Corporate, Business, Or Entity Culture – The Board’s Role And Knowledge About – From State Street

The following is a link to a January 2019, letter from State Street emphasizing and focusing on the business’s culture and how it adds value. The letter pertains to corporate culture because of the business in which State Street operates – but what we are really talking about is business or entity culture which includes public companies, private businesses, nonprofits, and governmental organizations and entities.

The letter is short and lacks detailed discussion about culture; however, I found interesting the attachment to the letter with possible questions that might be asked of the board members about the state of the business’s culture and the director’s knowledge thereof. I would assume that the majority of directors could not answer those questions with detail.

I also found interesting that the letter differentiates culture from values, and instead focus’ on culture’s impact on value. However, I would say that the business’s values drive and impact the business’s culture.

As culture has become a board topic (and apparently it might be here to stay), I would like to see additional, more specific discussions about how to evaluate and grade, and improve upon the organization or entity’s culture.

This definitely is a topic for the full board, but as it also falls into the category of risk management or ERM, this might also be on the plate of the risk management committee, if there is one, or on the plate of the audit committee to which risk management is often delegated (but let me also add, in my view, risk management is a topic for the entire board – if risk management is delegated to a committee, that committee should, nevertheless, report on risk management to the full board, for the full board’s consideration).

Here is the link to the State Street letter – be sure to read the attachment https://www.ssga.com/investment-topics/environmental-social-governance/2019/01/2019%20Proxy%20Letter-Aligning%20Corporate%20Culture%20with%20Long-Term%20Strategy.pdf

Best to you, David Tate, Esq. (and inactive California CPA)

Blogs: California trust, estate, and elder abuse litigation and contentious administrations http://californiaestatetrust.com; D&O, audit committee, governance and risk management http://auditcommitteeupdate.com

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The following are a few additional materials for your consideration.

Board understanding of culture and mood are pretty low – per NACD materials

Below I have provided a snapshot from NACD promotional materials that I received – the materials are Benchmark Your Board, with which I tend to agree, if the benchmark evaluation is done with meaningful detail, evaluation, and recommendations, and if the board then takes action to improve the board, and all levels of the organization. I find all of the statistics from the materials (see below) of interest; however, for the purpose of this blog post I am focused on the corporate culture section – earlier this year corporate or business or nonprofit or organization culture was heavily in the news, but these things tend to pass.

I don’t hear as much about culture now. But in my view, culture and values need to stay in the news as they are one of the keys to how the entity (i.e., the people in the entity) act or behave, and perform.

Notice, according to the materials, 87% of directors say that their boards have a high understanding of the tone at the top, but is that true and what does that really mean; only 35% of directors say that their boards understand the mood in the middle, whatever that means, but nevertheless, the percentage is very low; and only 18% have a high understanding of the buzz at the bottom, again whatever that means, but the percentage is very low. These seem like failing grades, evidencing, in addition to other things, that board members need get out and visit and mingle at the facilities more.

NACD Benchmark Your Board promotion stat. page

And here are additional materials from prior posts:

Organization Culture Compass Circle

OVERVIEW OF A RISK MANAGEMENT PROCESS THAT YOU CAN USE 03162018

Audit Committee 5 Lines of Success, Diligence, and Defense - David Tate, Esq, 05052018

COSO Enterprise Risk Management Framework ERM Components and Principles

Best to you, David Tate, Esq. (and inactive California CPA), Royse Law Firm, Menlo Park, California office, with offices in northern and southern California.  My blogs: trust, estate, elder abuse and conservatorship litigation http://californiaestatetrust.com, D&O, boards, audit committees, governance, etc. http://auditcommitteeupdate.com, workplace http://workplacelawreport.com

David Tate, Esq., Overview of My Practice Areas (Royse Law Firm, Menlo Park, California office, with offices in northern and southern California. http://rroyselaw.com)

  • Civil Litigation: business, commercial, real estate, D&O, board and committee, founder, owner, investor, creditor, shareholder, M&A, and other disputes and litigation; and investigations
  • Probate Court Litigation: trust, estate, elder abuse, and conservatorship disputes and litigation
  • Administration: trust and estate administration and contentious administrations representing fiduciaries and beneficiaries
  • Workplace (including discrimination) litigation and consulting
  • Board, director, committee and audit committee, and executive officer responsibilities and rights; and investigations

Royse Law Firm – Overview of Firm Practice Areas – San Francisco Bay Area and Los Angeles Basin

  • Corporate and Securities, Financing and Formation
  • Corporate Governance, D&O, Boards and Committees, Audit Committees, Etc.
  • Intellectual Property – Patents, Trademarks, Copyrights, Trade Secrets
  • International
  • Immigration
  • Mergers & Acquisitions
  • Labor and Employment
  • Litigation (I broke out the litigation as this is my primary area of practice)
  •             Business & Commercial
  •             IP – Patent, Trademark, Copyright, Trade Secret, NDA
  •             Accountings, Fraud, Lost Income/Royalties, Etc.
  •             Internet Privacy, Hacking, Speech, Etc.
  •             Labor and Employment
  •             Mergers & Acquisitions
  •             Real Estate
  •             Owner, Founder, Investor, D&O, Board/Committee, Shareholder
  •             Lender/Debtor
  •             Investigations
  •             Trust, Estate, Conservatorship, Elder Abuse, and Administrations
  • Real Estate
  • Tax (US and International) and Tax Litigation
  • Technology Companies and Transactions, Including AgTech and HealthTech, Etc.
  • Wealth and Estate Planning, Trust and Estate Administration, and Disputes and Litigation

Disclaimer. This post is not a solicitation for legal or other services inside or outside of California, and also does not provide legal or other professional advice to you or to anyone else, or about a specific situation – remember that laws are always changing – and also remember and be aware that you need to consult with an appropriate lawyer or other professional about your situation. This post also is not intended to and does not apply to any particular situation or person, nor does it provide and is not intended to provide any opinion or any other comments that in any manner state, suggest or imply that anyone or any entity has done anything unlawful, wrong or wrongful – instead, each situation must be fully evaluated with all of the evidence, whereas this post only includes summary comments about information that may or may not be accurate and that most likely will change over time.

More on Culture/NACD, and Risk Management

I did some weekend reading. The following are two items of interest.

New NACD Report on Culture

The following is a link to the page for the NACD Commission Report on Culture as a Corporate Asset – the complimentary material (28 pages) is worthwhile reading if you are not a NACD member: https://www.nacdonline.org/Resources/Article.cfm?ItemNumber=48256

Of course, the NACD culture report doesn’t carry with it any force of law or requirement, and, although the report is fairly specific while at the same time also vague in that it often refers to comments by commission members who are unnamed, the report is significant because it is provided and supported by a leading board director organization as an indicator that entity culture is an important area for board oversight.

New Post by Norman Marks About Risk Management

And from part of a blog post by Norman Marks about risk management, which you can see at the following link  https://normanmarks.wordpress.com/2017/10/14/is-it-about-managing-risk/

” . . . board should be asking these questions:

  • How likely are we to achieve our objectives?
  • If the likelihood is less than acceptable, why? What can we do about it?
  • If there is a possibility of exceeding our objective, what can and should we do?
  • What assurance do we have that management is taking the right risks, making intelligent and informed decisions?
  • Are there any risks that we should be concerned about, that merit our attention and possibly our action?”

Culture and Governance; The Weinstein Company, Uber, Fox, WFB and Others

Each of the four above listed businesses, and others, have been in the news for issues relating to culture and governance, and other related matters. The legal structures of these four businesses differ significantly, from privately held, to privately held but with high value and reputation venture capital, to publicly held. I have blogged about the new COSO enterprise risk management (ERM) framework, and that the first of the five major components pertains to culture and governance, and the fifth of the five major components pertains to communicating and reporting.

Would the news about these businesses have been different if COSO ERM had been implemented and followed? Perhaps, perhaps not. We might also ask about and evaluate the executive officers; board, board committees and director oversight; the responsibilities of in-house counsel; the actions of the chief compliance officer (if any); how internal audit (if any) might have been helpful; whether issues came or should have come to the attention of the external auditor (including, for example, during the audit planning phase, or even during a more limited review engagement); workplace practices and policies; and perhaps the actions or inactions of the regulatory agencies (if any).

Culture and governance carry with them the potential to affect value (both positive and negative, and for both financial and reputation value), liability, and damages, not only for the business, but, of course, also for victims (and erroneously accused as we have also seen those situations), and for the executive officers and other management, the board and the directors, HR, the chief compliance officer, in-house legal counsel, the chief of internal audit, the partner running the external audit, the employees for their jobs and possible investment and pension holdings, creditors who have loaned money to the business, founders, owners and investors, customers, consumers, and other stakeholders. And these issues apply not only to public and private businesses, but also to nonprofits and governmental entities, and to the people who are involved in and with them.

It isn’t surprising that actions and events occur that are different than reasonably and primarily anticipated (that is the nature of risk management), and that negative and detrimental events also occur, sometimes without legal fault or liability. However, it is somehow also more disappointing to hear that possible or actual problems were known or might have been known to exist for a length of time without being addressed and remedied.

That’s all. I don’t have any personal knowledge about these specific situations other than what I read in the news. And I’m not casting fault, culpability or liability – each situation needs to be internally and/or externally investigated and evaluated by qualified people with the requisite experience, knowledge, demeanor and approach (i.e., objectively and prudently, and where necessary and prudent by people who are independent and without conflict or bias). Often times (practically always) the situations and facts are different (sometimes better, and sometimes worse) than first thought. And then there is always the prospect for litigation to establish responsibilities and rights, liability, causation, damages and remedies including recovery of damages.

We do seem to be seeing an uptick in discussions about the culture and governance of businesses (private, public, and nonprofit) and government – we’ll see if it lasts, and if more specific expectations develop including greater design, implementation and oversight of culture and governance controls.

Please note that the comments in my blog posts are my own, and are not by no one else, and do not apply or related to any particular or specific person, business or other entity, or situation.

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New Governance Guidance Stretches Thinking on Ethics, Risk, and More

​The King IV draft code has much to say about governance, risk management, compliance, and assurance. Click on the following link for the discussion by Norman Marks and see my comments below: iaonline.theiia.org

This article by Norman Marks discusses parts of the new King IV code that concentrate on culture, ethics and risk. It’s interesting for thought with respect to your own organization. It is and has been long well-known that all three corporate areas, culture, ethics and risk management, are instrumental to business performance and legal compliance.

And although these areas are discussed, and significant strides have been made in or discussed about risk management during the past couple of years, there still are no universally recognized standards or criteria to evaluate or audit how the business is doing in these areas.

I have long been surprised that the auditing professions, external and internal, have not jumped on these areas and also governance.

See also Tate’s Excellent Audit Committee Guide at CLICK HERE

Best, Dave Tate, Esq. (San Francisco and California), http://auditcommitteeupdate.com, http://californiaestatetrust.com, http://tateattorney.com

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‘Internal audit is crucial to assessing impact of corporate culture’

Internal audit’s mandate is much broader than external audit’s, says Richard Chambers of Institute of Internal Auditors

Click on the following link for the article: www.thehindubusinessline.com

Dave Tate, Esq. comment.

 

I’m going to disagree with Mr. Chambers on this one. I believe it is better for external audit to be auditing this issue – which is an issue that external audit already should be taking into consideration when designing the audit and the extent to which management and the accounting and internal control functions can be relied upon.

 

Although internal audit could be assigned a task or project relating to culture, on this topic I would keep the task or project very specific. Internal audit does also work and interact with management and executive management – assessing culture might detrimentally impact those relationships. I would however recommend that internal audit be more involved in risk management, which could involve culture but in a different context.

 

Audit committee, D&O, risk management, etc. blog: http://auditcommitteeupdate.com

Website: http://tateattorney.com

Trust, estate, conservatorship and elder abuse litigation blog: http://californiaestatetrust.com