Managing Ethical Dilemmas & Culture Risks in CHRO Academy

CHRO Academy Managing Ethical Dilemmas & Culture Risk Diane Gherson Stephen Fry June 6 & 8, 2023 1

2023 What s happening at the Board level? 25% of the Russell 3000 and 49%of the S&P 500 have a Committee name that implies a broader purview than Compensation 2

NACD Compensation Committee Blueprint, 2023 3

When does culture come up at the Board level? Culture/People Risks 4

How can the CHRO enable the Board to exercise How can the CHRO enable the Board to exercise appropriate oversight of culture? appropriate oversight of culture? Committee remits Audit reporting relationship Formal Structure Embed culture into discussions about strategy, people, performance, compensation and enterprise risk Regular Committee Items Informal Exposure Shaping Board Culture Site visits Leadership meetings Town hall videos (succession) Organizational Health Reviews Board orientation and annual HCM reviews 5

Yes, the Chief People Officer has a fiduciary Yes, the Chief People Officer has a fiduciary responsibility to effectively address a toxic culture responsibility to effectively address a toxic culture Chancery Court of Delaware, March 1, 2023 IN RE MCDONALD S CORPORATION STOCKHOLDER DERIVATIVE LITIGATION The Court found CPO Fairhurst breached his fiduciary duty by consciously ignoring red flags regarding sexual misconduct and failing either to address those red flags of a toxic culture and widespread complaints of sexual harassment and misconduct, or to escalate them to the Board or CEO. The court reasoned that Fairhurst s day-to-day responsibility of overseeing human resources and promoting a safe, respectful work environment required him to have his ear to the ground on the Company s employees, coordinate EEOC complaints, and address or report upward to the CEO and Board." 6

Sales practices, overly ambitious sales goals and sales management tactics were found to be the cause, and these persisted despite numerous employee complaints and whistleblowers. In 2022, company paid $3B to resolve criminal and civil investigations into its sales practices involving the opening of millions of accounts without customer authorization. Admitted they collected millions in fees and interest that were unauthorized or fraudulent, harming customer credit ratings and misusing sensitive personal information. Employees engaged in gaming to receive incentive compensation or avoid negative consequences such as reprimands or terminations. Many widespread forms of gaming violated federal criminal law. 7

How do you proactively red flags? proactively detect and address the Data to identify hot spots Volume of investigations, hot line cases % substantiated, disciplinary actions vs benchmark Turnover rate in units with high frequency Pulse survey, Inclusion and Engagement data Social sentiment analysis People Analytics Senior Team Culture Risk Discussion & Actions Data Analysis Quarterly Country, Global Senior team People Analytics Report Enterprise Risk discussion Recommendations to address potential red flags Predictive Analytics Root Cause Analysis Combine multiple databases: Audit, Legal and HR, Employee Surveys, Manager training, Sales Incentive achievement, etc.

Best practices to address toxic culture Best practices to address toxic culture and misconduct and misconduct Detect Data Org Health Patterns Prevent Surface Expectations Code of Conduct Manager Training Severance practices Concerns Tone from the Top Leadership assessments Anonymous & Confidential Channels Speed Table-top exercises Line involvement Respond 9