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Toxic Corporate Cultures—and How To Deal with Them

Chief Executive Officer of the WomenCorporateDirectors Foundation Director of Marsh & McLennan Insights

Over the last year, the media have been full of stories about organizations’ cultural missteps or toxic cultures, with almost weekly reports of executives being dismissed for infractions. And boards are asking themselves—does our organization have cultural problems, and if so, how do we detect them and respond?

An organization’s culture is a critical element for success and differentiation, and it can be the rocket fuel for delivering value to stakeholders. But a dysfunctional or toxic culture creates inefficiencies and underperformance across the organization. At worst, cultural blowups can damage a company’s reputation with negative media coverage, put the organization in breach of laws and regulations, trigger lower productivity, and be very costly to resolve.

How Healthy Is Your Organization’s Culture?

There is a significant body of research on the importance of culture in driving organizational success as well as guidance for boards in their role in oversight of organizational culture. Despite this, culture is not yet a regularly scheduled agenda item in many boardrooms, or there may only be limited updates on the organization’s culture or the process to drive the desired culture.

This needs to change. As organizations and boards face growing questions on culture from investors, regulators and employees, it’s critical that directors have regular, detailed updates on the health of the organization’s culture.

Directors need to prioritize scheduled discussions on culture. Typically, the role of a board director is summed up as: “nose in, fingers out” (i.e., oversight but not management). With culture issues, the role of the board is now to “nose in, nose in, nose in”—to look deeper, ask questions, and probe for details when something seems amiss.  

A Board Cannot Create an Organization’s Culture—but It Can Influence It

While boards have an oversight role for culture, the reality is that boards cannot lead or set the organization’s culture. Rather, the organization and the executives create the culture; they are the ones living and breathing it every day.

However, the mechanisms by which boards capture insights on culture—either in their committees or as a full board, how directors engage on the issue, and how the board engages management—all serve as levers that influence culture and how management prioritizes culture.

Research by Marsh & McLennan Insights, which included interviews with members of WomenCorporateDirectors, has developed a number of recommendations on how boards can detect and respond to dysfunctional or toxic corporate cultures.

The CEO As the Chief Culture Officer

For boards, the primary instrument by which they can influence culture is through the selection of the CEO.

The CEO serves as the “Chief Culture Officer,” and boards should capture insights, such as 360-degree evaluations, on the CEO as a cultural leader. Further, boards should formally consider cultural leadership factors in CEO and executive team succession and planning.

The executive team that the CEO develops is also a critical indicator of the expected organizational culture. The CEO should be able to indicate the leadership qualities of the individuals in the management team and how they align with the goals and culture of the organization.

Organizational Culture As a Regular Board Agenda Item

The second most important action boards can take is to include culture as a standing and consistent board agenda item.

The board must turn the mirror on itself. If the board has a toxic culture, how can it spot a toxic culture within the management team?

In most boardrooms, few directors have a deep background in talent management or human resource factors. It is probably not ingrained in a board’s psyche to discuss culture regularly. But by prioritizing culture discussions, directors can help the CEO and management team uncover issues across the organization.

A culture dashboard, with regular tracking of key cultural performance indicators, shifts the discussion from episodic, one-off discussions—that, when introduced by the board, could make management feel blindsided—to a natural standing topic of discussion.

Organizations can examine data points, such as whistleblower hotline data, compliance data and employee data, such as employee engagement surveys, data on hiring, performance ratings curves, pay increases, promotions, and turnover reports to get insights into the organizational culture.  

Hunt for the Discrepancies in the Data

It is important that boards do a deep dive into the data and consider the indicators by gender, race, age, geography, business unit, tenure, and employment level.

Discrepancies in the data can indicate areas or departments within the organization that are at risk for dysfunctional or toxic behaviors. For example, high staff turnover rates in one business unit might indicate a local management problem; or limited career growth of female staff may indicate that the day-to-day operating environment is not aligned with the desired organizational culture.

“Nosing into” data by these different aspects can also help the board determine if the “tone at the top” is also the “tone from above” throughout the organization—that is, the culture set by a manager or supervisor. Middle management is a powerful layer in setting organizational subcultures, especially in large global organizations, enabling culture to trickle down organizations.

Does the Board Have Its Own Toxic Culture?

The board must also turn the mirror on itself. Directors should consider potential culture indicators within the boardroom and how effectively the board can respond to cultural issues.

If the board’s own culture aligns with the organization’s culture, it may be particularly difficult to spot indicators of cultural dysfunction, as doing so would take a sense of self-awareness that not all organizations have.

If the board has a toxic culture, how can it spot a toxic culture within the management team?

A lack of diversity in the boardroom is also a cause for concern. Data shows that, over the past two years, only 37 percent of boards have discussed how diversity, or the lack thereof, impacts company culture.

Can a board without women address #MeToo-related complaints and issues?

Can boards with limited racial diversity be effectively attuned to diversity issues?

If there are only one or two directors in the boardroom who can contribute diverse perspectives, as is the case in most boardrooms, it can be difficult to push conversations on challenging topics.  

By tracking cultural indicators, increasing cultural awareness in the company, and applying levers of change where necessary, boards can help steer the culture—creating a greater alignment of the entire workforce to the vision of the organization.

Susan C. Keating

Chief Executive Officer of the WomenCorporateDirectors Foundation

Susan C. Keating is the chief executive officer of the WomenCorporateDirectors Foundation (WCD). Prior to joining WCD, Susan was president and chief executive officer of the National Foundation for Credit Counseling, the largest and longest-serving nonprofit credit counseling organization in the United States.

Lucy Nottingham

Director of Marsh & McLennan Insights @lucynottingham2

Lucy Nottingham is a director, Marsh & McLennan Companies’ Insights. Based in Washington, D.C., Ms. Nottingham focuses on evolving risk governance challenges and explores complex risk issues that are reshaping industries, economies and societies, and how companies can respond as a result.

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