Article 1: What is Corporate Culture and Why it Matters to the Bottom Line?

For an introduction to this series of articles, please view Why Banks Should Focus on Culture, Now More Than Ever.,

It’s no secret that the recent global economic meltdown and resultant bailouts caused more than just financial damage to the global banking industry.  The brand image of banking, and bankers in general, has taken a major hit for the worse.  Where banks were once respected institutions of integrity and financial prudence, and bankers admired for their business acumen and community service, today the reputation of banking is at an all time low.

The poor image of banking is not solely in the eyes of the public, however.   Sadly the stain is internal as well. Inside many major banking organizations morale is at rock bottom and feelings of professional pride are a distant memory.

And the rush to rebuild their image and business standing through the implementation of new business models, restructuring, advertising campaigns and “transformation” programmes may actually be making things worse.  Long-term employees feel insecure about their futures, new employees are wondering how to get ahead amidst all the changes, and corporate, commercial and retail customers are wondering whom to trust. To make matters worse, several of the large banking institutions are losing top talent in droves as individual performers search for a “better fit” at other banks or even in private financial institutions such as hedge funds.  These are some of the hidden speed bumps that will slow down the banking industry in its efforts to recover its reputation.

We believe this time of upheaval and transition provides a perfect opportunity for leaders of courage and wisdom to remake the image and brand of banking and grow shareholder value by building healthy, high performance corporate cultures.

The “Hard” Edge of Corporate Culture

Hold On! Before you stop reading, thinking this is perhaps another of those “fluffy” articles on organizational behaviour or human resources, let us state our position on culture and its connection to strategy delivery and operating performance.

First of all, while the experts and academics still don’t fully agree on what culture is, in everyday terminology corporate culture is often called the “personality of an organization”, or more simply “the way we do things around here”.  More recently corporate culture has been recognized as more complex than just the collection of shared employee behaviours. A more comprehensive understanding of corporate culture takes into account not only shared behaviours (mindset), but also skills and business processes.  CEOs and senior executives we have worked with find the following definition easy to understand and use:  “the habitual ways we go about solving business problems and treating each other.”

It is now well documented that corporate culture impacts performance and that a culture can either propel or hinder strategic and business agendas  (McKinsey Quarterly 2006, No 3; McKinsey Quarterly 2007, No.3; Towers-Perrin Global Workforce Study 2007-2008).  In a recent study on culture among 300 European banks it was estimated that if a bank was to succeed in increasing the human-orientation of its corporate culture by 10%  the ratio between EVA and invested capital would rise by 2.44%.

Like it or not, understand it or not, culture matters to the bottom line. And at no time is culture more critical than during periods of large-scale change.

How Culture Impacts Performance: The relationship between culture and performance is more easy to see with the understanding that Strategy – Structure – Culture are interlinked and for top performance, these three critical business elements must be in alignment.  In simple terms, “everyone knows where we are going” (strategy), “it’s clear who does what in the organization” (structure), and “we all understand the groundrules for working together and for dealing with clients” (culture).

In less turbulent times when the pace of change was slower, organizations were able to gain alignment between these three critical elements and as a result produced efficient performance and long term growth.

However, with the explosion of technology, rapid globalization, aggressive new competition and shifting regulation, companies are often forced to shift their strategies, and to subsequently reorganize in order to remain competitive (the history of the airline industry is an excellent example).   When new competitive strategies are called for, a company usually needs to reorganize to better deliver on their new strategy.

The problem is, that’s as far as most senior teams take it; thinking that improved performance should naturally follow.

Because most CEOs and senior executives are often insulated from the real internal culture(s) within their organization, it becomes difficult to see the link between culture and performance. It also becomes difficult to see when the existing culture is no longer aligned with the new demands of the business.

Unless there is work done to reshape the culture, the old culture can act as an anchor, slowing down and in some cases even stopping real change.   Therefore, to fully implement a new strategy or to rebuild your organization to be effective in a changed world, it is critical to reshape culture as well.

While it may be tempting to believe that culture is an internal issue, how we work together inside the firm, it should also be understood that culture directly impacts how we deal with clients and prospects.  Expecting alignment and collaboration on a new client pitch from a culture of silos and fiefdoms is both naive and costly.  The fact is, a culture will treat its customers in exactly the same way it treats internal departments and each other.  No wonder everyone is looking for a magic training course to improve the teaming abilities of various bank departments during a major new client pitch.

In a large study of European banks published in 2003, researchers found a negative correlation between culture and short-term profitability, but a strong positive correlation between culture and Economic Value Add, postulating that investing in people and teams to build a strong internal culture may be costly in the short term but a wise investment in the long run.  In many cases it is up to the leaders to balance their strategies to provide for improved profit performance while also building long-term economic value.

So, if culture impacts performance and our ability to implement business strategies and change, then why isn’t corporate culture more valued in the executive suite?

We believe it stems from the so-called culture gurus who have for the past three decades (ever since the publishing of “In Search of Excellence”) been focusing entirely too much on the outward manifestation of culture, that is behaviours, and not enough on what really creates corporate culture in the first place.  We believe that the majority of those involved in consulting and writing about corporate culture and culture change have been far too interested in pushing the solutions of executive coaching or team training as their solutions and have missed the two primary shapers of corporate culture: repetitive business processes and the activities of the senior leadership team.

In the next article, The Determinants of Corporate Culture, we will focus on what creates corporate culture and how cultures are built and solidified over time.

Tight Lines . . .

About johnrchildress

John Childress is a pioneer in the field of strategy execution, culture change, executive leadership and organization effectiveness, author of several books and numerous articles on leadership, an effective public speaker and workshop facilitator for Boards and senior executive teams. Between 1974 and 1978 John was Vice President for Education and a senior workshop leader with PSI World, Inc. a public educational organization. In 1978 John co-founded The Senn-Delaney Leadership Consulting Group, the first international consulting firm to focus exclusively on culture change, leadership development and senior team alignment. Between 1978 and 2000 he served as its President and CEO and guided the international expansion of the company. His work with senior leadership teams has included companies in crisis (GPU Nuclear – owner of the Three Mile Island Nuclear Plants following the accident), deregulated industries (natural gas pipelines, telecommunications and the breakup of The Bell Telephone Companies), mergers and acquisitions and classic business turnaround scenarios with global organizations from the Fortune 500 and FTSE 250 ranks. He has designed and conducted consulting engagements in the US, UK, Europe, Middle East, Africa, China and Asia. Currently John is an independent advisor to CEO’s, Boards, management teams and organisations on strategy execution, corporate culture, leadership team effectiveness, business performance and executive development. John was born in the Cascade Mountains of Oregon and eventually moved to Carmel Highlands, California during most of his business career. John is a Phi Beta Kappa scholar with a BA degree (Magna cum Laude) from the University of California, a Masters Degree from Harvard University and was a PhD candidate at the University of Hawaii before deciding on a career as a business entrepreneur in the mid-70s. In 1968-69 he attended the American University of Beirut and it was there that his interest in cultures, leadership and group dynamics began to take shape. John Childress currently resides in London and the south of France with his family and is an avid flyfisherman, with recent trips to Alaska, the Amazon River, Tierra del Fuego, and Kamchatka in the far east of Russia. He is a trustee for Young Virtuosi, a foundation to support talented young musicians. You can reach John at john@johnrchildress.com or john.childress@theprincipiagroup.com
This entry was posted in corporate culture, leadership. Bookmark the permalink.

5 Responses to Article 1: What is Corporate Culture and Why it Matters to the Bottom Line?

  1. Hank McCard says:

    John,

    Congratulations on your new blog. I commend you for focusing on corporate culture. You helped me focus on that matter many years ago we were successful in changing the culture at TDS in the ’80s.

    Thank you again for all of your assistance.

  2. Pingback: Another clue that big banks are doomed . . . | John R Childress . . . rethinking leadership

  3. Pingback: Admiral Rickover and The Responsibility of Leadership | John R Childress . . . rethinking leadership

  4. Pingback: The Culture of Banking is Broken . . . An Example | John R Childress . . . rethinking leadership

  5. Pingback: Why Banks Should Focus on Culture, Now More Than Ever | John R Childress . . . Rethinking

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s