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Feature
Corporate Culture: the Ultimate Driver of Business Performance By Dov L. Seidman We don’t need to labor over Hewlett-Packard or the hundreds of companies facing backdating accusations to see that business conduct has become front-page news. We have entered an era of values, where a reputation for responsible corporate conduct is the new currency of commerce. Individual character and organizational culture are now the foundation upon which a business reputation is built and maintained over time. The reason for this is unmistakable: human conduct, or how we do things, is much more visible than ever before. We are living in a far more transparent world, where companies must not only appear to have nothing to hide, they must actually have nothing to hide. As a corporate director, you are likely immersed in talk of your company’s culture. The National Association of Corporate Directors, the Department of Justice, the Securities and Exchange Commission and the United States Sentencing Commission have all zeroed in on culture as the best – and really the only – means of creating an environment where corporate malfeasance cannot thrive. The revised Federal Sentencing Guidelines for Organizations go so far as to require companies to “promote an organizational culture that encourages ethical conduct and a commitment to compliance with the law.” Moreover, the Sentencing Guidelines require you, as the “governing authority,” to be knowledgeable about and exercise reasonable oversight of ethics and compliance programs. You will undoubtedly ponder your role in guiding and governing culture, how far you should go and what investments of time and money you should make during your service. Ultimately, if you are to responsibly discharge your fiduciary responsibility as directors, you must ask one foundational question: “Are we shaping corporate culture to be the driver of our business performance and success?” Culture’s Links to Business Performance Just as character determines the destiny of individuals, it is now equally true that business culture determines business destiny. Lou Gerstner of IBM once said, “I came to see, in my time at IBM, that culture isn't just one aspect of the game; it is the game.” The culture of the companies you govern – by which I mean the system of beliefs, norms, practices and values that are passed from one generation to the next in the organization – determines how people act, make decisions and govern their affairs. It directs the promises made to your shareholders, customers, employees, partners, environment and communities, and more importantly, how you live up to those promises over time. It’s a point recently reiterated by Warren Buffet in a September 27 memo to his senior managers, in which he wrote, “…culture, more than rule books, determines how a corporation behaves.” If there was any doubt in the past, it can be increasingly substantiated that an ethical culture satisfies more stakeholders than a culture that lacks high standards and values. Take corporate reputation and branding, for example. If you’ve been a board member for several years, you have probably witnessed the importance and monetary value your company devotes to developing their brand awareness in the marketplace. Companies have spent millions of dollars defining, building and protecting their brand. But in this new era of values, the question is increasingly not “Am I aware of the brand?,” but “Do I trust it?” If they don’t, the cost in terms of lost brand value and sales can be substantial. LRN commissioned a research study that produced some revealing data in this regard. Our survey found that consumers literally place a higher value on a corporation’s ethical reputation than on the cost of its products. In fact, 72 percent of Americans said they actually prefer to buy products and services from companies with ethical business practices whose prices are higher than from companies with questionable business practices and lower prices. An even more striking result was that 70 percent of Americans had already decided not to purchase products or services at some time from a company because of questionable ethics. It’s not just consumers who want to deal with ethical companies. More and more investors also consider a company’s ethics in their investment choices. Although some large institutional investors put the pressure on short-term results, long-term investors cherish growth and value and will vote with their wallets when a company succumbs to scandal or heavy losses due to fines, litigation or a damaged reputation. The LRN study cited above correlated this trend among investors, finding that more than half of Americans who owned stocks independent of a 401(k) said they declined to purchase stock in a company thought to have questionable ethics. A company’s ability to hire bright, dedicated employees also increasingly correlates to having an ethical culture. Roughly 94 percent of employed Americans believe it is “critical” or “important” that they work for an ethical company, the LRN study found. The reasons are intuitive: employees want to be proud of what they do and the company they work for, and perhaps most intimately, they want to know that they are doing the right thing so that they can sleep at night. Not surprisingly, the LRN study found that 82 percent of respondents said they would actually prefer to be paid less to work for a company with ethical business practices than to receive higher pay at a company with questionable ethics. Keeping employees also depends on inspiring an ethical culture. Employees report that they are more engaged when working in organizations who reward and value high standards of behavior versus companies that say one thing but then expect another. The LRN study found that more than 33 percent of employed Americans have actually left a job because they disagreed with a company’s business ethics. Perform a few math equations based upon this statistic and you’ll find that turnover due to unethical cultures leads to millions, even trillions of dollars in lost revenue. The most common reasons for leaving a company for ethical reasons include believing the company was not acting according to its promises or corporate values, pressure to compromise personal ethical standards, pressure to engage in illegal activity and disagreeing with the ethics of fellow employees, supervisors or management. These last points are significant. There is a real distracting power associated with unethical behavior and non-compliance that exerts a drag on performance, creates dissonance and friction, and also eats away at profits. Board members should take heed that unethical actions are a huge drain for their company. Data from the LRN study found one in four workers have witnessed unethical, and even illegal, behavior where they work within the past six months, and among those, nearly all of them (89 percent) said their work habits and productivity were seriously affected by it. The stock option backdating scandal provides another good example of that cost. Recent research showed that this questionable tactic typically lead to an increase in executive compensation of $600,000 but a loss in shareholder value of $500 million. That’s a bad equation. Recommendations for Boards Given the growing linkages we’re seeing between culture and customer loyalty, investor interest and employee motivation, there can be little doubt that boards need to have an increasing interest in -- and responsibility for -- nurturing the corporation’s culture so it becomes intrinsic to a productive, winning strategy. As board members, you must determine whether the organizations you serve are implementing the right strategies and systems that purposefully advance the right culture. Are you shaping an environment in which your executives and employees self-govern their behavior within the context of your shared corporate values or are they trying to make the numbers any way they can? I recommend several actions that you, as board members, might begin implementing: 1. Become involved in culture - As this article has presented, culture is reflected in every action, decision and promise that employees and management make to customers, partners and colleagues. Ensuring an ethical culture can no longer be delegated down to managers, or worse, siloed off to ethics and compliance professionals. Boards need to become involved in managing their culture and assessing whether it is properly serving the long-term goals of shareholders. 2. Stop asking “Can we do this?” but rather “Should we do this?” - Relying on what is legal as the basis for business decisions misses the forest for the trees. The HP imbroglio proves this point. Laws reflect the floor, not the ceiling of conduct. If you strive only to comply with legal minimums, sooner or later you will step over the line. Puzzling over what regulators and the courts may allow you to do ultimately prevents you from fostering a culture that does what is right, not simply what is legal. Remember what Supreme Court Justice Potter Stewart pointed out decades ago – there is an essential difference between that which you have a right to do and that which is right to do. 3. Focus on how your organization does business, not just what it does: This maxim should be a consistent reminder for boards. In today’s world, the how of your business matters far more than the what. Anyone can imitate your product or service in as little as 24 hours. The high standards and values embedded in how you do business are more powerful differentiators to distinguish you in the marketplace. People in your organization must always seek to win by consistently acting according to a higher standard of business conduct. 4. Reward ethical leadership, even when it hurts, and punish unethical behavior whenever you see it: If ethical leadership is central to your organization, you cannot move it aside now and then when convenient. When an individual demonstrates ethical leadership, he or she must be rewarded and celebrated, even when it is inconvenient or if greater short-term gain could have been achieved through unethical conduct. Only when you wholeheartedly back ethical decision-making with what you reward and celebrate – and who you promote – will the organization believe that you are committed to it. And remember Warren Buffet’s words when you see an ethical failure: “If you lose dollars for the firm, I will be understanding; if you lose reputation, I will be ruthless.” 5. Make your decisions in light of the broader ecosystem: Boards today should also recognize that ethics, compliance and corporate social responsibility practices are organically merging on a singular path towards the same goal: to do the right thing any time and all the time. Insist on the same high standards toward values-based decision-making in every area, whether it is how you govern yourself or the mechanisms used to ensure responsible governance on the part of your partners. These suggestions are the fruit of more than a decade of involvement in building ethical cultures. Let me add that I fully understand today’s sometimes antagonistic boardroom environment and the multi-faceted roles board members must play. That said, however, I encourage board members to look to corporate culture as the best opportunity they have to strengthen their governance role, fulfill their commitment to shareholders and ultimately drive business performance. There is real advantage to using your leadership role to foster and strengthen a more ethical, values-based, self-regulating culture that delivers honesty and integrity, along with great products and services to your investors, employees and customers. The rewards to all stakeholders will follow. |
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| Dov
Seidman is chairman and CEO of LRN, and author of "HOW" (John Wiley and Sons; June '07). LRN is a leading provider of governance, ethics and compliance management applications and services. Mr. Seidman is recognized for his thought leadership on ethical capitalism and how executives and boards can advance cultures that encourage self-regulation based on shared values, rather than simple acquiescence to externally imposed rules. In 2004, he testified before the U.S. Sentencing Commission about the need for companies to focus on fostering ethical cultures instead of check-the-box, compliance-only approaches. Today, companies are judged by this higher standard. Mr. Seidman is frequently invited to speak at leading industry events and to senior management and Boards of Directors. Recent presentations include the Ethics and Compliance Officer Association (ECOA) Annual Meeting, the Outstanding Directors Exchange, The Defense Industry Initiative’s Best Practices Forum, National Contract Management Association World Congress, Corporate Board Member Magazine Boardroom Summit and a Commencement address at UCLA entitled “Do The Right Thing.” His views on business ethics and corporate culture have been quoted in dozens of print and broadcast media, including The New York Times, The Wall Street Journal, Fortune, Forbes, The Financial Times, CNBC, ABC’s Good Morning America and BBC News. Pulitzer Prize-winning journalist Thomas L. Friedman included excerpts from his interviews with Mr. Seidman on the importance of trust and protecting and strengthening corporate reputations in his book, The World is Flat: a Brief History of the Twenty-first Century. Mr. Seidman initiated the strategic alliance between LRN and RAND Corporation, which resulted in the creation of the LRN-RAND Center for Corporate Ethics, Law and Governance. The goal of the Center is to study ways businesses can best conduct operations ethically, legally and profitably at the same time. He is a member of the Board of Overseers of the RAND Institute for Civil Justice (ICJ), which unites leaders to provide insight and advice on facilitating change in the civil justice system. He earned simultaneous bachelor’s and master’s degrees, summa cum laude, in philosophy from UCLA. Mr. Seidman later earned a B.A. with honors in philosophy, politics and economics from Oxford University, where he was a Newton-Tatum scholar and captain of the Balliol College crew team. Mr. Seidman graduated with honors from Harvard Law School, where he was an editor for the Harvard Civil Rights-Civil Liberties Law Review. Copyright © 2007 Directors & Boards, P.O. Box 41966 Philadelphia, PA 19101-1966. All rights reserved. Contact the webmaster. < Privacy Notice > |
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