Does culture matter?

There’s long been a debate about whether a company’s culture makes any difference in how it performs.  Culture often is derided as the “soft stuff” that is nice to have but not really essential to a company’s success.  Indeed, Sandy Weill once famously quipped that culture was “something they put in yogurt.”  (Of course, we know how things turned out at Citigroup.)

Research by Professor Jim Heskett of the Harvard Business School has demonstrated the value of a strong corporate culture.  He estimates that companies with effective cultures outperform their peers by as much as 30%.

But there’s now evidence from the financial crisis of the importance of corporate culture.  The UK’s top financial regulator, the Financial Services Authority, recently published a report on the collapse of the Royal bank of Scotland.  Part 2 of the FSA report focuses on how the bank’s management, governance and culture led to its failure. (A hat tip to Lucy Marcus, whose blog post on the FSA report caught my attention.)

A corporate culture can be seen as a set of shared values, a common sense of purpose and a widely understood mission.  They are the intangible forces that guide a company’s behavior, and go beyond rules and handbooks.

Culture can be hard to assess, which the FSA report recognizes. But its report makes clear that culture was an important factor in the bank’s failure:

“Some aspects of management, governance and culture can be assessed fairly precisely. For example, it is possible to identify whether a bank has appropriate formal processes of governance by reviewing matters such as whether board agendas cover appropriate issues and management information flows to the appropriate level. However, many of the important questions about management, governance and culture cover issues such as boardroom dynamics, management style and shared values. These, by their nature, are matters of judgement and are difficult to assess precisely, even on the basis of contemporaneous documentation. … Despite these difficulties, the Review Team has concluded that it is highly probable that aspects of RBS’s management, governance and culture played a role in the story of RBS’s failure and should be addressed in this Report.”

Later, the FSA report frames the importance of culture at RBS in more precise terms:

“The crucial cultural questions relevant to RBS’s failure, however, relate not to the fair treatment of customers, but to whether RBS was over-confident about its abilities, had too optimistic an outlook, and was too focused on revenue and profit at the expense of balance sheet risk.”

Beyond the focus on governance and culture, the FSA report is remarkable for its clarity and thoroughness, even bringing its own supervisory actions under the microscope.

When will US regulators publish a similar report on, say, AIG?

 

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