A company’s culture will gradually shift as the business transitions through different stages of maturity. Along the way, the board will be instrumental in determining how those shifts play out. To calibrate culture in a way that suits each evolutionary phase, the board must decide what sort of risk appetite it wants to instil within the organisation.

“If you’re a small entrepreneurial business, your agility is your magic sauce,” says ICAEW Director, Corporate Governance and Stewardship, Peter van Veen. “It wouldn’t be in your interest to hire people whose instinct is to start implementing bureaucratic processes that will stifle your innovative drive. Entrepreneurship is about moving fast, breaking things, learning quickly and continuing to move fast – otherwise, someone will take your lunch.”

Conversely, Van Veen points out, if you are in a mature business that has thousands of staff around the world and is generating constant returns, a ‘move fast and break things’ approach would almost certainly sink the business, sooner rather than later. Although major tech brands such as Facebook, Google and Amazon try to maintain an entrepreneurial ethos, this is within clear tramlines and constraints.

Targeting incentives

To set risk appetite and shape the organisation’s culture, the primary tool that a board will use is incentivisation, or how it chooses to reward the pursuit of certain goals.

“Let’s say you’re the board of a mining company and you incentivise your CEO and senior staff solely around the next quarter’s results,” Van Veen says. “Don’t be too surprised if things veer quickly off track, because you’re setting the wrong targets. Extractive industries are very long-term plays: a new oil refinery may take as much as 25 years to yield positive returns. So, the challenge for boards is how to set incentives that match the nature of the business. Incentives that encourage a ‘winner takes all’ short-term behaviour in a startup are no longer fit for purpose in a thriving larger, more mature business.”

Lack of clarity around incentives, or picking the wrong ones, can open the door to ethical crises, Van Veen warns; distorting a company’s culture, or paving the way for wrongdoing.

“The sales channel can be the most significant driver of culture,” he points out. “Around 10 years ago, Wells Fargo aggressively incentivised its people to sign up new customers, which resulted in a culture where people broke the rules and cut corners to meet targets, leading staff to create tens of thousands of fake customer accounts.”

Cultural DNA

It is vital for boards to understand the culture in their organisations, so they understand how to shape it for the better. That requires a keen focus on how incentivisation delivers strategy and how it dovetails with ethics and values. Last year, ICAEW held a panel on the role of the board in shaping culture and how to measure success. The session provided some powerful insights on how boards can fine-tune culture in their organisations, and where ethics – and investors – sit within that dynamic.

Macfarlane Group Non-Executive Director Laura Whyte saw first-hand the board’s impact on culture during a previous role as Personnel Director at John Lewis. A brand deeply ingrained with strong ethical and service values through its employee-owned Partnership scheme, the retailer undertook an ambitious store development programme in 2008 that aimed to add up to 10,000 new partners to its roster of what was then 28,000.

Whyte explained that employees’ desire to support certain values was codified in the buzz-phrase, “It’s just not Partnership,” which staff used to describe anything that felt ‘off.’ “Amid the store development programme, we recognised the risk of diluting that cultural DNA,” she said. “So, we went to our elected representatives and said, ‘Okay, define what ‘Partnership’ means.’ We identified six values and behaviours, and wrote them into our appraisal system. Each partner was assessed 50/50 on commercial delivery and behaviours.”

Tanya Gass, Partner in the Board Practice at executive search firm Norman Broadbent, also commented on how boards can shape culture through hiring. “Authenticity is key,” she said. “You can’t fake it. Your recruits are your strategic engine. ‘Culture eats strategy for breakfast’ comes from the fact that you can’t get anything done on strategy alone, because people are delivering it, and they have to want to do it. If it’s not authentic, it won’t wash.”

Enforcing values

Turning to why investors should be genuinely curious about the cultures that boards are developing, Corporate Culture Adviser Annabel Gillard cited a 2012 PhD that academic Alex Evans produced for Massachusetts Institute of Technology, which used Great Places to Work data as a proxy for organisations with positive cultures. “When adjusted for other variables, he found that those employers outperformed the general market by 2.1% per annum, which ought to get any asset manager excited.”

In 2023, FTSE Russell updated that research with a hypothetical index of Great Places to Work, which revealed that in the preceding 25 years, those organisations outstripped the general market 3.3 times over. “That’s a huge amount of value,” Gillard said.

For Corporate Governance and Culture Consultant Rafal Budzinski, investors can play a valuable role in raising culture’s profile by using their investment choices to lead by example. “That will send a message to the investment community that culture is something they care about,” he said. “Investors can also bring up culture in their engagement with companies. It’s about supporting the sustainable running of business in our economy and society.”

Asked to provide a concise piece of advice on how boards can shape culture, Gillard said: “Ask yourself, or your board, how important you think culture is, and compare that to how importantly the board or company is treating it. If there’s a gap, it needs urgent attention – and if, in the past three years, the board hasn’t revisited how it’s assessing culture, it’s almost certainly missing a trick.”

Offering some further advice, Macfarlane Group Chair Aleen Gulvanessian – who also chaired the panel – said: “if a company sees the executive or board enforce a value against somebody very senior, employees will really start believing in that culture.”