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Column

Lawrence M. Adelman
Principal
AEG Partners

Board of Directors Must Serve as ‘Keeper’ of Corporate Culture
Many believe that senior management commands responsibility for a company’s culture. Not so.

By Lawrence M. Adelman

Here’s a prediction. When the BP PLC drilling disaster settles down, the oil giant’s directors will dismiss CEO Tony Hayward and make other significant board changes.

Why? Because any way you look at it, BP’s board neglected its responsibilities. It either didn’t serve as “keeper” of BP’s corporate culture — which is increasingly critical as a board duty — or it failed to ensure the right culture for its management to operate in, especially when it involves the risk related to environmental safety. As a result, the lax culture permitted employees to take myriad shortcuts and unacceptable risks, all of which contributed to the massive Gulf of Mexico oil spill.

Corporate culture is a profound driver of any business. That’s why in practically any corporate scandal that allows malfeasance or misguided judgments to happen, the question arises, “Where was the board?” In BP’s case, corporate culture was so poorly managed that personnel felt they could take unacceptable risks or disregard others on the offshore oil rig.

The fallout isn’t entirely environmental. BP stock has lost a big hunk of its value and the company has been rumored to be a takeover target. With the right risk-prevention measures, personnel wouldn’t have made the decisions to take shortcuts. They wouldn’t have bet the farm — in this case, the company’s future — that a disaster wouldn’t occur.

‘A Profound Driver’
Many corporate governance authorities argue that senior management commands responsibility for corporate culture, not the board. But corporate culture is such a profound driver of any business that directors must oversee it. Its importance simply can’t be overstated. It evolves; it isn’t static. A company’s culture:

Encompasses its values in its history.
Provides a roadmap for the company’s present and future environment.
Sets values that its key constituents — employees, customers and vendors — can rely upon.
Establishes the standard for the board and management decision making on matters of risk and reputation.

In today’s era of stricter Sarbanes-Oxley corporate governance, the board plays a more critical role, especially the outside lead director and any other independent directors who aren’t beholden to management. The outside lead director’s responsibility is almost at a higher level than the board chairman/CEO.

Owner of the Longer-Term View
Reflecting its corporate governance responsibilities, the board must play the principal role in overseeing the company’s culture. For one thing, directors often have served the company longer and with more continuity than has senior management. As a result, they own the longer-term view. In addition, senior management reports to the board.

Lastly, and most critically, the board is most responsible for the care and loyalty to the stockholders. Through its oversight role of the company’s culture, the board ensures that culture is an integral component of corporate strategy, performance and value-generation.

In addition, the essential “tone at the top” that can only come from the board shapes corporate culture and pervades a company’s internal and external relationships. This is a critical time for the board to oversee a company’s culture, as recession-wounded companies emerge into a sunnier economic outlook and major societal changes continue, especially environmental ones. Together, directors can ensure the integrity of the corporate culture and protect stockholders against management moving too aggressively or making wrong decisions.

It Could Have Been Avoided
In BP’s case, the board and its relevant committees should be working with management to actively promote and cultivate a corporate culture and environment that truly understands enterprise-wide risk management and incorporates it into BP’s overall corporate strategy and day-to-day business operations.

If that had happened earlier, BP — and the entire Gulf Coast — could have avoided what has become the worst U.S. environmental disaster.

Lawrence M. Adelman is a principal of AEG Partners, a national restructuring and turnaround management firm. He co-founded the firm in 2000 to focus on advisory and restructuring services for underperforming and distressed companies. As a specialist in dealing with complex and difficult situations, he often serves in the role of chief restructuring officer or financial advisor.

He is an active member of the Turnaround Management Association, where he has served on the board of directors and as president of the Chicago Chapter.

He can be contacted at ladelman@aegpartners.com.