Getting on board with organizational culture

Business World (08/24/2015)

SUITS THE C-SUITE

By Maria Pilar B. Hernandez

In their paper “Responding to organizational identity threats: Exploring the role of organizational culture (2006), authors Ravasi and Schultz describe organizational culture as “a set of shared assumptions that guides what happens in organizations by defining appropriate behavior for various situations.” It is pervasive in an organization’s operations and influenced by the environment where the organization operates and the employees’ motivation for doing things. Moreover, the environment and employees’ motivation are largely influenced by the “tone at the top,” Board oversight and the Code of Ethics, all of which set the values and standards of an organization.

That the Board plays a critical role in an organization cannot be overemphasized. The Board is responsible for an organization’s overall strategy for growth, assessing risks, and ensuring the soundness of operating and financial practices. In fact, the Philippine Securities and Exchange Commission (SEC) provides the general responsibilities of the Board:

· To foster the long-term success of the corporation, and to sustain its competitiveness and profitability in a manner consistent with its corporate objectives and the best interests of its stockholders and other stakeholders.

· To formulate the corporation’s vision, mission, strategic objectives, policies and procedures that shall guide its activities, including the means to effectively monitor management’s performance.

How can the Board articulate and implement these broad responsibilities and make them work for the entire organization?

Part of the answer lies in how the Board can work with or, if needed, initiate changes in the culture of the organization. One aspect of that culture that the Board may wish to strengthen is improving corporate governance, particularly of publicly-listed companies. Initiatives by regulators include revising the Code of Corporate Governance, revisiting the qualifications of directors, and remaining vigilant on the compliance of companies with the submission of reportorial requirements.

The initiative to revise the Code of Corporate Governance results in a culture of compliance that should be intrinsic in all organizations; otherwise, there may be unnecessary repercussions or penalties.

For example, in June 2015, the SEC issued an Order mandating corporations which were registered in 2008 that have failed to submit their annual reports to the SEC for at least five consecutive years to appear before the Commission within 30 days from the date of the Order’s publication. The corporations were required to explain their failure to comply with the reportorial requirements and justify why their Certificates of Incorporation should not be suspended. The license to operate of entities who failed to appear and/or provide due case for noncompliance will be suspended until such time as the corporation has complied.

This SEC requirement illustrates management’s responsibility to implement a culture of compliance throughout the organization. It is also a reminder that Board oversight is necessary to ensure that the organization’s current practices are aligned with its overall strategy.

A culture of compliance is, however, only one aspect of an organization’s composite culture which can be complex, particularly for large multinational entities operating across multiple borders. Issues of national culture, language, ethics and local business practices can vary significantly from country to country or — for that matter — from organization to organization.

In the 2015 Audit Committee Leadership Summit held in New York last June, there were several discussions on the challenges of reinforcing a single corporate culture within global, diversified companies. In fact, a member raised a concern on whether there are countries where they cannot operate due to specific regional problems that may impact the entire company. These were reported in the latest issue of Viewpoints published by Tapestry Networks, Inc. and Ernst & Young.

This observation gives us reason to pause and ponder: How it can hold true for Philippine companies that are involved in the growing trend of globalization?

The ASEAN Corporate Governance Scorecard — Country Reports and Assessments 2013-2014 can provide some insights on how culture can work for or against an organization. The 2013-2014 results indicate that the improvement in scores of the Top 100 Philippine publicly-listed companies is the result of the adoption of leading corporate governance practices. As the business environment becomes more complex, management and the Board need more stringent measures to address the issues surrounding corporate governance, including potential changes in the culture of an organization.

Board oversight entails the regular review of strategy and of key management personnel (including the C-Suite) to see if they are doing their jobs. This way, Board members are able to put a finger on the organization’s pulse which, essentially, is its culture. In the Philippines, Board oversight of this “pulse” may be difficult since not all directors work full time in the company. There may also be geographical limitations as operating plants and/or facilities may be distant from headquarters. While this task may be challenging, the Board should make an effort to be engaged in the organization’s culture because this will help them significantly in assuming their oversight role.

To get a feel for the culture, the Board can visit sites regularly and establish relationships with key employees, especially those who have been with the company for a considerable number of years and have acquired “corporate wisdom.” Interacting with customers can also be a measure of the strength of the company’s organizational culture by way of the feedback they provide.

Another suggestion that arose from the Audit Committee Leadership Summit is to have integrated reports that focus on the culture of the company. Integrating financials and sustainability measures with reports on customer loyalty, employer rankings, employee retention and other measures which provide a snapshot of the company’s organizational culture can help the Board better understand the entity, its values and its people. These statistics can be further used to scale management’s compensation as these are indicative of management’s performance.

Furthermore, communicating consistently with internal and external auditors is also useful as a means of benchmarking the company’s culture. Internal auditors have a mechanism to report on the compliance of people, including leadership; external auditors, on the other hand, are often exposed to the best practices of other companies.

While organizational culture is essentially a team effort which gradually takes shape as an organization matures, the Board plays an important role in overseeing its development in the right direction. Organizational culture is not built overnight. An enduring culture is grounded in the right attitude and sound practices and procedures with the Board at the helm.

Maria Pilar B. Hernandez is a Partner of SGV & Co.