Corporate Culture and Performance

Many large organisations lament the lack of innovation; the lack of agility; and the over centralisation of decision-making. A further analysis of these “ailments” often leads to the conclusion that performance is not as good as what it could be; in other words the company is not achieving its potential. If innovation, speed and empowerment are considered to be symptoms of a corporate culture rather than processes in themselves then it seems that there might be a link between corporate culture and performance.

The answer as to whether there is a link or not is to be found in a book by Kotter and Heskett of the same title (1992, The Free Press). They specifically set out to determine whether there is a relationship between corporate culture and long-term economic performance. The term “corporate culture” was relatively new at the time, but twenty years on, their findings are still pertinent, relevant and applicable today.

Here is a summary followed by a consideration of further implications (“et alors”).

Corporate Culture and Performance

The authors studied the culture of 207 companies and analysed their respective financial performance over an 11 year period (revenue growth, net income growth, and increase in stock value). There are three key findings:

Strong Cultures

A “strong” corporate culture is where “almost all managers share a set of relatively consistent value and methods of doing business”. In particular, a new employee is as likely to be corrected by her subordinates as by her bosses if she violates the organisation’s norms.

At best there could be seen to be a very-loose correlation between short-term performance and strong cultures. On the other hand, strong cultures are considered by analysts to be diametrically opposed to long-term economic performance.

Strategically Aligned Cultures

Here the content of the culture is more important than the strength of the culture. The corporate culture is only “good” if it “fits” its context. The context can be the business strategy or the “objective conditions of the industry”.

The concept of “fit” appears to be useful in explaining short- to medium-term performance; however both the “fit” and the related performance appear to be temporary and cannot explain long-term economic performance.

Adaptive Cultures

Here “managers throughout the hierarchy provide leadership to initiate change in strategies and tactics whenever necessary to satisfy the legitimate interests of not just shareholders or customers or employees but all three.”

There is a strong correlation between adaptive cultures and long-term economic performance.  12 companies with the most adaptive cultures (compared to the 20 with the least) had better revenue growth at 682% (cf. 166%); better net income growth at 756% (cf. 1%); and better increase in stock value at 901% (cf. 74%).

Et alors?

So why doesn’t every organisation adopt an adaptive culture? Firstly because when organisations have a strategically aligned culture, the firm performs well and there is no incentive to change or be prepared for change. Management can become not only complacent but arrogant. Inevitably, the environment changes (regulations, competition etc.) and because the strategies and tactics are not developed and successfully implemented, the culture no longer “fits”. Performance deteriorates but there is no perceived crisis and the organisation tends to become stuck in a “strong” but-no-longer-appropriate culture.

Secondly “strong” cultures (including many erstwhile good “fit” cultures) can become too strong especially in terms of management versus leadership. There are no leaders and so change becomes very difficult not least since managers may be hostile to any fundamental change. The authors identify this as an “unhealthy” culture where the management care about neither shareholders, nor customers, nor employees but just themselves. Accordingly, there appears to be a thin line between strong and unhealthy cultures. Both are far from being adaptive and the difference is only minor in how much the management’s behaviour is arrogant, self-centred, insular, political and essentially bureaucratic. Hence the financial analysts’ dislike of strong cultures!

It therefore requires a strong leader to implement an adaptive culture and the reason a lot of large companies do not get there is “(1) a strong culture can blind people (even smart, experienced and successful executives) to facts that don’t match its assumptions; and (2) an entrenched culture can make implementing new and different strategies very difficult”. There are however two solutions, but neither are quick fixes. For the long-term, a robust leadership development program needs to be in place to balance management with leadership so that if (and when) change is required, there are the resources in place to achieve it throughout the organisation. In addition, usually precipitated by a crisis, the leadership to change the corporate culture has to come from the top. This is the medium-term “project” and in particular, the best-placed individuals to effect the change are those who can maintain an “outsider’s objective outlook” but have built a robust credibility and internal power-base…