Building a High-Performance Board Culture
President and Chief Executive Officer of the National Association of Corporate Directors (NACD),
Jun 11, 2024
Compendium
President and Chief Executive Officer of the National Association of Corporate Directors (NACD),
Jun 11, 2024
Compendium
This article was originally published in the Starling Insights' 2024 Compendium — “Culture & Conduct Risk in the Banking Sector: Why it Matters and What the Industry is Doing to Address It”. Please see the end of this article for more.
Companies are well aware of the importance of corporate culture in driving corporate performance, but what about the impact of board culture in driving board performance and effective governance of the enterprise? While often overlooked, the board’s shared norms, protocols, and practices influence each interaction, discussion, and decision of the board — and its ultimate success as a trusted steward of long-term value.
Each boardroom harbors a distinct ecosystem, nurtured by shared values, beliefs, assumptions, experiences, and expectations that may differ from or even undermine the corporate culture. If left unattended, a dysfunctional board culture may foster misunderstandings and conflict and contribute to poor board decision-making that could increase the risk of company failure. [See the 2023 Good Counsel article Establishing an Effective Board Culture]
Today, boards and companies are grappling with a permacrisis — an extended period marked by change and uncertainty. Events and their effects such as the COVID-19 pandemic, supply chain disruptions, technological advances, cyber threats, geopoliticalinstability, and new regulatory requirements have fundamentally reshaped business and redefined how companies need to be governed. In response, board responsibilities have intensified, gained greater visibility, and now carry higher stakes. The expectations for both overall board and individual director performance have reached unprecedented levels, encompassing demands for increased transparency, diversity, and accountability. When a crisis hits, stakeholders are turning their attention to the role of the board. Major investors are closely scrutinizing the range of experiences and expertise of directors, and activists are targeting those who are not keeping pace. Boards are adopting new governance practices in an effort to become more agile in this environment.
Each boardroom harbors a distinct ecosystem that may differ from or even undermine the corporate culture.
For example, boards are refreshing their boardroom composition, bringing in directors with new and diverse perspectives, backgrounds, and skill sets to meet new governance expectations and evolving needs. The pursuit for greater board agility has driven boards to forge more dynamic and fluid relationships with management.
Each year, NACD convenes a Blue Ribbon Commission, a collective of experienced directors and leading governance professionals (the “Commission”). The Commission examines a challenging issue facing boards and sets a new standard for effective board practices. Recognizing the rising demands on the board, in 2023, NACD looked at the role that board culture plays in board performance.
The Blue Ribbon Commission Report on Culture as the Foundation: Building a High-Performance Board offers recommendations and tools to help boards intentionally shape their culture and use it as an instrument to drive board performance. The report emphasizes that both activities within the boardroom and interactions between the board and management are integral elements of a high-performing board, necessitating an initial evaluation of cultural red flags.
Most boards evaluate their own performance, considering factors such as effective agenda setting, meeting preparation and engagement, adherence to committee charters, and other functional elements. But directors may fail to see the telltale signs of cultural dysfunction on the board that can impact performance. They can include these:
Faced with cultural dysfunction, boards may feel that they have only two choices: either tolerate the status quo or institute a complete overhaul. Instead of resorting to the extremes of inaction or explosion, boards can intentionally build a strong board culture deeply rooted in continuous improvement. The path forward to elevate board culture and, consequently, board performance, demands a collective and unwavering commitment from each director. This united effort empowers the board to face emerging challenges with greater agility. [See also the 2023 Peer Perspectives Article Linking Culture and Financial Performance]
The Blue Ribbon Commission identified 10 recommendations in three key areas of focus for boards to intentionally (re)shape their culture to build a high-performance board.
Define the optimal board culture. Boards must first deconstruct their current cultural reality — the unspoken rules, communication patterns, and decision-making dynamics that currently shape their interactions. Then, the directors must embark on a shared journey to define their ideal cultural state. This involves envisioning the values, norms, and behaviors that will best enable them to navigate today’s dynamic and demanding environment. Do they aspire to be agile and decisive, swiftly adapting to market shifts? Or perhaps their strength lies in deeply held consensus and thorough analysis? Understanding their aspirational culture allows directors to bridge the gap between their current reality and their desired future.
Reinforce the board’s culture and behavioral norms. Once the cultural aspirations are defined, the focus shifts to integrating them into everything the board does. Board leadership (board chairs, lead independent directors, and committee chairs) serve as culture carriers and are supported by the nominating and governance committee. Together, they can monitor the board’s effectiveness, hold directors accountable for upholding the desired cultural norms, and lead by example. The board’s culture can be embedded in processes such as recruitment and onboarding, with a focus on integrating new directors into the boardroom, culture, and evaluation process, advancing accountability and continuous improvement.
Address major cultural fault lines. No culture is perfect, and boardrooms are no exception. Boards must address these “fault lines” — areas that can divide the board — to build and maintain an effective culture. For example, perhaps silos have developed between groups of directors or there may be “problematic directors”— those exhibiting disengagement, unpreparedness, staleness, or even unethical behavior. Boards must have the courage to take action and address these issues that undermine board culture and performance. Directors need to get more comfortable making fellow directors uncomfortable. An “off-boarding” strategy for both individual directors and the full board, aside from age or term limits, should be established. Board service is not a lifetime appointment, and rigorous individual director evaluations and self-reflections should be prioritized.
No culture is perfect, and boardrooms are no exception.
Some boards will benefit from a comprehensive road map approach, while others may benefit from specific recommendations, such as equipping board leadership to affect the culture. This journey toward an engaged and high-performing board requires a shared commitment to continuous refinement and culture reinforcements woven through the workings of the board — by both directors and members of management.
NACD research found that a healthy board management relationship is one of the most significant factors contributing to strengthening board culture.1 Internal dynamics and established norms are deeply intertwined with how effectively the board interacts with management. While a more fluid board-management relationship fosters collaboration, it also poses a risk of micromanagement or unproductive tension, which can impact overall board performance. This dynamic shift in board management relationships requires ongoing dialogue, especially between the board leader and CEO, to promote a constructive relationship. The Commission identified the following actions to clarify (or reset) the board-management relationship:
For decades, the adage “nose in, fingers out” has stood as a guiding principle for boardroom engagement. It paints a picture of vigilant oversight (“nose in”) by directors without interfering in the day-to-day operations of management (“fingers out”). Coined by NACD’s founding president John Nash, it captures the crucial distinction between observation and advice versus direct action. Given the complexities of today’s environment, a nuanced approach and a more proactive and deeply engaged board is necessary.
Directors should reflect on the level of psychological safety that exists in the boardroom.
Visionary directors ask pointed questions to guide management’s focus on emerging issues. They actively listen to responses, seek out short- and long-term consequences, and analyze complex issues from various angles, offering diverse perspectives. Active questioning strengthens board oversight without overstepping operational boundaries, uncovering the “whys” and “hows” behind management’s decisions without dictating or micromanaging. During the Commission’s discussion, some commissioners added “eyes open” and “fingers on the pulse” to the original adage to capture this approach. Directors must maintain a clear line between oversight and management to avoid unnecessary friction with the management team and safeguard board independence.
In the dynamic landscape of today’s business environment, the pursuit of board agility is shedding light on the pivotal role that the board’s culture plays. Boards must create performance cultures on the board akin to the performance culture they expect management to create and sustain. Often underestimated, the shared norms, protocols, and practices within the boardroom exert a profound influence on every interaction, discussion, and decision. Neglecting to cultivate a purposeful board culture isn’t simply a missed opportunity, it’s a breeding ground for misunderstandings, conflicts, and, ultimately, the erosion of good governance.
To seasoned directors operating within performance enhancing cultures, a detailed focus on culture and specific activities to enhance and maintain board culture may seem like common sense. But looking at the rearview mirror to boards associated with company failures, it becomes clear that board culture deserves keener attention than it has been receiving.
The 2024 Report
The Compendium summarizes global trends in the governance and supervision of culture & conduct risk. It has become widely known and highly regarded thanks to the dozens of articles and interviews with leading industry figures worldwide that feature each year. This year's report includes over 500 pages of insights, analysis, and perspectives contributed by dozens of prominent figures worldwide. Despite a focus on the financial services sector, the Compendium regularly addresses governance challenges common to all boards as well as the audit industry.
The 2024 Compendium features several articles relevant to board directors and others who follow the NACD’s work:
If you are interested in downloading the full report, you can access it here:
Our Archives
NACD’s value insights, professional development events, and resources, such as the NACD Directors SummitTM and the NACD Directorship Certification® program, support boards in navigating complex challenges. With a growing network of more than 24,000 members across more than 20 chapters, boards are better equipped to make well informed decisions on the critical, strategic issues facing their businesses today. Learn more at www.nacdonline.org.
Join The Discussion