The Board Perspective:
Does Corporate Culture Matter?

By Dan Denison, PhD, Chairman, Denison Consulting and Robert Hallagan, Vice Chairman, Korn Ferry

An earlier version of this article originally appeared in the March/April 2017 issue of NACD Directorship magazine.

A Case Study in How Culture Can Make or Break an Organization

One of the most important roles of the Board of Directors is to serve as a key strategic asset for their corporation. The Directors are charged with safeguarding the firm’s competitive advantage, ensuring that the firm is talent rich, and building a winning, ethical strategy supported by deep operating excellence that drives long-term shareholder value. But many Directors spend their time focused on key financial metrics and major strategic priorities, and fail to recognize that their mission cannot be fulfilled without paying attention to the culture and character of the organization. Building a forward-looking approach to the people, the talent, and the culture are the foundation of a high performance organization.

Years ago, corporate scandals at Enron and WorldCom caused directors a lot of embarrassment. But more recently, the same lack of oversight of corporate culture and leadership has led to a new round of dramatic failures. Wells Fargo fired 5300 employees involved in their “cross-selling” strategy, which had open millions of hidden accounts in their customers’ names to meet their performance targets.

But the scale of this scandal makes it clear that the issue wasn’t 5300 individual “bad apples,” but rather the “bad orchard” that created them. Volkswagen lost huge credibility claiming that a decade-old process that affected millions of vehicles was a result of what the CEO described as “the terrible mistakes of a few people” just days before he got fired. It soon became clear that the implementation of this flawed strategy required the ongoing efforts of thousands of people all over the world. Both of these examples show how a failure in the corporate culture can lead to a failure in the business. Maybe it is time to make sure that corporate culture is front and center on the board agenda.

Directors often comment that culture is hard to define and hard to measure. Nevertheless, every director has the responsibility to take the time to study the concept and become a subject matter expert. The following case study shows how one company measured its culture and was consequently able to turn itself around.

Case Study

Our case study is a manufacturing firm that tracked the culture of their organization over five years. This case study shows a close relationship between the culture and the performance of the business. The progress was tracked using the well-known method, the Denison Organizational Culture Survey. The Denison model emphasizes four culture traits that research shows have the biggest impact on business performance: A strong sense of mission, a high level of adaptability, a deep commitment to the involvement of their people, and a strong foundation of consistency.

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There’s a lot of research on this model and the findings are pretty clear: Organizations that have better cultures tend to have better performance. Figure 2 shows an example of the link between culture and performance. This study looked at 60 companies that were owned by a private equity firm, and studied the performance differences between the ones with high & low culture scores. The results speak for themselves: The firms with better culture scores have much stronger growth in both EBITDA and Sales.

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When our client first assessed their culture in 2010, their results were good, but not great. These results were shared with the Board, and the leadership team seemed to have a plan for action that would help improve the business. But, in fact, this organization was beginning a period of decline. Performance rapidly deteriorated over the next three years.

In 2013, the organization repeated the assessment, and the results were much worse. But the Board didn’t see the culture results, even though the performance impact was clear everywhere in the business. Soon, the Board decided to replace the CEO. When the Board finally saw the 2013 culture results, they understood more clearly how far the organization had declined and why the performance problems had become so severe. Figure 3 shows the results for 2010-2013.

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The new CEO had his work cut out for him. But the culture survey gave the Board and the new leader a road map of the issues to tackle. From this low point in 2013, improvements in both culture and performance turned things around. If only the Board had tracked these results more closely from 2010 to 2013!

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Conclusions

There are three key takeaways for directors from this case study:

  1. There is a direct correlation between a company’s culture and performance—become an expert on how this works.
  2. It is the board’s role to understand how the company defines its culture and what processes and tools are needed to validate or monitor its culture.
  3. It is important to have executives on the board who understand the impact of culture on business performance and who have experience leading companies with winning cultures.

Be sure that culture is on your 2017 board agenda. A helpful start would be to have experts in the field expose the board and the management team to examples of winning and losing cultures, techniques to measure culture, and yellow flags that will alert management and the board of potential issues.

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In the process, be sure to ask members of the leadership team to define the company’s current culture. This can be pretty revealing. For example, in 2013 the executives in our case study firm were asked to describe the culture of the firm in terms of an animal. One of the executives suggested that the company was like Eeyore from Winnie-the-Pooh — head down, disengaged, walking aimlessly around, bumping into walls. The “A” players had already left the organization or were on their way while Eyeore and his friends remained behind.

In the end, the board proved to be a true strategic asset to the company. They will never forget the importance of culture and the impact that it has on the business.

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As a CEO of a private equity firm, you know that firms with a strong, vibrant culture perform better in a highly competitive marketplace. Denison can work with you to build effective culture in all of your portfolio firms. Our assessment tools enable you to capture a clear picture of your current state. Our consulting expertise supports you in making the changes necessary to achieve superior financial performance. It’s about how you work as a team, how your policies meet practice within the culture of the organization, how performance aligns with your investment criteria.
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  • Offers hands-on strategic consulting to address gaps and affirm best
practices currently being used by your portfolio companies
improvement
Our approach:
Financial Services
In the financial sector, you are active in a wide variety of client environments that need to support accountability and the highest ethical standards. The trust that your customer places in your organization is dependent upon the culture that your employees exhibit every day.

You need a clear understanding of how your culture and the people in your organization function within the midst of the complexities of the current financial institutional marketplace. The Denison Model can give you that clarity. From brokerage firms, to retail banking, to institutional banking to insurance, Denison has specific, measurable benchmarking that identifies the strengths and weaknesses of your organization. With this baseline diagnostic, our consulting team can support you to put in place action plans to sustain your high standards and see financial performance improvement.
Manufacturing
The manufacturing environment is constantly being tasked with improvement in quality and delivery while maintaining the highest levels of safety. The Denison Model equips you to reach from the senior leadership team to the shop floor in a globally networked manufacturing environment to build a culture oriented to continuous improvement in these mission critical areas.

Through our consultancy services, we work with a broad cross-section of your technical and operational staff to align around the goal of producing the highest quality products in the world--on time and on budget.
Healthcare
Within the healthcare market, high performance is measured primarily in patient outcomes. The marriage of the institution with doctors, support staff and operational teams is key to achieving best-in-class patient outcomes. Denison works with you to achieve these outcomes by building a culture that is tuned to the unique ecosystem of support that patients require.

Our organizational culture assessment based on the Denison Model is a proven approach that has supported healthcare providers with actionable feedback for decades. Against four core drivers of cultural high performance, the assessment identifies what is going well and clarifies challenges you may be facing. Then our consulting team is able to support you in addressing these challenges with action plans tailored to your inclusive and diverse environment.
Case Study
The management of culture in an organization whose members are always on the move.
Education
At Denison, student outcomes are well understood as the goal of every educational organization. Our consulting expertise and diagnostic tools allow your team to more fully understand, articulate and implement your mission. You will gain a collective understanding of your organization’s strengths, weaknesses and challenges benchmarked against other peer institutions, all targeted toward providing students with the best learning environment.

Then, through Action Planning, we will work with you to improve your academic and operational excellence to support the diverse student learning environment of higher education, K-12 schools and related associations.
Retail
As a retailer, you know that culture drives the customer experience of your organization. The hospitality, support, and follow-up lived out by your staff all make the difference in each interaction with a consumer. It's that experience that really drives what your behavior should be.

Denison allows you to understand how your organization can support the customer experience. We provide you data that helps you understand your organization all the way through checkout. And we provide sustainable support programs that enable you to address the challenges you face to attract and retain loyal brand customers and to ensure superior financial performance.
Restaurants
Smart restaurant owners know that the patron experience is driven by the culture of their organization. The hospitality, support, and follow-up lived out by your culinary and waitstaff all make the difference in each dish you serve. You know that it is the patron’s needs and expectations that really drive what your team’s behavior should be on the floor.

Denison allows you to understand how your organization is positioned to support the patron experience. We provide you benchmarked data from across the food industry that helps you understand your organization right to the final after-dinner mint. And we provide sustainable support programs that enable you to address the challenges you face to attract and retain loyal brand customers and to ensure superior financial performance.
Government
To achieve high performance in a government initiative requires a different understanding of metrics of success. Typical financial results of business, like sales growth or ROI, are not the KPIs measured here. Rather it is advancement of the mission.

For example, Denison supports military men and women in action through our work with the Defense Logistics Agency (DOA). We provide core culture assessment and an improvement program that helps this department maintain a strong culture to fulfill their mission--addressing everything needed to support fighting men and women in combat through readiness preparation.
Case Study
A transformation that didn’t require thousands of dollars, but a new way of interacting.
Technology
Because of the ever-increasing pace in the introduction of new technology and shortening of technology life-cycle, having a culture fluent in adaptability is critical. These factors all drive the need to recoup costs and show profit more and more quickly. Being able to seamlessly change business models to drive market expansion, product acceptance and superior performance is absolutely critical in this high-potential return but volatile market. Talent is also at a premium.

Based on diagnostics structured through the Denison Model, our consultancy team will help you build a culture that knows who it is and who best will fit your organization. With this alignment, you gain a competitive edge in attracting and retaining the engineers, researchers and innovators you need to lead in introducing market-changing innovation.
Transportation
Whether you deal with business travelers, tourists, or products in the supply chain, safety and schedule reliability are two of the key deliverables. For decades, Denison has worked with leaders in the transportation industry, helping transform organizations in the face of changing markets and technologies, to ensure consumer safety and satisfaction, as well as bottom-line business success.

When you bring Denison on board, our experienced consultants help you make decisions and plans based on data benchmarked against the global industry. We put your organization on the path to high performance, with measurable benefits to your bottom line.
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