Corp. Culture: Who Failed, Who Got It Right

The concept of corporate culture is difficult to get one’s arms around. We know it exists within every organization, although trying to identify or define it is challenging. That notwithstanding, executives who have been through the “wars” know well that shaping a company and its people to the desired culture plays a major role in how the organization is run and how successful it will be.

I want to look this month at the relevance of this thing we call “culture,” the effect it has on corporate behavior, and what works in its formulation and enhancement within an organization.

Grasping Culture

This heading probably is an oxymoron, as getting hold of something as intangible as corporate culture is challenging, if not impossible. The dictionary says it is the professional atmosphere of a company, along with its values, customs, and traditions. COSO’s Enterprise Risk Management—Integrated Framework adds that culture encompasses ethical and behavioral standards and how they are communicated and reinforced. (Full disclosure: I was a primary author of that framework.) The report makes a key distinction: that official policies specify what a company’s board and management want to happen, where its culture determines what actually does happen—and which rules are obeyed, bent, or ignored.

The effect of culture can be seen in any company. Consider the German engineering company Siemens. Reports say corruption at the company was extensive, driven by a culture where employees believe bribes were not only acceptable, but implicitly encouraged. And changing that is difficult; reflecting on Siemens’ reaction to the bribery scandal, a founder of Transparency International makes the point: “There are new processes, new people, and new procedures, but that does not make a difference in the world unless there is a change in culture.” An executive brought in from General Electric as the company’s new anti-corruption cop is cognizant of the challenges inherent in his new role, saying “healthy compliance cultures depend on a more values-based leadership, where people don’t need to look at the rule book, where they know intuitively what the right thing to do is.”

A well-known and still relevant example of a company knowing the right thing to do is how years ago Johnson & Johnson reacted to the Tylenol package tampering scandal of 1982. Because the company’s culture put the customer first—regardless of short-term profit pressures—management immediately pulled the product from shelves and maintained and strengthened its positive reputation in the marketplace. Because of the shared values within the organization, the decision was a no-brainer: There was no choice but to do the right thing for customers.

Cultural Failures

The list of companies experiencing disaster from cultural deficiencies is too long to include here, although we can look at some of the failures inherent in the recent financial system meltdown.

Mortgage generators. It’s become all too clear that many banks, mortgage brokers, and other generators of home mortgages developed a culture of “get my money now, damn the customer.” Putting buyers in homes they simply could not afford—either initially or when adjustable rates were to ratchet up—certainly helped the companies’ bottom lines in the short run, but resulted in disaster for both the companies and home buyers alike. After all, go ask those same mortgage generators how business is these days.

Credit card companies. The next shoe to drop in the mortgage-led economic downturn is the credit card industry, which sent pre-approved applications seemingly to anyone who could breathe. Providing credit to people unable to afford further debt, along with policies of charging exorbitant interest rates for one-day-late payments or jacking up rates on new balances surely does not put the customer first, and bad debts are now overwhelming these organizations.

Investment banks. And of course we can look to the investment banks and other financial institutions slicing and dicing collateralized debt obligations and selling them off as gold-plated securities. Another fair question is how much they knew these securities didn’t deserve the triple A ratings bestowed by the credit rating agencies. Not only did pension funds, municipalities, and other investors get burned; these financial institutions were left with toxic securities in their pipelines and too much leverage, bringing these firms to their knees and threatening the entire financial system.

Another massive failure of several years ago comes to mind, under somewhat different circumstances but still with the common thread of cultural failure. I’m referring to Arthur Andersen, one of the (then) Big 5 auditing firms held in high esteem within the profession and marketplace. There are different views of what went wrong at Andersen. Mine centers on the firm’s urgent drive to grow the business, based at least partly on losing its highly successful and profitable consulting arm in a high-profile court case, receiving the lowly sum of $1. I believe that Arthur Andersen was the only one of the large firms to have a policy where the engagement partner—not the national office’s experts—made all final professional decisions. So when a national office partner disagreed with the partner on the Enron engagement, guess who won? And we know what transpired thereafter. This wonderful firm let its culture shift from embracing the highest integrity and professional and ethical standards to one allowing critical audit decisions left to one field individual.

Companies That Got It Right

There’s no quick recipe or silver bullet for developing the “right” corporate culture. Books have been written on what to do. In the space available here, I’d like to share a few of my personal experiences with chief executives whose actions have had a dramatic and long-lasting positive effect on their organizations, shaping their corporate cultures for years to come.

Insurance company. This major firm got caught up in a scandal involving improper sales practices and was working diligently to strengthen its system of internal control to help prevent future failures. It learned that a group of customer service call center employees, to continue being paid on a commission (rather than salary) basis, needed to obtain requisite licenses. Looking to do the right thing, the CEO announced that the group’s personnel would immediately begin the necessary steps to register for and take the tests for licensing; and in fairness to those employees, commission-based payments would continue during the transition. While having good intentions, the CEO learned that the message received by the company’s personnel was that continuing to break the rules is OK as long as there is a plan to come into compliance. Recognizing how the initial decision was being interpreted, he quickly changed tacks, shifting the group to a straight salary until licenses were secured. This company’s culture soon reflected the message that not only is it necessary to work toward doing the right thing, but also to take what might be unpopular action to do what is right at all times.

Professional services firm. A manager passed over for partner in one of this firm’s highly profitable business units requested that the decision made at the local level be reviewed. Following a thorough file review and interviews with the manager and the unit’s partners, it became clear that this female manager was eminently qualified in all respects for admission to the firm. The problem turned out to be the unit’s managing partner, who apparently had a history of discriminating against women’s advancement in the firm. The CEO met with a leadership group, listening to one recommendation after another on how to deal with the matter. The CEO—a former Marine and highly principled no-nonsense guy—then asked the question: What is the right thing to do? After a brief period of silence, the general counsel answered that not only should the manager be admitted, the managing partner should be removed. Those actions were quickly implemented and became well known throughout the organization, and the decision to do the right thing became imbedded in the firm’s culture.

Consumer products company. This company’s CEO and leadership team decided to move forward with plans to design and implement an enterprise risk management process. Following a diagnostic review of the current state of risk management in the organization, it became evident there was a risk focus only in a few small, contained units, while the “tough guy” culture of the broader organization essentially prohibited personnel from speaking about risk. Anyone doing so would be viewed as going against the company’s “can do” philosophy and style, and perceived as being negative, weak, and lacking in leadership. Recognizing the importance of an effective ERM system, the CEO made a decision that the company’s culture needed to change. By initiating an in-depth risk analysis at the next strategic planning and budgeting meeting, the CEO made clear to his direct reports that discussing corporate risks would not only be tolerated, but mandated. He followed up in meetings with the next management level and videos to the entire organization, and within months the culture embraced the concept that “smart tough guys” indeed do focus on risk in making action-oriented decisions to move the company forward.

The Importance of Getting It Right

Experience shows that culture has a strong and pervasive effect on a company, either positively or negatively. Top management usually has an accurate picture of organization’s culture, but reality is that a significant number of CEOs learn too late that they were badly mistaken. Among the most critical roles of a CEO and senior executive team is to have an in-depth and accurate understanding of the company’s culture, determine what changes are needed, and take quick and decisive action to mold the culture to what’s needed to enable the company’s successful future.