25 August 2017 by Anthony Hilton
Reforming culture is a daunting challenge, says Anthony Hilton.
The American investor Warren Buffett once observed that if a manager with a good reputation takes over the running of a business with a bad reputation, it is the reputation of the business that remains intact.
Behind his comment lies a truth that is acknowledged much less frequently than it deserves to be: it is actually very difficult to change the direction and culture of a business.
This may come as a surprise, because a superficial reading of the business press would suggest that corporate life today is all about change and the business universe abounds with executives who are skilled at it. No doubt some people actually believe this.
The reality is most businesses are wedded to the status quo and cling to what they understand and what has led to past success because that is where almost all feel most comfortable. Most do not change until forced to, and often not even then, or by as much as is required.
Although many executives have a reputation as turnaround specialists, the majority of them have achieved prominence by going in and rescuing businesses already on their knees.
This is obviously not easy but they have an advantage over other executives in a business which still appears to be performing reasonably well, as they can be far more ruthless and quick acting.
When one analyses what turnaround specialists do, it tends to revolve around three things: using their reputation to secure new finance to repair the balance sheet and buy a bit of time; focusing on what is profitable while slimming down, closing or selling everything else to deliver a quick boost to cash flow and profits; and then finding a buyer for the streamlined firm so the executive can exit while the going is good, with their reputation enhanced.
This real world also appears somewhat removed from the idealised one of politicians and regulators. In the aftermath of the financial crisis it became fashionable to talk about the culture of a firm and to attribute the bad outcomes to deficiencies in the firms’ culture.
Regulators then conclude that the way to cure the problems and to ensure that similar disasters do not happen again is to secure change in the culture of the relevant firms.
One should say in fairness to FCA chief executive Andrew Bailey that he does not pretend it will be easy. He readily acknowledges that persuading a wolf that it would be happier if it adopted the personality of a rabbit is difficult.
He acknowledges too that culture is not something painted on to an organisation by senior management to put a gloss on whatever lies beneath. Instead he sees culture as something that evolves within the firm and is forged by the activities and attitudes of those within it. It is therefore hard to change and requires more than simply ‘tone from the top’.
If a firm is starting from scratch, the founders can imbue it with the culture they want while it is small and will have some chance of success if they are careful while it grows. It is a different matter to change the culture of an existing business.
This requires nothing less than changing the behaviour and attitude of every single employee, while simultaneously removing the incentives that makes them behave the way that they do – and if left unchanged will cause them revert.
At least one senior executive, now the head of an insurer but previously operating at the higher levels of banking, believes such exercises will fail. But he makes a serious further point: that he can think of no large, successful firm which has changed its culture and remained large and successful.
In fact, he can think of very few that managed to change culture, full stop.
Bad culture drives out good, he says, not only within a firm but across an industry. Public companies are under constant pressure to deliver growth and the only two ways they can do this in the short term is by cutting costs and by selling more. There are limits to cost cutting, so the focus is usually on sales. Intense pressure to boost volumes will almost always lead to a drop in ethical standards.
What happens then is that the boards of the firm’s competitors put pressure in turn on their CEOs and ask why they have not done as well as Company A. They are pressured to match its performance or risk being replaced by someone who will. So they too drop standards and cut corners, and before long the integrity of the whole sector has taken a turn for the worse.
So culture is not just an issue for firms – it derives at least in part from the expectations of the financial system, the role of investors and the pressure of short termism. Perhaps that is where reform should begin.