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Shearman & Sterling LLP The Importance of Adding Culture to the Board Agenda | 5 CULTURE AS A COMPANY ASSET SIGNIFIERS OF A HEALTHY CULTURE Culture can be difficult to define, but if values are about the "what" and the "why" of an organization, then culture is the "how" — the way in which those values are lived day to day. The NACD report uses the definition developed by MIT's Edgar Schein, who characterizes culture as a series of assumptions individuals make about the groups in which they participate. In this model, a group's culture is visible through its artifacts, goals and aspirations and common beliefs. Culture should be viewed as an asset, a valuable one, similar to an organization's human capital, financial resources and intellectual property. Studies show that organizations with highly engaged employees (one indicator of a strong, positive culture) outperform others on customer satisfaction, safety, quality, profitability, productivity and shareholder returns. Companies with weak ethical cultures experience levels of misconduct as much as 10 times higher than those with strong ethical cultures. Despite its proven importance, less than a majority of directors reported to the NACD that their boards We "see" culture through: Highly engaged employees Alignment between values and actions — actions that get rewarded or punished are aligned with values Strong corporate resilience that allows company to withstand stressors from inside and out Accountability — mistakes are regarded as a source of learning rather than blame Changes are implemented in a thoughtful and deliberate manner Communication is strong and transparency embraced assess the cultural alignment of their organizations. Only about half of directors say they have information on the cultural beliefs of employees. Viewing culture through the "asset" lens can help facilitate initial discussions with directors by adding corporate culture to an already crowded board room agenda. Public statements, organizational structure charts and recruiting materials Artifacts Business plans, incentive plans, compensation and governance and compliance and ethics guidelines Training activities, norms of leadership behavior, reporting chains and communication and information flows Goals and aspirations Common beliefs WHAT IS CULTURE