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11 Jul. 2018 | Comments (0)

On Governance is a series of guest blog posts from corporate governance thought leaders. The series, which is curated by the Governance Center research team, is meant to serve as a way to spark discussion on some of the most important corporate governance issues.

Culture matters. We hear it all the time, and no one dares disagree, but why does it matter? Group culture is one of the most powerful forces on the planet. We can measure its impact on the bottom line. According to a Harvard study of more than two hundred companies, strong culture increased net income by 756 percent over 11 years. We know that it works. We just don’t know quite how it works.

But defining the concept, and, more importantly, determining ways to foster a fabulous culture remain elusive. Especially for the board, operating from within its own hermetically sealed chamber, and even then, only occasionally. Do we give up? Not yet. Let’s do some studying about trends and techniques.

In their widely influential 1934 book Security Analysis, now in its 6th edition, Columbia University Professors Benjamin Graham and David Dodd laid out a method of valuing companies in which tangible assets were the primary driver of company value. Intangible assets, if they were considered at all, were viewed as a small component of corporate value, perhaps reflecting the value of a brand name. As post-industrial economies continue to evolve, however, the intangible elements that comprise a company’s culture grow in importance.

Some estimates suggest that intangibles today comprise as much as 80 percent or more of corporate balance sheets. This may seem hard to credit. But consider the nature of many of our large enterprises today. We worry about the lack of agility of big box retailers and are in awe of Amazon. Intellectual capital in an age that prizes innovation is of huge importance; focus is greater on research and development over capital spending. Even manufacturing companies depend heavier on the intangible value of customer service and brand loyalty.

Looked at this way, it is easy to see that culture, while a squishy, imprecise term, spells competitive advantage. Thus yes, every board must focus on that mysterious set of qualities called culture, under which many intangibles seem to be lumped, along with that relentless effort to build the tone at the top that promotes ethical behavior. Focus on culture is about about winning, about building an organization for success. More specifically, it is about doing the tactical things to make sure your people and your organization are aligned in their behavior.

There are many ways to say this: Corporate culture is the only sustainable competitive advantage that is within the control of the organization’s leaders. And here is another: An organization's ability to learn, and rapidly to translate that learning into action, is the ultimate competitive advantage. And yet another: In the end, an organization is nothing more than the collective capacity of its people to create value.

From here, we realize quickly that each CEO is also the “Chief Cultural Officer,” whether he or she recognizes it or not. And it is the CEO’s behavior, not their speeches nor the list of corporate values they recite, that trumpets what the culture values. Employees who believe that management is concerned about them as a person — not just an employee — are more productive, more satisfied, more fulfilled. Satisfied employees mean satisfied customers, which leads to profitability. In other words, the trick may be to treat your employees exactly as you want them to treat your best customers. It is not possible to buy emotional commitment from managers no matter how much money is spent. Without such emotional investment, however, a company is only a shadow of its best self.

So, what to do next? Attract the right people. Shaping culture is more than half done when you hire the team. In determining which people are the right people, author Jim Collins, in his book Good to Great: Why Some Companies Make the Leap...And Others Don't, how such companies placed greater weight on character attributes than on specific educational background, practical skills, specialized knowledge, or work experience. Two main attributes are mentioned repeatedly: ambition and humility.

Good leadership requires you to surround yourself with people of diverse perspectives who can disagree with you without fear of retaliation. Instead, use disagreement to show that it is appreciated, and dissent is not seen as disloyalty. Arouse enthusiasm and develop the best that is in a person by appreciation and encouragement, often of that very ability to disagree. There is nothing that kills the ambitions of a person as effectively as criticism from superiors. Give incentives to work and to speak up. Be eager to praise, but loath to find fault. If you are fortunate enough to have employees, you want to make sure they look forward to coming to work in the morning, ready to invest themselves in their work.

So, to recap, intangibles are now a huge percentage of what drives value. Using them well is a major and perhaps the only source of competitive advantage the company controls, which leads us to recognize that for good or ill the CEO is the chief architect of culture, not in word but in deed. Those deeds include finding employees with ambition, humility, and strong character, and treating them as if they were major customers, encouraging them to perform, including to disagree with their leaders without fear of reprisal.

To many this will sound like anarchy. But as we recognize that intangibles drive such a huge portion of value creation in our companies and our economy, so must we realize that the command and control hierarchies of the industrial age are rapidly being outgrown. Company culture is the connective tissue, far more critical to success than stated authority on the organization chart.

Culture is the pattern of shared basic assumptions invented, discovered or developed by a given group as it learns to cope with the challenges of external adaptation and internal integration that have worked well enough to be considered valid and therefore, to be taught to new members as the correct way to perceive, think and feel in relation to those challenges.

Company culture shapes the workday experience of each employee. It grows from the company’s mission, the mood of the group, its values, expectations, goals; from hiring choices, desk positioning and floor plans — all those factors, great and small, that shape the company’s overall direction. Company culture can determine if someone “likes” their job or values their company.

Culture guides discretionary behavior. Culture tells us way more effectively than the employee handbook ever will how to respond to an unusual customer request, or whether to risk telling the boss about a new idea, or to surface or hide a problem. Employees make hundreds of decisions on their own every day, and culture is their guide. Culture tells us what to do when the boss isn’t in the room, which is most of the time.

A culture of trust works wonders. In such an environment, heated arguments are merely grist for the mill, as long as those arguing are recognized to have the best interests of the company and the wider team at heart. A strong culture in which trust and safety are key values gives people the space to argue, to learn, and to understand each other better. And if they understand each other better in their soul, it is easier to overcome minor differences. Fundamentally, they learn that that their colleagues are, in the end, just like them, with the same worries, the same questions and joys and loyalty.

Being successful at building that culture of trust is not something that can occur on demand. There are many seemingly small actions and choices that contribute to building that fabric. I borrowed the following vignette from The Culture Code, by Daniel Coyle, which I highly recommend reading. Coyle suggests that you imagine you are in a meeting and want your group think more creatively. Which phrase should you use?

1) “What if we….”

2) “Why don’t we….”

3) “How might we….”

The third choice wins, because it sends a signal that failure is OK. “The beauty of the phrase ‘How might we do this’ is that it eliminates fear, stress, and anxiety by supportively implying that there may be more than one solution, and that nothing more is needed at the moment than ideas,” says Jean Greaves, an organizational psychologist and CEO of TalentSmart. “This is the language that primes our mind for having fun exploring and pushing beyond what’s already known.”

In other words: if you want creativity, start with safety and permission. And no one in the company is in a better position to create that environment than that board of directors. To summarize, to foster that desired culture of trust, the board must focus on only a few key areas:

Engagement

Employees want a positive workplace culture; they are looking for advancement opportunities and collaboration. By addressing some of these elements, you’re investing in the success of your workforce. Engaged employees are powerful assets.

Financial Success

According to a Gallup meta-analysis of 1.4 million employees, companies with employee engagement measured in the top-quartile are 22 percent more profitable than those in the bottom-quartile. The same study suggests that engagement can lead to improved customer interactions, an indication that your customers also experience the benefits of your culture.

Recruiting

With reports out such as Fortune’s “100 Best Companies to Work For” and Glassdoor’s Employee Choice Awards, applicants are adding culture to their list of considerations. In fact, highly educated job-seekers are prioritizing aspects of organizational culture, such as company values and growth opportunities. This can be an important differentiator and a powerful tool in attracting top talent.

Retention

When your employees know you care, they feel their work is valued and are more committed to performance. According to a study by the Corporate Leadership Council, engaged employees are 87 percent less likely to leave the company. Turnover is expensive and rough on morale and working on your culture is one of the best things you can do to address it.

Moral of the story? Don’t take your employees for granted, but instead embrace that amorphous collection of behaviors that comprise company culture. In the words of Jack Welch, former CEO of General Electric, “There are only three measurements that tell you nearly everything you need to know about your organization's overall performance: employee engagement, customer satisfaction, and cash flow ...It goes without saying that no company, small or large, can win over the long run without energized employees who believe in the mission and understand how to achieve it…”

(The blogger recently published The Governance Revolution: What Every Board Member Needs to Know, Now!)

The views presented on the Governance Center Blog are not the official views of The Conference Board or the Governance Center and are not necessarily endorsed by all members, sponsors, advisors, contributors, staff members, or others associated with The Conference Board or the Governance Center.

  • About the Author: Deborah Midanek Bailey

    Deborah Midanek Bailey

    Founder and president at Solon Group Inc. and principal at Prevail Investments LLC, Deborah Midanek Bailey has also served as director, lead director or chairman as well as committee chair (audit, com…

    Full Bio | More from Deborah Midanek Bailey

     

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