Corporate culture in corporate governance: directors must now take an active role in establishing and maintaining the appropriate culture and attitude for healthy and productive shareholder engagement.

• Author: Rome, Mark

Within the past decade, Congress has empowered federal regulators with the Sarbanes-Oxley Act and now the Dodd-Frank Wall Street Reform and Consumer Protection Act, with the latter paving the way for proxy access, additional executive compensation disclosures, and improved whistleblower protections.

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In a number of recent webinars, the National Association of Corporate Directors (NACD) suggests that proxy access will be a game changer. The U.S. Chamber of Commerce claims that proxy access expands the role of the federal government, increases business uncertainty and costs, and stifles a company's ability to focus on long-term growth.

For long-term investors, proxy access is deemed necessary to ensure the company is on a long-term sustainable path; that directors are representing the interest of long-term shareholders; that mechanisms are in place to identify, contain, and adequately disclose risks; and that executive compensation is fair and equitable. The California Public Employees' Retirement System (CaLPERS) has already engaged a firm to identify qualified director candidates in an effort to reshape the boards of underperforming companies.

If the Dodd-Frank Act has permanently altered the corporate-shareholder relationship, directors must now take an active role in establishing and maintaining the appropriate culture and attitude for healthy and productive shareholder engagement. This includes working with management to not only ensure the right tone at the top for ethics and compliance, but also to achieve performance goals and objectives aligned with those of long-term shareholders.

Culture and Character

In a 2007 study, Sean Griffith and Tom Baker examined how liability insurers transmit and transform the content of corporate and securities law. The findings suggest that what matters in corporate governance are deep governance variables such as culture and character, rather than the formal governance structures that are typically studied.

Corporate culture is a profound driver of any business--it determines the company's ability to execute its strategic vision and mission. Leadership and corporate culture excellence are essential to company performance and organizational well being. The "tone at the top" shapes corporate culture and drives the organizational behavior, which pervades internal and external relationships.

All the soft controls in an organization together constitute its corporate culture. The...