For a long time, business leaders innately knew what academics later came to acknowledge and name. Corporate culture was described back in 1966 by McKinsey & Company managing director, Marvin Bower, as “the way we do things around here.” Again, like many things, often the first impression is the most powerful and accurate. The natural simplicity and resonance of the phrase strikes a chord with anyone who has been in the middle of a culture change. A more scientific definition by one of the leaders in this field, Edgar Schein, suggests that culture is:
…a pattern of shared basic assumptions that was learned by a group as it solved its problems of external adaptation and internal integration, that has worked well enough to be considered valid and, therefore, to be taught to new members as the correct way to perceive, think, and feel in relation to those problems.

Or, if you prefer, Geert Hofstede’s “collective programming of the human mind” also seems to get to the heart of the matter.

So, corporate culture exists. Now what do we do about it? A healthy culture can positively influence the firm. And, we have all witnessed some disastrous consequences when it goes awry. Do Merrill Lynch and AIG come to mind? In the current environment, there seems to be no shortage of companies behaving badly. As we write this, the business world is undergoing fundamental disruption in the who, what, why and how of daily operations. Long-accepted practices are going by the wayside and brand new approaches to conducting business are being proffered. While even the most basic tenets of commerce are being challenged, one source of shelter in the storm continues to exist – the power of people. It may sound a bit simplistic but, especially now, the quality of your workforce and their commitment to their customers, management and each other can make or break the company.

One thing is for certain. The more managers know about their firm’s culture and how it is evolving, the more effectively they can design and implement training and communication initiatives aimed at greater productivity, strategic coherence and employee engagement. As Schein noted:
“…the only thing of real importance that managers do is to create and manage culture.”

Schein believed that managers try to influence corporate culture through:

• What leaders pay attention to, measure and control on a regular basis
• How leaders react to critical incidents and organizational crises
• How leaders allocate resources
• Deliberate role modeling, teaching, and coaching
• How leaders allocate rewards and status
• How leaders recruit, select, promote, and excommunicate

The stakes are high. A reasoned and thoughtful approach to this vital subject is critical to the success of the enterprise.

The Denison Model
Developed over 20 years of research and real-world application, the Denison Organizational Culture Model describes a theory of organizational behavior that links the strength of corporate culture to bottom-line performance.

The Denison Model

Through work with over 5,000 organizations, the Denison model and survey has demonstrated the link between healthy cultures and growth in ROA, ROI, sales and market share. The knowledge that leaders gain through the process equips them to leverage company strengths and identify weaknesses that may hamper its long-term success.

To evaluate an organization’s culture against four key traits and 12 indices, the Denison Organizational Culture Survey asks questions that measure specific aspects of corporate culture. (See graphic below.) Employees and managers take a 60 item survey that explores their behaviors and underlying beliefs and assumptions. Their answers offer in-depth insights into deeply-held beliefs and core values. Individual survey results are then aggregated and reported back to management for a comprehensive overall picture.

The model highlights the four key traits of Mission, Consistency, Involvement and Adapt¬ability that an organization should understand and harness in order to be effective. Each trait breaks down into three more specific areas for a total of 12 indices. Each of the four traits is represented by a different color on the graphic. This color coding helps to provide visual and intuitive feedback to management.

What is Meant by Mission?
Mission – Defining a meaningful long-term direction for the organization.
A mission provides purpose and meaning by defining a social role and external goals for the organization. It provides a clear direction and goals that serve to define an appropriate course of action. A sense of mission allows an organization to shape current behavior by envisioning a desired future state. Being able to internalize and identify with an organization’s mission contributes to both short and long-term commitment.

What is Adaptability?
Adaptability – Translating the demands of the business environment into action.
A system of norms and beliefs supports an organization’s capacity to receive, interpret, and translate signals from its external environment (market, etc) into internal behavioral changes that increase its chances for survival, growth and development.

Three aspects of adaptability impact an organization’s effectiveness: the ability to perceive and respond to the external environment, the ability to respond to internal customers, regardless of level, department or function and the capacity to restructure and re-institutionalize a set of behaviors and processes that allow an organization to adapt.

What is meant by Involvement?
Involvement – Are people engaged, developed, and committed to the mission?
Organizations characterized as “highly involved” strongly encourage a sense of ownership and responsibility. They rely on informal, voluntary and implied control systems, rather than formal, explicit, bureaucratic control systems. Out of this sense of ownership grows a greater commitment to the organization and an increased capacity for autonomy. Receiving input from organization members increases the quality of the decisions and improves their implementation.

What is Consistency?
Consistency – Defining the values and systems that are the basis of a strong culture.
Consistency provides a central source of integration, coordination and control. Consistent organizations develop the mindset and systems that engender governance based on consensual support. Consistency creates a “strong” culture based on a beliefs, values and symbols that are widely understood.

What happens after the survey?
The colorful graphical report that emerges from the collective survey results will highlight the strengths and weaknesses of your corporate culture. The more color, the stronger the culture. So you may be pleased or displeased with the results, but almost always there are areas identified that could be improved and make the organization a more cohesive and effective one. So, you are wondering, where do we start? Now that we’ve found out we have an issue in Mission, for example, how have other companies moved the needle in Mission?

Best practices of other companies faced with similar situations can be a good guide when embarking on a change program. Over the decades of the survey’s existence, many companies have walked in your shoes. While every management’s response will be tailored to the specific needs and dynamics of their firm, some overarching principles have been noted. It’s better to learn from the school of hard knocks and understand what really works and why.

A Blueprint for Change
Through the experiences of many firms which have embarked on culture programs in the past, a sort of road map has emerged on how best to go about effecting change in your organization. The Denison Culture Transformation Cycle reflects best practice on how many companies have successfully enacted change in response to survey results.

The cycle starts and ends with an assessment of the status quo. Once management receives their Denison results, the divergence of goal and actual performance must be acknowledged. Then building the team of key individuals who will step in and help transform the organization must be firmly established. Creating a vision and driving an action program are logical next steps. An evaluation of progress constitutes the next stage in a critical and ongoing process.

Best Practices: Hard-Won Insights from the Trenches of Culture Change
Here are a few pearls of wisdom distilled from the experiences of others that may help you craft your company’s unique response to this call for action:

1. A company cannot rely on consultants to enact change. In order for the process and results to be meaningful, authentic and successful, a firm must own the process. Top management buy-in and commitment is critical.
2. Ask yourself what actions your company has already taken or what ongoing business processes support culture initiatives. Nothing happens in a vacuum. Consider the context.
3. Your actions will likely not impact just one trait. Culture is a system.
4. Embed new goals, vision and objectives in your performance appraisal system.
5. Explain to stakeholders why change is important and necessary. Simplicity is essential to conveying the urgency of the situation. A card or other graphic which summarizes the new vision may enhance adoption of the change initiative.
6. Implementation programs work best when they are cross-functional and include representatives from all geographic regions of the company.
7. Use every method of communication available to get the word out. Widen your concept of stakeholders to include all levels of management, retirees, community, shareholders and board members, among others. Many companies have adopted all-employee meetings as a way to communicate and garner buy-in and commitment. Data from the survey is important but open discussion of the results can make the difference in affecting meaningful culture change.

In Summary
While identification of problems is certainly vital to solving them, sometimes the best prescription for a cure is to step back, gain a real understanding of underlying issues and craft a thoughtful, informed response. It seems clear that some general principles of corporate culture change do exist. But a successful action agenda will depend heavily on the dynamics of the individual culture. It is hoped that by sharing the stories of what has worked for others, change leaders may be empowered to develop unique solutions to address their firm’s specific challenges.

Sounds like heresy, right? Hadn’t we all learned in B-school that profit maximization was the only reason for a firm to exist? Anyone or anything that got in the way of full-throttle, no holds barred financial results was to be ignored, discarded or run out of town. But what came out of this pervasive school of thought was a destructive misalignment of senior management goals and the interests of the owners of the firm – the stockholders. With owners and managers at cross purposes, could employees be as committed, united and incented as they needed to be to achieve superior results? If the culture of an organization is not authentically connected to a purpose and an ethical philosophy, other than greed, how can the company possibly succeed in the long-run?

Because of the dispersed ownership structure of many listed companies, the voice of the owners was lost among the daily market pressure for an ever higher stock price, consistently up-sloping profit line and the personal ambitions of the organization’s most trusted managers. What academics like to call the “agency problem” reared its ugly head en masse in recent years, culminating with our current crisis. Agency theory suggests that the objectives of principals, –the shareholders, and agents — the top management team — diverge in many modern companies. Managers are hired by owners to act on their behalf and in their best interests. An agency problem arises when managers do not share common values, goals or philosophies with their employers and instead seek to boost their wealth to the detriment of other stakeholders.

But what seems clear in the current crisis is that both sides have lost. It is obvious that shareholders have surrendered a tremendous amount of value in their holdings. The Dow Jones Industrial Average has lost over 40% of its value in the last year. But top managers have ironically also put themselves on the short end of the stick, a fact admittedly obscured at this point. What we are saying is that not being attuned to and aligned with stakeholders has ultimately, and perhaps even inevitably, resulted in a real disaster for executives. Even when the jig was truly up and the scope of the financial debacle was exposed, notable examples of what can happen when a corporate culture grows unhealthy were widely in evidence. It made you want to avert your eyes.

Even after being forced into the arms of Bank of America by the government, Merrill Lynch executives still did not have an epiphany, or even come to terms with reality. Despite posting a huge net loss for 2008, the firm bonused a million dollars-plus to 700 employees right before the legal merger with Bank of America. AIG also got caught up in this conundrum, stoutly affirming its decision to grant bonuses of $165million (and possibly eventually totaling $450 million) to top executives. AIG reported a net loss of $99 billion for fiscal year 2008. Shareholders can understand the theory behind pay-for-performance. But they seem to be having trouble wrapping their minds around paying for failure. Generously rewarding top managers, no matter what the results, runs counter to how most people believe the world works. AIG executives asserted that these bonuses were necessary to retain their “executive talent.” Do their shareholders feel the same way?

Greed is (not) Good
If “Greed is good” is the mantra, we need a new religion. Unbridled self-interest has led to ruin not only for many companies but also for numerous managers. The reputation of American business executives as being the smartest guys in the room has given way, in general, to a sense that the best and the brightest were also the most opportunistic – and short-sighted. How long could that model really work? Greed and intelligence are really NOT the same thing!

Both running a business and stock ownership seem to us to be, by their nature, long-term endeavors. It could be said that most of the things a manager does today cannot be fully assessed until a tomorrow far into the future. And, do not many of the building blocks of a well-considered strategy, like product development, capital expenditure and development of the workforce, naturally have a longer-term time horizon? Why, then, did the global business community fall so easily victim to the innately pessimistic philosophy of short-term results and so short-term pay?

The behavior of executives led to new caps on executive pay imposed by the government on companies who have sought help. For firms accepting government funds, the recently passed stimulus bill prohibits golden parachutes and limits incentive compensation to one-third of a manager’s salary. The number of executives within the company this rule applies to ranges from one to 20, depending on the amount of the bailout.

The government’s actions may have consequences for the overall wage level of senior executives. To those who have speculated that a limit on compensation packages on government-aided corporations will simply drive talent to other firms, we have one question: Where do you think that they will go? With GM and GE and other bellwether stocks at the lowest levels anyone can remember, how many organizations are in a position to get into an executive bidding war? And, if you have just run a company into the ground, will other boards really be clamoring for your services? So, we believe even those leaders not directly involved in these recent events may be subject to some fallout. On the bright side, the norm on compensation may now be re-set lower and give all the players in this drama yet another chance to get it right.

Wait. What about the Directors?
The elephant in the room, of course, is the board of directors. This body is supposed to act in a fiduciary manner in virulently protecting shareholder interests. But it seems that some senior executives gamed a system that was designed without stockholders in mind, complaining about SOX compliance every step of the way. Or maybe it never occurred to rule makers that Agency would ever be more than an academic problem.

Now that the genie has already escaped, it seems that the opportunity to re-think and re-fashion our institutional structures is here. Limits on compensation have a place in this revolution. But, an appreciation for the power of corporate culture and authentic internal and external communication should help shape the dialogue. Some forum for gaining consensus among stakeholders on core values and goals going forward appears critical to firm health and market stability. Insisting that boards do their jobs and retain their highest loyalty for shareholders is also key.

Closer alignment among stakeholders could have forestalled the looming problems of executive compensation, the diminished image of commerce and weakened trust relationships. We hope that a new day is dawning and that we emerge from the current chaos of creative destruction with a hard-won nugget of gold.