Committees : Governance

Why Board Culture Matters

I spend an increasing amount of time writing about and engaging with bank boards of directors on the topic of corporate governance. And one of the most unappreciated factors that determines a board’s effectiveness is its culture.

Step back for a moment and think about what a corporate board is at its most basic construction. A board is essentially a social entity, and its culture will be a reflection of its purpose, composition, independence, transparency and alignment.

A board whose primary, self-defined purpose is to support the chief executive officer will have different priorities and instincts than one that cares more about protecting the interests of the bank’s shareholders. And this critical distinction will become an embedded value in its culture.

Board composition can also have a big impact on board culture. Let’s say you have a board made up of 10 directors and three leave because they exceed the board’s mandatory retirement age. Three new directors are recruited as replacements. Those new members could significantly change the board’s personality unless its underlying cultural values have been institutionalized.

In my experience, personality is separate from culture. Personality is a reflection of the individuals who serve on the board at any given point in time. Significant changes to a board’s composition, like adding three new members, will probably change its personality. The board’s culture, on the other hand, is determined by the embedded values that all of the board members acknowledge and accept, and is the more enduring factor.

Values that can help shape board culture include independence. Do board members feel empowered to ask questions, to probe and examine? A board that is run by a controlling CEO who also serves as the chair may be less tolerant of questions than one that is run by an independent chair who promotes a more open governance environment. Having an independent board chair does not automatically result in better governance, but I do believe it increases the chances.

Another important cultural value is transparency. Is the company’s management team sharing all relevant information with the board, or is negative information that would reflect badly on management sometimes withheld? For effective oversight to occur, the board and management need to be reviewing the same set of facts.

Just as importantly, the board needs to have access to any information it deems important to the effective discharge of its fiduciary duties. While it’s important that boards not get too deeply in the weeds of the company’s operations, directors need to have access to any information they consider essential to their oversight responsibilities. 

A fifth cultural value that is vitally important is alignment around a common set of objectives. These can be a set of performance metrics like return on equity, return on assets or the efficiency ratio, or the successful execution of a strategic growth plan that is driven primarily by acquisitions. The objectives themselves are important, of course, but it’s equally important that all directors understand and support them. Highly effective bank boards generally agree on what their corporate objectives are and the directors are all focused on achieving those.