Boards, Culture, and Compensation

Amid several recent corporate scandals highlighting the business and reputational risk that can stem from culture problems, boards of directors are increasingly being asked to enhance their oversight of corporate culture.

Agenda associate editor Melissa Anderson sat down with Elaine Eisenman, managing director of Saeje Advisors and a director on the board of DSW, and Melissa Means, managing director at Pearl Meyer, to discuss how boards can better incentivize CEOs to ensure their company’s culture is aligned with strategic goals.

Q: How should board directors discuss culture, and what is the board’s role in ensuring the company has a culture that will drive its strategy?

Eisenman: The real issue is, boards can’t ensure that a company has a particular culture. What boards’ role is in culture is understanding tone at the top and understanding whether or not the culture is a good fit with the strategic initiatives of the company. An old [saying] is that culture eats strategy for breakfast—or lunch, depending on your meal of choice. And the board’s role is understanding what it is, looking for areas of alignment, and looking for areas of misalignment or inconsistency, and helping management understand that.

Means: We’ve even had some recent examples where the culture at the top is not the culture at the middle or at the bottom, either. And so how does a board even stay on top of [culture] as it evolves throughout the organization differently?

Q: Where does compensation fit into the picture here? How can boards and companies ensure that the culture of the organization is tied to its strategy?

Means: Culture and compensation and strategy to me are integrally tied together. And when we’re working with companies to help them think about their compensation philosophy and strategy, we start off with the business strategy. But as Elaine just explained, just as [important to] that business strategy is your culture. You have to be able to fundamentally understand both business strategy and culture, how they're working together and where there might be disconnects, in order to craft a compensation program that supports both.

If you try to craft a compensation program that doesn’t support both of them, you end up with unintended consequences and driving or incentivizing behaviors that you didn’t necessarily want, either related to culture, or either not to achieve on your business strategy. And I’ve seen that happen multiple times in situations. And much like a board member, you have to be able to get your arms around and understand what that is, to be able to design that comp program well.

Eisenman: What Melissa is talking about is what happens when you reward certain behaviors that are no longer valuable, or in fact work against the growth of the company. Melissa and I have had many conversations about what happens when you only incentivize ROI, but you don’t incentivize small experiments that may fail, but the learning for failure is intelligent failure and goes on to spark other opportunities that may work out. If it’s a short-term view, and that’s what you’re incentivizing, that’s what people will do. Behavior follows incentive.

Means: It is amazing to me, day in and day out, how much that behavior is so truly driven by that incentive … because we’re all humans, right? That’s what we’re trying to drive from a compensation and a strategy perspective. Even as a human, when we know we probably should do X, Y and Z, but we’re driven by the fact that this incentive said to do A, B and C. So, we’re likely not going to focus on X, Y and Z, because you’re telling me A, B and C is more important. And it really is an amazing behavioral tool that can be used well or not.

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