Corporate culture is one of the most important drivers of a company’s business results. It has many dimensions and affects different aspects of organizational performance. Corporate culture comprises the values, beliefs, and norms that shape how people behave as members of an organization.[1]
Corporate culture can be an asset or a liability.
Effective leaders recognize that corporate culture can be either an asset or a liability. It is an asset when it improves organizational effectiveness and a liability when it harms or weakens company performance.
Two variables determine whether corporate culture is an asset or a liability: the “strength” of the culture and whether it is “functional” or “dysfunctional.” A strong culture is one that people understand and accept. A weak culture is one that people do not understand and/or do not accept.
The four states of corporate culture
Taken together, these variables create four possible states of corporate culture:
· Strong, functional culture
· Weak, functional culture
· Strong, dysfunctional culture
· Weak, dysfunctional culture
Your corporate culture is therefore an asset when it is strong and functional. It is a liability when it is either strong and dysfunctional or weak and dysfunctional.
How does corporate culture affect employee turnover?
A recent, as yet unpublished, culture study conducted for one of our client companies produced a highly significant finding about the relationship between culture and turnover.[2]
We found a statistically significant inverse relationship between the extent to which a culture is functional, or positive, versus dysfunctional, or negative, and employee turnover. Put differently, a functional, positive culture is associated with low turnover, while a dysfunctional, negative culture is associated with high turnover.
The cost of turnover
Although turnover is widely understood to be expensive, its true cost is usually invisible. When people leave a company, human capital is lost at several levels.
The conventional definition of human capital includes an individual’s knowledge and skills. In reality, however, there are two additional forms of human capital:
1. The collective power of high-performing teams
A high-performing team is one that delivers exceptional results, including financial results. For example, our published empirical research shows that the presence of a close-knit team of high-performing C-level executives—what we call a “leadership molecule”—is statistically associated with effective organizational development, which is itself an established driver of financial performance.[3]
2. A strong, functional corporate culture.[4]
Our research shows that corporate culture, when it is an asset, is a statistically significant factor in financial performance. More specifically, it explains up to 46% of EBIT.[5]
What does this mean for how companies behave during a pandemic?
During the pandemic, many—perhaps most—companies overlooked the fact that people represent an asset in several different forms. Instead, they were treated as a cost to be reduced. We saw contracts terminated, employees laid off, and people placed on unpaid leave.
Although these measures reduce payroll costs in the short term, they have serious hidden consequences and carry a high long-term price. Human capital in all three of its forms is literally destroyed, as though it had no value.
This happens because accounting systems do not record losses of human capital, even when a valuable asset is effectively being destroyed.
The result is a paradox: on the surface, the company appears to be doing well because it has reduced costs. Beneath the surface, however, it has liquidated valuable human assets—an asset disposal that usually remains hidden.
Even if the company eventually replaces the people it is laying off today, it will already have damaged its assets in the form of effective teams and a strong, functional corporate culture.
Are the initiatives you are taking protecting or destroying your human capital?
Whatever actions a company has taken in response to the pandemic, their impact on its culture—whether strengthening functional characteristics or reinforcing and creating dysfunctional ones—is highly likely to become visible later.
The good news is that nothing is irretrievable. A company can analyze the potential effect of its measures on the culture and take appropriate action. This is easiest when the company already has a system for diagnosing and monitoring culture. Such a system typically includes: 1) an explicit, formally communicated description of the company’s values; 2) a selected methodology and model for culture diagnostics that are applied systematically; 3) deliberately applied culture-management tools organized into a culture-management plan; and 4) clear responsibility for managing and developing the culture assigned to a senior executive.
In that case, the measures taken can be evaluated according to whether they support or conflict with the objectives and direction of the culture-management plan. The company can also conduct a brief pilot survey of the current culture—a pulse check—and compare the results with those of the most recent comprehensive culture survey, if one exists.
When a company does not yet have such a system, the appropriate course of action depends on which elements of an effective culture-management system are missing:
1. If the company has no formal description of its values, we recommend using this moment to begin identifying and defining them. Leaders’ actions during a crisis are a powerful expression of the values that truly operate in the business. It is worth asking: What values are we reinforcing through the decisions we are making now, and are these the values we want to guide our people’s behavior after the crisis?
2. If the company has not selected and systematically applied a culture-diagnostics methodology, we recommend conducting a short pilot culture survey combined with interviews and focus groups. This approach can provide information about both the current culture and changes in employees’ beliefs and perceptions resulting from the measures taken during the pandemic. It can also reveal opportunities to build a stronger, more broadly functional culture or repair potential damage caused by earlier decisions.
3. We would recommend a similar approach when there is no culture-management plan. Developing such a plan should begin with some form of assessment of the current situation.
4. If responsibility for creating and maintaining a strong, functional culture has not yet been assigned within the company’s senior management team, we recommend making this the top priority. We would also encourage the senior team to undertake training in culture management, as this is a capability that distinguishes truly exceptional companies.
Our experts can support any of these four scenarios when managing or preserving your company’s culture is among your priorities for 2020.
[1] Eric G. Flamholtz and Yvonne Randle, Corporate Culture: The Ultimate Strategic Asset, Stanford University Press, 2011.
[2] Eric Flamholtz, “Corporate Culture as an Asset or ‘Liability,’” unpublished research paper, Management Systems Consulting Corporation, 2019.
[3] Eric Flamholtz (2011), “The Leadership Molecule Hypothesis: Implications for Entrepreneurial Organizations,” International Review of Entrepreneurship, Vol. 9, No. 3, pp. 1–23; Eric Flamholtz and Rangapriya Kannan-Narasimhan (2013), “Examining the Leadership Molecule: An Empirical Study of Key Leadership Roles in Rapidly Growing Entrepreneurial Businesses,” International Review of Entrepreneurship, Vol. 11, No. 2, pp. 1–22.
[4] Eric Flamholtz (2006), “Conceptualizing and Measuring Human Capital of the Third Kind: Corporate Culture,” Journal of Human Resource Costing & Accounting, 9(2), pp. 78–93.
[5] Eric Flamholtz (2006), “Conceptualizing and Measuring Human Capital of the Third Kind: Corporate Culture,” Journal of Human Resource Costing & Accounting, 9(2), pp. 78–93.
