Today, is the second in a two-part series based on an interview with Rakhi Kumar, Senior Managing Director, Head of ESG Investments and Asset Stewardship, at State Street Global Advisors (SSGA) and SSGA’s recent letter (Letter) from its President and Chief Executive Officer (CEO), Cyrus Taraporevala, in which he called upon corporate Boards to place a greater emphasis on corporate culture, which SSGA says is a top asset stewardship engagement priority for the asset manager in 2019. Kumar discussed the Letter and the firm’s recent initiative around corporate culture and Board of Director engagement on this issue. Yesterday, I wrote about the issues laid out in the Letter and today I discuss the SSGA framework for doing so.
Based on insights SSGA has gleaned from years of engagement, it has developed a Framework for Assessing and Monitoring Corporate Culture (Framework) which can be used as a starting point to help guide directors and senior management on their role in oversight of corporate culture. Under this Framework, they suggest that senior management, with oversight from the Board, undertake three key exercises. First is comparative analysis, which is performed through a gap analysis or risk assessment. Second is the implementation phase where you move your organization to a place where your culture aligns with your long-term strategic goals. Third is reporting the results, ongoing monitoring and fine tuning. From the SSGA perspective, the Framework is not meant to be prescriptive, rather it is a tool to help Boards develop their own approach to incorporating culture into their long-term strategy.
Kumar emphasized that this is not a one size fits all prescription. Moreover, it is not a ‘tick-the-box’ exercise but one which is an ongoing process. She said, “A culture is very unique to a company. It needs to be unique, just like a strategies. Unique culture needs to be unique.” A Board must not only get the sense of where the corporate culture currently exists but also its long-term strategic goals. SSGA has developed a list of questions that each Board can ask of itself and its organization.
These questions include: (1) Can the directors up articulate current corporate culture? (2) What does the Board value about the current culture? (3) What does it see as its strengths? (4) How can current corporate culture be improved? (4) How is senior management influencing or affecting change in corporate culture? And (5) How is the Board monitoring the progress? Kumar went on to state, “while these may appear to be simple questions, they’re very complicated in the sense that these are conversational questions.” This is why this is not a “check the box kind of a Framework. There’s no right answer, wrong answer. It’s literally open ended questions to get a sense of how the Board and management is addressing and looking at culture.”
The Framework itself begins with a Gap Analysis by asking the Board to “describe the corporate culture need to achieve the long-term objectives of the organization.” Kumar said you should begin “by describing what is the culture that is needed to achieve the strategic objectives. As you are identifying and laying out strategy, think about it and expand that conversation.” This could mean “what kind of behaviors would I need my employees to have or what kind of culture do I need if I want to achieve the strategy?” Next you should move to “get a sense of what are the existing corporate and employee behaviors.” If there is a gap in this culture and your long-term strategic goals; this will tell you about what you need to change.”
From there you should describe the existing corporate culture and how it is aligned with your long-term strategy. If it is aligned, you should then inquire into how “does the Board and senior management perpetuate the current corporate culture?” If it does not, the Board needs to ask how “does the current culture need to change”, with the identified agents or practices which need to change. Now moving on to remediate, you need to measure your progress towards the desired culture by identifying the indicators you will assess as markers. Finally, what will be your reporting mechanism for continuous improvement towards your goal of aligning corporate culture to long-term strategy?
Kumar said that the next line of inquiry is to find out what is important to your culture that you need to perpetuate, what are its drivers? From there “what needs to change and what is the timeframe in which your organization is going to change it?” Further, “How are you going to evaluate if your corporate culture is actually being changed? And the last phase is the reporting phase. How are you going to communicate how culture fits in with your strategy and support your strategy? And, finally, how is the Board getting a sense of culture?”
SSGA suggests this process be performed in stages. As noted, it all begins with the Gap Analysis and moving forward from there. If your corporate culture is aligned, “identify how to perpetuate the current corporate culture by identifying the key drivers.” If the converse is found and it is “misaligned, determine the desired culture and identify the practices or agents that must change. The analysis should contemplate corporate culture in the context of the company’s long-term strategy, as meaningful changes may take many years to occur.” Kumar cautioned that this phase is not completed quickly and as the entire process should be seen as a multi-year process, with the first phase being at least one year.
The next step should be the implementation phase where “mechanisms to influence and monitor progress can be identified and implemented.” SSGA further notes, “In the context of rewards systems, culture-related indicators could be aligned with incentives, where appropriate. Senior management is the most influential agent for cultivating corporate culture and should take the leadership in its implementation throughout the organization. The Board and senior management should be aligned and implementation expectations should be clearly understood.”
Finally you reach the reporting phase. This can be a continuing challenge and SSGA has noted, “We have found few companies that can effectively communicate their Board’s involvement in influencing culture. However, given growing investor interest in this area, directors should also be prepared to discuss their role in influencing and monitoring culture at the company.”
Boards have been grappling with the difficult task of overseeing corporate culture. As a starting point, the SSGA Framework is a useful guide to help directors and senior management as they tackle this complex issue. Kumar stated, “What we have done through the Framework is to provide a viewpoint which we have shared in a systematic manner with all our Board members ahead of engagement. We have also put it out in the public domain, so other investors who may not have teams can evaluate and understand how we approach corporate culture.” Moreover, it is designed to be adaptable. She concluded, “We’ve had people start using the Framework, start actually understanding the issues involved and engaging on the issue both in internally and externally as well.”
SSGA is to be commended for moving the discussion forward.
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© Thomas R. Fox, 2019