5. Fairness
Truth, disclosure and consent, may be viewed as components of fairness. It is often difficult to define fairness succinctly. For example, the meaning of fairness of a transaction to shareholders of an acquired corporation has evolved in the case law of Delaware over decades. Even if fairness is amorphous, and often discernible only “in the eye of the beholder,” it is, nonetheless, a valuable guiding principle.
The question for directors is whether or not questions of fairness arise in Board meetings, and if so, the manner in which they are resolved. If no one ever asks about fairness, it is indicative of a corporate culture that does not care about it. If, on the other hand, directors and senior management routinely discuss the fairness of policies and practices, and actions, it is a sign that fairness matters. Directors and senior management need not get bogged down in metaphysical questions of fairness, but the topic should arise from time to time in the boardroom in discussion of particular, specific issues.
6. Balancing Stakeholder Interests
Another perspective on fairness is the balance, or lack thereof, is assessing how interests of different constituencies are affected by corporate policies and conduct. Often the focus is upon shareholders’ interests, which is consistent with directors’ fiduciary duties under state law. Some jurisdictions have enacted laws permitting or requiring directors to consider interests of non-shareholder constituencies, e.g., in the sale of the company. Directors of companies approaching or in bankruptcy must take into account the interests of creditors. Federal and state laws protect some interests of employees, customers and communities in which the company does business. The question is whether or not decision-making throughout the company takes into account competing interests, and how well it balances those interests when they conflict.
Michael Ross
Consideration of the interests of constituencies other than shareholders has been advocated by academics and practiced by many successful companies. Many financially successful companies discovered that shareholder interests are often well-served by taking good care of employees, customers and suppliers. Although shareholders (absent hedging) have ownership interests, those interests cannot be advanced without attention to the interests of the constituencies that make share appreciation and dividends possible. The focus should not be only on the value of a good reputation, but also on productivity and long-term profits that can flow from serving the interests of customers, suppliers and employees.
7. Long-term Orientation
Much has been written about the pressures exerted by Wall Street for short-term performance. Even supposedly long-term institutional investors often compensate portfolio managers, at least in part, based upon short-term results. Share prices react forcefully to disappointing results and forecasts. It is no wonder then that management of some public companies have succumbed to the temptation to meet or beat Wall Street’s quarterly and annual consensus estimates by using “creative accounting.”
Companies that emphasize long-term results are likely to have a corporate culture that has longevity and endurance. Board discussions that focus on sustainability of practices and results are indicators that priorities are in the right place. Could the financial service firms have believed that allocating hot IPO’s to corporate executives in exchange for investment banking business was a sustainable business practice?
Few companies have had uninterrupted successes; most suffer setbacks, experience failures of strategy or execution, or both. The companies that achieve long-term success learn from their mistakes and make improvements in their business plans and operations. In the face of declining share prices, they adhere to well-considered strategies and high ethical standards. One CEO expressed it well by saying he “was building a company, not a share price.”
8. Understanding Mistakes
One of the components of corporate culture is its treatment of mistakes that are made throughout the company, from senior executives through middle managers to the rank-and-file employees. It is probably no exaggeration to say that no company has been immune from mistakes. Companies cannot survive on mistakes alone, but their reaction to mistakes can be telling.
The first level of inquiry is into whether or not employees at all levels acknowledge that mistakes have been made. The second and related step is acceptance of responsibility for mistakes.
Some entrepreneurial companies encourage risky ventures because they realize that although some will not pan out, others will, and those will make the company successful. In some companies, the consequences for those who make mistakes are so severe that employees will go to great lengths to cover up or blame others for mistakes. This will make it difficult for the company to recover and learn from the mistakes and prevent their recurrence.
The example is set at the top of the corporate ladder. On conference calls with Wall Street analysts, senior management of some companies always have an excuse, something to blame other than themselves, for poor results. Contrast the CEO who acknowledges a flaw in strategy or defect in execution. Which company will be more likely to earn investors’ trust and confidence over the long haul?
9. Openness to Disagreement
Openness (or the lack thereof) to disagreement, at many levels, can be an important indicator of corporate culture. It starts at the top with the openness of the CEO to contacts by members of the board of directors with management and lower level employees. It continues down the organization with the openness of senior and middle mangers to employee feedback.
Although corporate effectiveness and efficiency generally require a chain of command, openness to contacts and communications outside the chain reflects executives’ confidence in their policies, performance and leadership. The use of upward evaluations is a positive sign that management is willing to listen. Listening is a good first step, but effectiveness requires appropriate responses to employee communications.
Openness will usually invite criticism. It is a sign of good leadership to be able to accept and respond appropriately to criticism. Some criticism will be constructive and lead to improvements in policies and performance. Other criticism will be self-serving or otherwise unmeritorious. The ability to distinguish between the two and respond accordingly is a sign of good management. Companies that develop strict ideologies, or value loyalty above all else, will likely demonstrate the hubris that characterized, and led to the downfall of Enron’s management.
10. Multi-dimensional Evaluation and Compensation Systems
If companies reward only financial results and not how they are achieved, they are risking that the results will be achieved unethically and illegally. Cynics argue that if given the choice between making money and acting ethically, most employees will choose the money. So long as there are some employees who will sacrifice ethics for money, it will be wise to create evaluation and compensation systems that measure and reward ethical conduct.
Most employees are motivated to meet the criteria for salary increases, bonuses and advancement. By including evaluation and discussion of some of the topics discussed above, employees will realize that the company places high values on ethics and integrity. That, however, is not enough. Results speak louder than words on a form. The company must reward ethical employees and withhold rewards from, and punish, the unethical employees, regardless of results.
Conclusion
Companies that routinely do the right thing do not get much publicity for doing so, but there are thousands of companies that are flying the “white flags” described above. If these flags are in evidence in the course of board deliberations, directors and senior executives can have some comfort that their corporate culture is healthy.
Michael C. Ross is the former vice president and general counsel at Safeway.
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