the intangible

November 15, 2017

Organizational culture is one of those fascinating subjects that everyone talks about but no one really understands. Some people actively dislike the entire subject of culture and try to downplay its importance, usually on the spurious grounds that it is very difficult–if not impossible–to measure cultural variables in any meaningful way. There are comparative measures of national culture, like the Hofstede and Project GLOBE scales, but nothing similar has been developed for organizational cultures; at least, not that offers any meaningful explanatory value.

The culture of every organization is unique and different, even if the differences are sometimes subtle and hard to detect, and this is one of the reasons why comparative study and generalization are difficult to do. There have been attempts to develop classes or categories of culture; for example, Charles Handy, in Understanding Organizations, proposed a fourfold classification of cultures which he called ‘role cultures’ (status depends on what post you hold), task cultures (status depends on what your function is in the organization), power cultures (status depends on how much personal power you have), and person culture (power depends on who you are). These can be useful for helping us understand how cultures differ, but we are still struggling to understand how culture works, and why.

And if culture cannot be measured, then can it be managed? Many have cited the famous dictum that ‘you cannot manage what you cannot measure’, but is that necessarily true? Often this is taken to mean that ‘you should not bother trying to manage what you cannot measure’, and therefore culture should be left to its own devices. Experience shows this is most definitely not true. In his book Management and Machiavelli, Anthony Jay described what happens to a culture that is not properly managed: competition, tribal warfare, the creation of fiefs and baronies in different parts of the organization with managers fighting each other for power, and the increasing paralysis of top leadership as the organization slips away from its control.

Culture does need to be managed, and failure to manage it means that cultures can all too quickly become toxic. In terms of organizational health, a toxic culture becomes a virus that infects the organization and spreads through it, killing off its healthy parts, weakening the whole, and eventually dragging it down to its death. Not every organization with a toxic culture fails–at least not right away–and there is no sign that Uber or Sports Direct is about to succumb any time soon (though it cannot be denied that neither is as healthy as it might be). But here are a few examples of organizations that were killed by their own toxic cultures:

Lehman Brothers. For more than a century, Lehman Brothers had been one of the most respectable and respected banks in America, dedicated to serving its clients and the country. But from the 1980s onwards, a new culture crept in, focused instead on performance, targets and profits, and the enrichment of the bank itself and its traders and moneymen. Some in high leadership ignored this cultural change, others actively encouraged it. By 2008, Lehman Brothers had stretched itself to the breaking point in the relentless pursuit of profit at the expense of pretty much everything else. When the financial crisis broke, Lehman Brothers did not have the resilience or the strength to survive. The toxic culture had already killed off the healthy cells.

Arthur Andersen. Like Lehman Brothers, accounting firm Arthur Andersen had been a byword for honesty and probity. But when the firm branched out into management consulting, a new culture began to take hold. The accounting arm had a culture of service, but the consultancy arm had a culture of profit, and when it became clear that the consultants were contributing more to the bottom line, their culture won out. The consultants could, and did, put pressure on the accountants to overlook problems. One of the problems they failed to see was the financial black hole at the heart of the Enron organization. When Enron collapsed, the reputational scandal engulfed Arthur Andersen as well.

The UK Independence Party. UKIP was founded as a single-issue political party, its sole aim to remove the United Kingdom from the European Union. It welcomed members of all political standpoints and every racial and faith group. But UKIP’s founders could not or did not prevent a cultural shift from happening. Accusations of racism, sexual harassment, bullying, and bigotry dogged many UKIP politicians and candidates. Moderates became disgusted and left the party, which became increasingly radicalized. During the last UK general election, UKIP was wiped out as a political force. The party still exists, but few believe them capable of mounting a significant challenge in the future.

1196toxic cultures and where they come from

As the above examples show, toxic cultures that damage organizational health come about when leadership either neglects culture or actively encourages a shift towards toxicity. And here is another key point to be made about culture. Most of the literature on organizational culture focuses on ‘good’ culture, where positive things happen, people are empowered to innovate and create, discrimination is banished, and so on. The truth is that some of the strongest cultures are some of the most toxic. Think of many terrorist organisations, or criminal gangs like the Mafia. Most of them have extremely strong and powerful cultures, with values that their members identify with and cleave to.

It comes back to what R K Krishna Kumar of Tata Beverages once called ‘the struggle between good and evil’ that goes on all around us in the world, including in business. There are ‘bad’ organizations and there are ‘bad’ people who will try to subvert organizations, and we must constantly be on our guard against both. Weak leadership very often opens the door to toxic influences. And let us be clear, these toxic influences do not come out of thin air. They are not mystical spirits that drift invisibly into our organizations and infect them. No, they come from people, those who are dominated by greed or selfishness or criminal intent, rather than recognizing that the primary purpose of any organization is to serve its members and/or the community at large.

This takes us back to the question of whether culture can be managed, and if so, how. One answer would seem to be that we manage culture by managing people. The process starts with selection: what people are we hiring? Are they the right people? Do they have values that fit with the culture we want to create and sustain? If we hire people because they have worked for lots of successful companies, or they got really good marks in their MBA program, will that necessarily be enough? McKinsey, the management consultants, often interview candidates anything up to eight times before accepting them, each interview carried out by a different member of staff. They will take people with third-class degrees who have the right mindset and values, and reject those with honours degrees who they think will not fit in.

My own observation from personal experience is that track record is a relatively weak predictor of success. One of the most successful hirings I have been involved with was a young director who had no previous experience at this level, but who had enthusiasm, creativity, and a whole-hearted commitment to the organization and its goals. She proved to be a tremendous asset to the organization. A few years later, we hired another director with a brilliant track record of success. What had happened, we do not know, but we would have done better to buy a bag of sand and place it on his office chair, so little did he accomplish.

the road to cultural health

Culture is created by people. Put any group of people together, and over time they will find a set of shared values around which they can coalesce; or, if they cannot, they will leave the group. That coalescence and those values determine the group’s culture. During that process, the group decides what it agrees are the important goals they share, what are the best ways of achieving those goals, what are the appropriate standards of behavior towards each other—and important, what are the appropriate standards of behavior towards people who are ‘not’ part of the group—what actions and words are tolerated and which go beyond what is permissible.

Anthropologists have noted how in nearly every society, there are subtle shifts over time as people come and go within society, generational shifts bring in new values and so on, and that is true of organizations such as businesses as well. Change in key personnel, changes in rewards and bonus systems, and reorganization and restructuring can all change the culture of an organization. For example, at Lehman Brothers, increases to performance bonuses for traders helped alter the culture from one which focused on service and the performance of the whole organization to one more attuned to personal reward, recognition, and promotion. Those who made the most money were rewarded, and that encouraged everyone else to seek the same rewards.

But these levers can also be pulled in the opposite direction. Pay, recognition, and promotion can also be used to reward creativity and innovation, high levels of service and positive contributions to the organization. Cadbury Brothers, the confectionery maker, used to have a staff suggestion scheme, and paid staff to come up with clever ideas to improve the company and its products.

Reorganization and restructuring can be used surgically to excise toxic elements of the company, which is one of the ways that Lou Gerstner turned around IBM. But they can also be used to encourage positive behavior by freeing up flows of information, creating a more egalitarian structure and breaking down hierarchy, and generally giving people more space and more empowerment.

the importance of leadership

Most critical of all, though, are changes in key personnel. I know of one company, which I will not name for legal reasons, which was highly admired in its sector and outperformed its competition on pretty much every measure. Within a short space of time, the non-executive chairman retired and the CEO fell ill and had to resign. The new chairman and CEO had a very different idea of how the company should be run. Specifically, they identified the potential for a massive profit to themselves if they could sell the company. They then quite deliberately ran down the company, made it less profitable and more vulnerable to a takeover. They duly got their wish, the company was sold and broken up, and they both became extremely rich.

Getting the right people into key leadership positions is vital for cultural maintenance and organizational health. Those leaders have to care about the organization. They have to put its interests and the interests of customers and stakeholders above their own. As they say at McKinsey, ‘Client first, firm second, self third’. Anyone who leads an organization or aspires to be in a position of leadership must have that mentality. Forget what is on the CV; concentrate on whether they have that right stuff. Experience and skills can be learned. Integrity cannot.

A healthy organization needs a healthy culture, and a healthy culture requires the right people, especially (though not only) in positions of leadership. A healthy organization requires people who will walk the walk and live the organization’s values, setting an example for others. And most of all, a healthy organization needs leaders who have their hands firmly on the tiller, who are managing culture, thinking about culture, understanding culture, and doing their utmost to ensure that the culture remains positive and reinforcing, not toxic and degrading. Leaders who turn their backs on culture are setting themselves up to fail.