IS CULTURE A CORE BUSINESS ASSET?
A few weeks ago, I came across a “Blue Ribbon Commission Report by National Association of Corporate Directors discussing “Culture as a Corporate Asset”. The report proclaimed that corporate cultures matter in business. I was a bit surprised because I thought that was obvious. I previewed some of the findings, and I promised to share my thoughts on the report over time. From our beginning 19 years ago, Inward believed culture is the way work gets done. Culture is the sum total of behaviors, beliefs and decisions that leadership exhibits to create a positive and conducive business environment that allows positive implementation of the company strategy.
Here is our next installment and interpretation of the findings and a discussion on why Culture should be viewed as a corporate asset. In the next excerpt I will review “Rethinking oversight of corporate culture and the priorities for action”.
Culture as a Core Asset
The absence of a healthy company culture is a liability. Weak ethical cultures have been shown to misconduct levels as much as ten times higher than those with strong ethical cultures. The report says, “It is perhaps unsurprising that in the wake of the WorldCom scandal (2002), a frequently cited comment attributed to then - CEO Bernard Ebbers was his dismissal of efforts to create a company code of conduct as “[a] waste of time.” Organizational culture is also widely acknowledged as a reason why many M&A fail as a result of clashing cultures or failure in the execution and ethical standards. Think back to Daimler Benz/Chrysler, AOL/Time Warner or Quaker/Snapple
Conversely, culture should be viewed as an asset, like an organization’s human, physical, intellectual, technological, and other assets. There is empirical evidence and research efforts that prove organizations with highly engaged employees (one indicator of a strong, positive culture) outperform others on customer satisfaction, safety, quality, profitability, productivity, and shareholder returns. The report quotes one Commissioner, “Strong corporate cultures contribute to success and lasting value in the same way as product quality and R&D.”
Research studies show that companies with a strong corporate culture have greater confidence in the future and have a stronger sense of purpose. They have more engaged employees 73% vs 23%, are more optimistic about long term potential to outperform the competition 79% vs 47%, confident the company will grow this year 82% vs 48% and encourages employees to innovate 80% vs 35% according to Gallup. Other studies show that companies who have high employee engagement , another indicator of a strong culture have the potential to be ten times more successful.
Culture is moving up on the list of priorities for many companies and boards
The commission reports other examples of the link between culture and performance results are one reason why culture is moving up on the list of companies and board’s priorities. In one recent survey, 87 percent of organizations cited culture and engagement as a top challenge, with a majority of leaders rating the issue as “urgent.” In a different study, only 28 percent of executives reported that they understood their organization’s culture, and just 12 percent said they believed their company is driving the “right culture.”. In another study which I recently reviewed, less than 50% of employees know what the brand values are and even less know what behaviors are required to delivered the brand promise to customers.
Other important factors motivating increased attention to culture on the part of board members and company leaders include factors such as these:
● Information on 24/7 demand: The 24 - hour news cycle is not a new phenomenon, but its power and potential for reputational impact have been amplified by the rise of social media. More information—both positive and negative—is available about companies and individuals than ever before, and has the potential to spread faster and wider.
● “Megatrends” affecting the workforce: The continuing wave of baby-boomer retirements, the rise of millennials as the largest generational group in the workplace, and the shift to a majority-minority population in the United States all have significant impact on employees’ relationships—with each other, and with their employers. A company’s ability to simply survive—let alone adapt and thrive—under these conditions will be determined in part by its culture.
● Greater scrutiny by investors and regulators: Major asset managers are issuing statements emphasizing that “over the long term, how a company does business is as important as profit at any one point in time” (BlackRock) and highlighting that they “expect boards to . . . influence firm culture and set ethical standards” and “promote a culture of accountability on the board” (State Street). On the regulatory front, the financial services industry has been under a global spotlight, with regulators taking steps to enhance rules and supervisory activities related to culture and conduct.
● Negative public attitudes about business: The Edelman Trust Barometer, a global survey of public opinion regarding business, government, nongovernmental organizations, and the media, reported that “the most profound difference between the elite and the broader populations is found in their attitudes toward business. Recent news regarding sexual harassment in the high tech and entertainment just exacerbates this situation.
The report suggests, “These factors are combining to drive a transformation of the board-management dialogue on company culture similar to the fundamental change that has occurred in the way boards approach risk matters. In the Commission’s view, board members need to achieve a level of discipline with respect to culture oversight that is comparable to leading practices in the oversight of risk. While circumstances and criteria will differ by company, directors should look for the following signifiers of healthy culture in the organization as a whole, and also in the boardroom”:
Just look at the problems that Uber and Wells Fargo are grappling with these days. Their problems are largely blamed on culture flaws. Uber, for instance, is grappling with scandals, government probes and shareholder litigation. A shareholder lawsuit, filed late September this year, called Uber’s corporate culture, “A toxic hotbed,” threatening its business. Wells Fargo admitted culture problems following a sales practices scandal that erupted a year ago. It is alleged that the bank employees opened customer accounts using fictitious or unauthorized information to meet lofty sales goals. In both these cases, the CEOs were either forced to resign or abruptly quit.
WHAT DIRECTORS SHOULD LOOK FOR REGARDING CULTURE TRAITS AND BEHAVIORS FROM MANAGEMENT
● Alignment: Clear linkage should be present between the company’s stated purpose, expressed core values, desired culture, and the actual culture, as demonstrated by observed, day-to-day behaviors throughout the organization—across multiple levels of seniority, operating units, functions, and geographies. “Boards need to ask for evidence as to the consistency between the company’s statements about its culture and values, and actual behaviors—especially behaviors that get rewarded or punished,” said one Commissioner. Lack of consistency, or dissonance, between stated and actual culture, or between aspects of the culture in different parts of an organization can drive cynicism and mistrust, forerunners of more serious problems. And there is evidence to suggest that alignment pays: a study exploring the relationship between employee survey data and corporate performance found that “organizations [scoring] high on purpose but also on dimensions of management clarity (e.g., . . . ‘Management has a clear view of where the organization is going and how to get there’) . . . exhibit superior accounting and stock market performance.
● Accountability: Like risk, culture is a shared responsibility that starts with the CEO and top management, extends to all employees, and includes the board—“it’s everyone’s job.” A healthy culture of accountability is one where “mistakes are identified, remedied, and regarded as a source of learning rather than of blame.” On the other hand, “the fear of criticism can leave employees unwilling to take ownership and preferring to pass on responsibility to others.”
● Transparency: Robust cultures have well-developed processes for communicating internally (up, down, and across the organization) as well as externally. Effective information flows are distinguished not only by the quality and quantity of what is communicated, but also by the tone (of respectful candor) and the content. In a thriving culture, employees at all levels of seniority are encouraged to report problems, errors, or risks without fear of disciplinary action.
● Resilience: Some commenters have observed that “the cultures of organizations are never monolithic . . . [and] they shift, incrementally and constantly, in response to internal and external changes.” The foundational elements of a company’s culture and values must be able to withstand stressors from outside and inside sources and avoid “changing with the wind,” but healthy cultures are also able to change in a conscious and deliberate manner, in order to adapt to new business dynamics and competitive realities.
RECOMMENDATION FROM THE REPORT in regard to treating “Culture as a Core Asset”: Directors and company leaders should take a forward-looking, proactive approach to culture oversight in order to achieve a level of discipline that is comparable to leading practices in the management and oversight of risk.
Cultivation of healthy culture requires a proactive stance on the part of company leaders and members of the board. Directors need to establish an ongoing discussion about culture that is forward-leaning—encompassing where the company is going, not just where it’s been. As a Commissioner summarized, “The ultimate aim is powerful, successful, durable companies that create lasting value. Our culture should be able to help us compete and win in the marketplaces for customers and talent”.
Inward has always been a strong proponent from the beginning when we established our firm, 19 years ago. Culture matters!
If you would like to have a conversation about culture clarity and attain cultural high-performance, please give us a call. We have been doing a lot of energizing and interesting work in regard to culture recently. How to articulated, how to embrace culture and change behaviors, and energize and build momentum for the long-term.
Allan Steinmetz - CEO/Founder
NOTE ON THE COMMISSION: The report was based on a 34-member commission that examined the role and impact of corporate culture on business and the corporate environment. The panel was comprised of independent directors, recruiters and consultants. The panel’s recommendation covers 10 steps, which include regular measurement of corporate culture, using combination of factors such as chief executive performance reviews, the scope of power held by risk management officers and others. If you would like to see a copy of this report you can download it for free from their site http://bit.ly/2xkB23b or contact me and I will be happy to forward you a copy.