Why corporate culture really pays off
Everyone seems to agree that corporate culture is important. But people secretly doubt whether an investment in this area will pay off. These doubts can be dispelled.
An intelligent colleague and lawyer who sits on several boards of directors recently asked me a question that seems to be on the minds of many, but which no one dares to ask: “I know you support companies in cultural issues, and of course I understand that investment in corporate culture is important. But how do I convince a CFO that the systematic development of a corporate culture really promises a rapid return on investment?” Everyone seems to agree that corporate culture is important. But secretly, there are doubts as to whether an investment in this area will pay off. This is apparently also the case for the newspaper “Neue Zürcher Zeitung” (NZZ). The business journalist Simon M. Ingold described why consulting firms in particular achieve a good return on investment with corporate culture – in the form of high fees. Ingold: “In good times, noble corporate values are not even considered. In all other situations, they are an empty promise that has as much to do with culture as Kim Kardashian does with Frida Kahlo. (…) The idea of a homogenic, arbitrarily malleable corporate culture that jumps from employee to employee like a spark of enlightenment remains a mirage. It’s talked about endlessly and earned a great deal without us really knowing how to make it tangible.” Companies like Goldman Sachs or McKinsey are considered top employers, “on the one hand, because they attract candidates with a certain personality profile, and on the other hand, because they are able to pay generous compensation for the 70-hour weeks they work.” “Good” is in the eye of the beholder, and as long as other criteria are met, corporate culture plays a minor role as a meaningful element.”
In places, the article reads like the work of a young business journalist who wants to make a name for himself with provocative writing. But the author is neither young nor new to the business. He’s also a book author, a board member, a graduate of HSG and Yale University, and – get this – recently became CFO at a small, innovative chocolate company.
So, dear CFOs and other doubters of the impact of corporate culture, let me prove you wrong:
Unfortunately, a spectacular proof of the importance of investing in corporate culture is probably provided by Credit Suisse. Thousands of righteous employees of the big bank are suffering from the effects of the Greensill scandal, which has damaged the bank’s reputation, will probably cost it billions, and has caused its stock market value to shrink by a quarter in recent months. Corporate culture also means risk culture. Whether the lack of risk culture can simply be blamed on the dismissed Chief Risk Officer Lara Warner is open to doubt. As one hears, Warner claims to have lived up to her name and to have warned her colleagues at the top of CS about the major risks. If the top had known about it, this would be proof that it is not enough to “pay a generous compensation for the 70-hour weeks worked”. A well-established corporate culture functions as an important “early warning system”; the management, in consultation with the shareholders, determines which risk culture is part of the business and where the boundaries are to be drawn. The staff can use this as a guide and draw attention to it at an early stage if there is a departure from it in operations. It is not just a matter of adhering to established rules – these can also be cleverly circumvented. It’s about a shared and securitized understanding of what “you don’t do in our company.” Another tragic example was provided by the Volkswagen Group, which wanted to advance its U.S. business “at all costs” and created a corporate unculture for this purpose that made the diesel fraud possible in the first place.
You don’t have to be threatened with fines in the billions or rapid share price drops to realize that creating a healthy risk culture offers a good return on investment.
However, corporate culture not only prevents misconduct, but also increases the long-term success of a company. Proof of this was provided in 1992 by the two economists John P. Kotter and James Heskett (“Corporate Culture and Performance”, 1992, Free Press; New York). They wanted to know what influence an internally well accepted and therefore distinct corporate culture has on the success of a company. In their research, they defined whether a corporate culture was distinctive by the extent to which certain values were shared by most employees. They defined the long-term success of a company in terms of the average increase in annual profit, the return on assets and the development of the share price. They then compared whether and to what extent these two values “culture” and “performance” are related to each other, i.e., how strongly they correlate. The study analyzed 207 companies and the correlation of “culture” and “performance” was remarkable: Kotter and Heskett found that companies with a stronger culture showed significantly higher sales growth (682% versus 166% for culturally weaker companies) and significantly higher profit growth (756% versus one percent) over an eleven-year study period. Thus, the study provided empirical support for the thesis that corporate culture really does make a difference.
Also of interest are the six areas of impact described by German economists Norbert Homma, Rafale Bauschke and Laila Hofmann in their 2014 book “Introduction in Corporate Culture,” which they see as making corporate culture a key factor for companies:
In a good, shared culture, an organization and its members remain alert to changes and trends. Everyone knows where the company is going, and if the environment changes, performance is no longer right internally, or values are not followed everywhere, this is quickly noticed and leads to discussions. These discussions then take place at a moment when action can still be taken in time and not only when the damage has already been done. The corporate culture is therefore also something like an early warning system and reduces the risk of missing important developments.
A shared culture helps you feel part of something bigger. People identify with a group that is working together towards a common goal – for example, to increase innovation, surprise customers in a positive way or improve earnings. If we share the same values and goals with others, we feel supported and can assume that everyone wants to achieve the same thing. We feel a strong team spirit that motivates individuals for their work.
If you know how to achieve a common goal and what you want to be measured by externally, you can clearly differentiate yourself from competitors. You know exactly what you don’t want and are sure what you want to do better than others. This makes it easier for employees to act convincingly as brand ambassadors, since they are sure what their own company wants to be unbeatable at.
If you know which decisions the organization will accept, you can act and react faster. There is no need for constant questioning. The culture prevents uncertainty and offers employees a safe space to shape their work and, in the interests of the company, to contribute their own ideas and try out new ways.
Because superiors cannot and do not want to control every detail, the corporate culture is also very helpful for them. After all, in a good corporate culture, many things are unspoken and clear from the start. And things that run counter to the commonly defined values are less likely to happen. This reduces the risk of unconscious misconduct “under the radar”. A good culture leads to correct behavior, even when no one is looking.
When everyone can rely on making decisions and acting according to the same values and norms, a company offers a lot of stability. This stability is attractive to employees and customers alike, because it makes the company “predictable” and particularly trustworthy.
As the authors also state in their book, this of course presupposes that the corporate culture actually has a formative effect. The described effect on an organization is only achieved if the corporate culture is lived at all levels. For corporate culture to have a supporting effect, it must influence daily behavior.
Now two practical examples from our everyday working life, which go back further and can therefore be written about: When General Motors was on the verge of bankruptcy and the Obama administration had to save the company with 50 billion US dollars in 2009, GM car dealers in Switzerland had already become accustomed to losing, because their market share had been declining for seven years in a row. A new CEO of GM Suisse sensed that only a culture change would make it possible to return to winning ways. He invested in a systematic culture change and managed to make car dealers believe in themselves again, trust the company and feel supported. Two years later, the turnaround was achieved, and the company regained market share. Second example: Years ago, a Swiss energy company was struggling with an LTIR (Lost Time Injury Rate) that was clearly too high. Although more and more rules were established and employees were trained to act safely, the accident rate did not decrease. It was only after a two-year culture change program, which also used gamification methods, that the rate dropped: by 30 percent in the 12 months and by the same percentage again in the second year.
A consciously managed corporate culture can therefore demonstrably improve risk management, enhance performance, strengthen differentiation in the market, and even prevent accidents.
We wish the NZZ business journalist Simon M. Ingold that he will contribute to a good corporate culture in his function as CFO – so that the chocolate company will be spared serious crises, can show its chocolate side in a tough competitive environment, and offer all stakeholders a sweet experience in the long term.
P.S. In addition to the two publications mentioned, another book recommendation on the subject: “The Culture Cycle – How to Shape the Unseen Force That Transforms Performance” by James Heskett, published in 2012 by Pearson Education Inc.