in the context of corporate governance.  It offers a definition of the concept of board culture as “the shared values, assumptions, experiences, and expectations that influence behavior in the boardroom and manifest themselves in board norms, protocols and practices.” The report further describes culture as “fluid” and “changing over time.” In addition, it identifies factors that tend to influence board culture. They include explicit and implicit rules, norms of behavior and interaction, leadership styles and compliance and ethics policies, compensation, onboarding, agenda-setting, meeting format and information flow, and individual style and diversity.

In terms of the substance, NACD’s “call to action” is manifested in 10 specific recommendations within three distinct phases of consideration.

The first phase is an intentional effort to define “optimal” board culture. It contains three recommendations: assess the current board culture to define the desired state; agree on behavioral norms that help clarify board and management authority; and assure that the culture is fit for the current business environment.

The second phase identifies steps to reinforce board culture and behavioral norms. They include clarifying the roles of designated board leaders in reinforcing or changing board culture, assigning overarching governance responsibility for culture matters to the nominating and governance committee refining recruitment and onboarding functions to accommodate culture matters, and incorporating culture and behavior into board and director evaluations.

The third phase contemplates addressing the major organizational fault lines. These may include dealing with unhealthy behaviors and problematic directors, destigmatizing the decision of individual directors to step away from leadership positions or from the board itself, and balancing the need for vigorous internal debate with the value of consensus on major decisions.

According to NACD President Peter Gleason, the report was prompted by three trends and developments that affect public, private. and nonprofit boards across industry sectors. These include the efforts of investors (and other third parties) to more deeply assess board effectiveness, the transitions  boards are undergoing due to aggressive, deliberate turnover in recent years, and the relentless change that in the current climate demands a strong, curious. and engaged boardroom culture.

NACD perceives boards as responding to these developments by striving to become more agile. That means assuring that they have “the capacity to address critical issues in a decisive, efficient and well-informed manner, and to pivot from a course of action when it is apparent that change is necessary.” The report concludes that better governance practices must be supplemented by an investment in board culture and norms of behavior in to gain the necessary agility.

The ultimate benefit of the report is that it provides a thoughtful, detailed, and reliable plan for boards to  evaluate their cultures. The value of the plan is enhanced by the report’s inclusion of a “toolkit” (including discussion guides and other supporting materials) intended to help boards implement its recommendations.

There is no formal standard for judging governance commentaries such as the NACD Blue Ribbon Commission report as offering best practices. However, considering their source, the report’s recommendations are highly credible. The NACD Blue Ribbon Commission responsible for the report consisted of 24 distinguished corporate leaders and subject-matter experts, who examined the role of board culture over six months.

Culture is regularly referenced in many boardroom conversations and in governance committee planning and strategy. The NACD report provides a renewed opportunity to turn those conversations into action.

This post comes to us from Michael W. Peregrine, a partner at the law firm of McDermott Will & Emery LLP, who advises corporations, officers, and directors on matters relating to corporate governance, fiduciary duties, and officer and director liability issues.