Peter Drucker, probably the world’s most famous management expert, is widely credited with first saying that “culture eats strategy for breakfast.” And while battalions of advisors have advocated a similar view in the nearly 20 years since Drucker’s death, businesses and boardrooms still grapple every day with the importance of defining, creating, and sustaining an organisation’s culture. Culture reflects the understanding that each employee has of a company's purpose, and the board can often tell a lot about the performance of senior management by ascertaining the health of an organisation’s culture and seeing how well it supports progress on the long-term strategy.

“A good organisational culture provides the framework for everyone to work together to hit corporate goals and to do so with purpose and in line with strong ethical values. This makes for a more successful organisation," explains Peter van Veen, Head of Corporate Governance and Stewardship at ICAEW.

“A good culture is one that employees identify with, and that the executives and board shape and demonstrate through leading by example. Culture underpins everything, including whether staff tend to comply with policies and procedures; whether those to speak up are rewarded or punished; and even whether management welcome ideas for improvement from staff at all levels or not,” he continues. “Boards have a critical role to play in ensuring the company has the right culture.”

Caroline Vanovermeire is Global Head of Talent at Dentsu, one of the world’s largest media and marketing agencies and was recently appointed as a non-executive board member at another organisation to provide guidance on corporate culture. She is keen to point out that culture has only become more important in recent years, in the fluid and unpredictable operating environment in which organisations now find themselves: “You now look at all the stakeholders – from employees to your suppliers, to society as a whole – there's an ecosystem in which you form relationships. Because you have all these interdependencies, in order to create value, you need to support each other.”

So therefore, she says, there is a risk that if stakeholders don’t see an organisation as authentically living up to its corporate values they will not work with that organisation as effectively as required: “I would define ‘authenticity’ as congruence between what a company stands for and what it does.” Boards have a vital and specific role to play in maintaining that culture too. She says that a lack of authentic leadership which underpins culture “has become a strategic risk linked to a company’s reputational, operational and people risk for boards to manage.”

What is culture?

If they are to improve and maintain an organisation’s culture, board members must first understand what tangible signs constitute a culture in good or poor health. "We talk a lot about culture and how important it is, but it's difficult to define and hard for directors to know if their company has the right culture. You can't touch it, it must be lived and experienced, but if culture goes wrong, the fallout can be huge. It's often only when things go wrong that the signs of poor culture are recognised" says Andrea Blance, Senior Independent Director at Provident Financial citing her experience of a major operational change, having joined the board of Provident Financial in 2017 (see case study).

"Provident Financial is an example of how a culture can be changed, but it needs strong CEO leadership, board support and time" says Blance. For any board director, it can be hard to satisfy themselves that their own business has a good culture. Now, as a matter of course, she says, she asks herself the following questions when she joins any business, specifically to test the culture.

- Does the company have a clear purpose statement and values that are well understood by colleagues, investors, and other stakeholders?

- Are the purpose and values embedded in the performance management framework?

- How often does the board consider the company’s culture, and is there a dedicated board member or board forum to assess it, and its impact on the company’s key stakeholders – customers, colleagues, suppliers etc…?

- Is what you hear about the company in the boardroom aligned with what you learn from colleague engagement events, including site visits?

The power of the right culture

The right culture will help with two imperatives that are important for any organisation. First, it’s nearly impossible to make a success of significant strategic change (such as major moves into new market segments or the digitalisation of a legacy business) or a big change management project (such as a reorganisation, or large-scale M&A or divestiture) without a healthy culture. And it’s clear that significant strategic change will be a likely necessity for many businesses around the world in the coming years. Almost a quarter (22%) of UK CEOs (and 39% globally) believe their business "will not be economically viable within a decade" without a vital change of direction, according to PwC's annual CEO survey.

Second, an unhealthy culture will undoubtedly lead to lower levels of employee engagement and so the likely departure of an organisation’s most talented employees, as the most talented are often the most likely to find a job elsewhere. Despite economic headwinds, companies are competing in tight labour markets and realise that if they are to implement large-scale strategic changes in the coming years, they need to employ the very best people they can. PwC’s annual survey finds that CEOs now "recognise that future success is very much contingent on their people, and they need to protect this commodity, particularly in a tight labour market" said Kevin Ellis, Chairman and Senior Partner, PwC UK at its launch.

Beyond the importance of culture to the success of a strategic shift, investors and regulators are increasingly aware that good corporate culture makes companies better ‘corporate citizens’, and so better for the economy and society overall. For example, the Financial Reporting Council (FRC), the UK's watchdog of corporate governance, has been grappling for best ways to convey the critical importance of culture in ensuring robust businesses since 2016, when it published its culture report.  

"The reason we did the culture report was that we did not see the progress. The following report was done because we did not see the change. The pandemic helped to keep the momentum, and in the last few reports you can see evolution and improvement. But there is still a tick-box mentality evident (in corporate reporting) although there is more happening now" says Rafal Budzinski, senior policy associate at the FRC, who has been at the heart of the culture project.

 The FRC’s UK Corporate Governance Code is up for review this year. "The government has given us a free hand to look at whatever we want to change in the Code. We want to improve reporting on the Code across the board and that has to do with culture, strategy, purpose, and values. In changes to the Code, we will be looking at explaining the process as a cycle." says David Styles, FRC Head of Corporate Governance and Stewardship.

How to engender the right culture

With culture vital to the success of the major strategic shifts many CEOs say they need to make, and with governments and regulators also casting a keener eye over the cultural health of organisations, board members clearly have more pressing responsibility than ever to create and sustain a healthy culture at their organisation.

An important step to doing so is to ensure the right use of HR knowledge and expertise, including staff surveys, to keep track of ‘cultural health’. But boards should be careful not to create culture-specific board committees or subcommittees, as this takes the focus away from the main board and can institute a series of tick-box exercises. For example, business purpose, one of the drivers of a strong culture, needs to be articulated and understood at every level, which in turn requires a lot of explanatory conversations. This extends to board members' use of language, as well as clear communication from them to the executive and from executives to middle management and so forth. “The Board has a vital role in setting the right tone from the top and this cannot be delegated to a board committee,” says Van Veen

"Culture manifests itself in how decisions are made - what the board pays attention to and what questions it asks. Quite a few NEDs ask 'set questions': they don't tailor them to a particular issue or ask themselves about the language they are using. A critical role played by HR is to hold up the mirror and make sure there is consistency. Leadership that flip-flops is the worst thing you can have" says Camilla Faith, Director of consultancy 2Enable UK and former HR director at a London-based global privately owned business.

“Culture and trust are closely entwined. If you want people to share their ideas when they see room for improvement, speak up when they see something that is not right, they must feel psychologically safe and not at risk of retaliation," Van Veen adds. “A good culture will ensure that managers, executives and the board are always open to new ideas and fresh thinking and genuinely value those who protect the business through raising concerns and speaking up.

All employees need to understand that the company has a strong purpose and that senior managers use that purpose to guide their decisions and behaviour. "If we now agree that 'culture eats strategy for breakfast', then we should add that it is purpose that chooses the venue, invites the guests and lays the table," says Sarah Gillard, CEO of Blueprint for Better Business, an independent charity.

"Human beings are very good at sensing intent" says Gillard, meaning that they quickly understand what is needed to get on in any business, through their experience of its culture. Vanovermeire agrees with this. She says that managers who take on management simply to further their own careers is an indication of a poor culture. These types of managers see employees “as a resource rather than an asset” which sends a bad signal. One way Dentsu ensures leaders treat teams and employees as more than simply a ‘resource’ is through how it sets budgets and targets. If targets are too short term, says Vanovermeire, then there’s no time to develop people and “create more skills for the wider organisation.”

“If I need to bring someone on board and therefore it will take a bit longer for this person to give me the same value, and I can't do this because my targets are so short term that I can't think mid- or longer term, then we create a contradiction” between what the values ask for (namely, that people are an asset to be developed) and what the goals require. It comes down to ensuring that the ‘what’ and the ‘how’ are aligned.

Vanovermeire also recalls how someone in a previous firm she worked for “was denied a six-figure bonus, because the person had achieved the 'what' but had done it to the detriment of the colleagues, and therefore, didn't get the bonus because they were told, 'Sorry, it's a 'what' and a 'how', and you completely failed on the 'how'.”

This consistency between what the company’s values and purpose espouse and the way a company’s leaders act should go beyond the employee base. “A good culture should give confidence to all stakeholders that the company is focused on hitting its strategic goals, and doing so in the right way” reinforces Van Veen.

Discussions around company culture have spanned decades, with stakeholders agreeing on its critical role in building a long -term sustainable business. As Lou Gerstner put it after stepping down as CEO of IBM, “I came to see, in my time at IBM, that culture isn't just one aspect of the game, it is the game. In the end, an organisation is nothing more than the collective capacity of its people to create value.” And there is no group more important than the board in maintaining that culture.