Private equity companies increasingly recognize that corporate culture impacts financial performance. It is an important metric for predicting, driving, and assessing success, both internally and in their portfolio firms.
Challenge 1: Your company has just hired a new associate. She is bright, but young and inexperienced. How do you make the most of her talent, and then keep that talent in-house instead of watching her become another high-turnover statistic?
Challenge 2: Your company has just acquired a new portfolio firm. How do you help ensure that the acquisition increases profitability, follows best practices, and assimilates well into your firm?
Research shows that the answer to both questions involves developing a culture that cultivates employee engagement.
Corporate Culture and Financial Performance
What is corporate culture? It’s “the way things are done around here.” It comprises the norms, values, and unspoken assumptions that are expressed in day-to-day employee behaviors and embedded in company processes and systems.
From 2011 to 2014, DenisonConsulting conducted a study using data from 38 portfolio companies and their lines-of-business (totaling about 32,000 employees) to examine the effect of organizational culture on financial performance, including sales revenue and EBITDA (earnings before interest, taxes, depreciation, and amortization). Using our proprietary, statistically validated Denison Organizational Culture Survey (DOCS), we found strong positive effects on EBITDA and sales growth for organizations that scored high on four culture elements:
- Mission: Providing a clear sense of vision, goals, and strategic direction.
- Adaptability: Translating organizational learning and the demands of the market into both responsive and anticipatory actions.
- Involvement: Engaging, developing, and empowering employees individually and in teams.
- Consistency: Facilitating coordinated actions and promoting consistency of behaviors in line with core values.
In the companies studied, those with top scoring cultures had 8 percentage points greater EBITDA growth and 8 percentage points greater sales growth than the bottom scoring companies. The strongest and most consistent links concerned employee involvement—bottom-up, active participation from employees.
Investing in Culture, Investing in Employees
The goal is to develop employees’ capabilities, to empower them to quickly apply their capabilities, and to facilitate effective teamwork. That takes investment—an investment that is recouped in corporate financial performance. The investment can take many forms. For example, looking back at the two challenges from the beginning of this article, for younger employees, that investment might include:
- Mentoring and apprenticeships.
- Sponsoring advanced academic studies and participation in professional conferences.
- Proactively involving junior associates in deal decision discussions and portfolio operations (with feedback from senior associates).
For acquisitions, the engagement investment might include:
- Improving the C-suite by importing culture-savvy members from your own organization.
- Intentionally creating a community and infrastructure around their portfolio.
- Emphasizing knowledge sharing across portfolio companies through regular executive forums webinars, and similar events.
As equity firms make the transition from financial engineering to proactively developing corporate culture, especially to cultivating employee engagement, we can expect to see improvements not only in employee and customer satisfaction, but also in financial performance.
For more insights from Denison’s study of the organizational culture’s impact on financial performance in portfolio management companies, see “Culture Can’t Wait to be King,” in Corporate Learning Officer magazine.