Action Steps for Healthy Corporate Cultures

Corporate culture matters. If you need evidence, consider a July 2016 study from the UK's Financial Reporting Council, presenting findings from interviews with 250 CEOs and other business leaders. It concluded that "a healthy corporate culture is a valuable asset, a source of competitive advantage and vital to the creation and protection of long-term value."

So how can companies create sound and ethical corporate cultures?

The Women in Capital Markets Initiative—which brings together leaders from across finance, academia, and policymaking—addressed this question at a roundtable discussion in New York City. The discussion explored the focus of both companies and policymakers on fostering healthy corporate cultures, as well as the significance of culture for employees and investors. While acknowledging the challenges inherent in this complex and evolving topic, the discussion yielded several actionable recommendations for enhancing corporate culture in ways that can benefit individuals, organizations, and the markets.

The conversation was conducted under the Chatham House Rule, to encourage candor, but I'm pleased to share a few of the group's insights with you.

The Struggle to Define Corporate Culture

Before tackling the issue of enhancing corporate culture, the conversation began with the recognition that questions tend to swirl around the subject of corporate culture, which can be viewed from many perspectives: safety and soundness of an institution, retention and hiring, crime prevention and the public good, gender equality and diversity, as well as overall ethics.

Another key question: can corporate culture be measured? Or rather, as one participant put it, is it more "one of those 'I'll know it when I see it' things?" Indeed, academics, policymakers, and private sector interests have struggled to find ways to define and measure corporate culture. "Proof is hard to come by," said Thomas Baxter, general counsel at the Federal Reserve Bank of New York, in a 2015 speech. "Yet I am not alone in the belief that a strong ethical culture will lead to better behavior." In January 2016, the Financial Industry Regulatory Authority set forth its set of cultural parameters when it indicated it would assess five indicators of a firm's culture, including whether control functions are valued within the organization and if immediate managers are effective role models of firm culture.

The "Balancing Act" of Culture

The Women in Capital Markets discussion participants voiced concern about the dangers of focusing too heavily on development of corporate culture. "It does slow down the business a little bit," said one. "One of things we're struggling with right now is, are we too controlled? Have we taken some of this too seriously?"

Finding the right approach to culture plays out especially when setting explicit rules. "Rules can drive culture and help move it along," observed one participant. Another agreed, pointing in particular to the importance of compensation rules that can deter excessive risk-taking or unhealthy short-termism.

On the other hand, it was observed that rules by themselves are insufficient to developing a sound corporate culture. "You have to internalize [rules] for them to really be effective," said one discussant. Similarly, several participants also noted that thriving businesses are often the product of a "rebel spirit" that defies convention and sees rules as meant to be broken. "It's a balancing act," a participant.

Healthy Corporate Cultures: Best Practices

Managing these complexities and balancing acts may never be easy, but participants identified several key items that can form the basis for sound corporate culture.

• Setting a strong, ethical "tone at the top." There was strong consensus that striking the right tone at the top is indispensable. "Tone at the top is really important for creating an ethical culture across all levels: diversity, compliance with rules, good disclosure practices, all of that," said one participant. Another recalled being inspired by a senior leader at a major financial services firm who framed culture and compliance as much more than "check-the-box" exercises. In her words, the executive's attitude was that "we're not doing this because we have to. We're doing this because it's in the best interest of our customers." The observation brings to mind the views of Zappos.com CEO Tony Hsieh, who has written: "Protecting the company culture and sticking to core values is a long-term benefit."
• Establishing governance marked by checks, balances, and perspective. Many companies owe their success to dynamic founders or leaders with vision and drive. Yet, as noted by participants, corporate culture can be adversely affected if power becomes concentrated in a small number of individuals, especially if those individuals are perceived as "culture carriers." "If everybody answers to one person in a publicly traded company, it doesn't work," said one. Such situations can be compounded by a weak or disengaged board. Directors, it was noted, should interact with employees and "walk the plant." At one financial services firm, a participant recalled, board members even took several hours to listen to customer service interactions at a call center.
• Supporting company values, demonstrably. The establishment of company values was identified as an important step in fostering good culture. Doing so, said one participant, "brought us together and helped give us the glue to work as an organization." Another shared that her company asks its employees to chart their progress advancing core values in their year-end reviews. "It makes you strive to have something tangible and not just fluff," she said.
• Maintaining clear and open lines of communication. Healthy corporate cultures, it was agreed, are ones marked by open lines of communication. This includes robust mechanisms for whistleblowing, which can be one of the most effective ways for companies to detect financial fraud and other occupational wrongdoing. (For more on effective whistleblower programs, see the Anti-Fraud Collaboration webcast, "How to Improve Your Whistleblower Program and Address Impediments to Reporting.")
• Celebrating the good. Companies can encourage good behavior by highlighting instances where employees did the right thing. A participant cited one company that set up a forum to celebrate and discuss instances where people acted ethically, both in "small moments" as well as more complicated situations. "It's simple, but we don't do enough of it," she said.

Do you have thoughts or best practices regarding the creation of sound, ethical corporate cultures? If so, I invite you to share them in the comments.

A securities lawyer, Cindy Fornelli has served as the Executive Director of the Center for Audit Quality since its establishment in 2007.