A Lighthouse Warning
In 2002, President Bush proposed revolutionary reform to US corporate governance legislation with the Sarbanes-Oxley Act, as a result of a succession of US scandals. In Hong Kong, there has been a call for administration of the HK Ex Listing Rules to be transferred to the SFC and to give the rules statutory backing, so that offenders can be fined rather than just reprimanded. The transfer would remove the conflict of interest that HK Ex faces between being a for-profit company and a regulator. It is clear to the international community that new steps need to be taken to safeguard shareholders’ and other stakeholders’ interests for the wellbeing of local and international economies. However, while governments play a central role in shaping the legal, institutional and regulatory climate within which individual corporate governance systems are developed, the approach of any organisation to corporate governance will be largely a function of its own corporate culture. Unlike Bush’s 10 Points or the HK Ex Listing Rules, the process is organic and dynamic. As the corporate culture of any organization is unique, so each organisation’s approach to corporate governance will be unique.
Enron. Anderson. OneTel. WorldCom. Over and over again, the neglected corporate culture has been named a key culprit for the demise of these major respected organizations, and this serves as a lighthouse warning to all. Insiders and experts talk about a lack of integrity, greed, back-stabbing and other degenerate values and behaviours. In recent times, although structural changes had been made to the way corporations are governed, most often these changes have not led to a more basic cultural change. Therefore, while new legislation will be of some help in creating the correct infrastructure, it is the culture of Board directors which is fast becoming a new yardstick, and integrity must lie at the heart of this.
Corporate Culture
One definition is that corporate culture is;
As no two corporate cultures are the same it effectively is
the organisation’s fingerprint, and is a key component of the corporate brand
and image. Product, policies and
processes can be copied by competitors, but not your people and how they
deliver to other stakeholders. Corporate culture develops as an organisation
grows and over time, the culture changes as faces change. In a well-established
corporation, it will be so strong that even top management may not be able to
re-align culture with strategy without support from key members of senior
administration. Or if they try, it may
take many years and it will be painful.
- Effects of
Toxic Corporate Cultures
The Enron collapse sent
shockwaves through the financial world when it emerged that management had used
off-the-books, unregulated private partnerships to absorb losses and support
inflated revenues. When analysts
questioned where the money came from Enron refused disclosure. Only under mounting pressure did they
eventually comply and communicate its overstatement of profits in November
2001. This triggered the collapse of
the company and its bankruptcy filing by 02 December, 2001. During investigations it emerged that Anderson,
the Enron auditing firm, had supported the deceit by turning a blind eye to
questionable accounting practices to secure lucrative consulting fees. A 217 page report by Enron’s Board condemned
Enron’s management for inflated profit reports and failure of controls at every
level. The report states the following:
`a culture emerged of self-dealing and
self-enrichment at the expense of shareholders; accounts and lawyers signed off
on flawed and improper decisions every step of the way’
The report criticises
Enron’s long time Chairman and Chief Executive, Ken Lay, and his protégé
Jeffrey Skilling who served as President and Chief Executive. Skilling set up a flawed system for
self-enrichment and in that system Falstow, who served as Chief Financial Officer,
also served as general partner of the partnerships. Oversight broke down. The
impact went on to destroy Anderson who were convicted of approving the
practices used by senior Enron executives to tamper with the books and dress
the financial reports given to stakeholders.
The old adage rings true. Be
careful of the company you keep.
In her book 1
Barbara Ley Toffler, former partner-in-charge of Anderson’s “Ethics & Responsible Business
Practices” consultancy practices from 1995 – 1999, named the cause of
Anderson’s downfall succinctly:
`a corporate culture that put loyalty to the firm
above loyalty to the client or the investing public’
When Arthur Andersen
founded the company in 1913 his motto was “think straight, talk straight” and
over time he earned a reputation in the marketplace for his integrity. However, by the 1990’s the Andersen culture
had changed completely and, according to Toffler, it was all about money. Staff were applauded for the amount of money
they brought in, but nobody was acknowledged and rewarded for standing up to
unethical conduct as the founder had done.
Self-interest triumphed over the interests of the larger population.
In a culture where Toffler
felt like an outsider, like-minded recruits were sought on college campuses and
trained in Andersen’s facility. “The
loyalty of the partners was something akin to that of a military unit” she says
and closing ranks to cover up questionable and illegal activities was expected. However these life-time employees, who
referred to themselves as Androids, acknowledged that for the company to grow
they had to hire outside specialists.
Predictably, many specialists burnt out. Yet others simply chose not to fit in with the toxic corporate
culture. In1999 Toffler wanted out and
Anderson did not try to keep her.
Reflecting on the 2002 corporate scandal which brought down the premier
global accounting firm, Toffler says that Anderson’s senior administration
acted blind to the dangers they faced until it was too late.
It is not plausible that
all the “bad guys” reside together in the same corporations with the “good
guys” existing on another plane. Most
would concur that elements of a toxic corporate culture can be evidenced in any
organization. World famous Swiss
psychoanalyst Carl Jung has a view on why this occurs.
It is a notorious fact that the morality of society
as a whole is in inverse ratio to its size; for the greater the aggregation of
individuals, the more the individual factors are blotted out, and with them
morality, which rests entirely on the moral sense of the individual and the
freedom that is necessary. Hence
everyman is, in a certain sense, unconsciously a worse man when he is in
society than when acting alone; for he is carried by society and to that extent
relieved of his individual responsibility.
Society, by automatically stressing all the collective qualities of its
individuals representatives, puts a premium on mediocrity, on everything that
settles down to vegetate in an easy, irresponsible way. In a small social body, the individuality of
its members is better safeguarded; and the greater is their relative freedom
and the possibility of conscious responsibility. Without freedom, there can be no morality. And in so far as he is
normally adapted to his environment, it is true that the greatest infamy on the
part of his group will not disturb him, so long as the majority of his fellows
steadfastly believe in the exhalted morality of their social organization.2
Jung correctly identified
that the moral and spiritual essence of an organization is reliant on
individual freewill and personal responsibility, and puts forward a strong case
for the value of ethical leadership.
Recently, the Sarbanes-Oxley Act `10 Points’ demands integrity in no
less than three instances. Also, the
demand in different global marketplaces, for more onus and personal
responsibility to be put on directors for their actions, is a big step in the
right direction. A healthy corporate
culture has to start at the top, and must be cascaded through the
organization with the right behaviours rewarded and irregular behaviours
severely punished. Leadership and
appropriate role-modelling are paramount so that the right tone is set.
- Benefits
and Outcomes of a Healthy Corporate Culture
On a positive note, there
are and have been many reputable studies done on the positive impact of ethics
in the workplace. Harvard Business School professors John Kotter and James
Heskett studied the performance of 207 large firms over 11-years. In their findings, they wrote that corporate
culture can have a significant impact on a firm’s long-term economic
performance. The study found that
organisations with cultures that emphasized all the key managerial
constituencies, (customers, stockholders and employees) with leadership from
managers at all levels, outperformed by a large margin organisations that did
not. Over an 11-year period, the former
increased revenues by an average of 682% versus 166%, expanded their workforces
by 282% versus 36%, grew their stocks by 901% versus 74% and improved their net
incomes by 756% versus 1%.
A case in point. In addition to winning the Platinum Category
of the Hong Kong Society of Accountants “Best Corporate Governance Transparency
Awards” 2002, HSBC Holdings Hong
Kong achieved significant benefits and outcomes from the recent 2.5 year
bankwide culture change programme which yielded a ROI of 606.3%.
“Together, We Win!” which
is better known by its Chinese name “Chung Chi Sing Sing” (CCSS) encompassed
15,000+ staff from the Chairman to the most junior employee. The initiative was sponsored by the General
Manager. A Steering Committee was
established and chaired by the Assistant General Manager, to drive the
programme with the CCSS Project Manager and ensure it was fully aligned with
the Bank’s business strategy. The
external cost of CCSS was HK$6.3 million over 2.5 years. 43,082 delegate days
were delivered at HK$146 per day or HK$419 per person. The programme was designed with one aim and
three objectives which cover major stakeholders:
Aim: | To work together to embrace change and allow HSBC continuing success in the 21st Century |
Objectives: | To support implementation of the Bank’s strategic objective to continue to build shareholder value
To heighten levels of customer satisfaction To improve staff satisfaction |
CCSS Outcomes and benefits included:
Bottom Line: HK$33.8
increased revenue |
Plus significant cost savings through line teams working smarter and measuring ROI locally, using
hard and soft data and Q.M. tools provided by the change team. The bank’s
profit performance has remained strong, despite the difficult economy and
market conditions supporting the belief that a more satisfied team and more
satisfied customers will lead to an improved profit. |
|||||||||||||||
Employee Attitude Survey: `Company
Image’ which has a huge impact on brand value and shareholder value, topped
the charts with a 15% improvement. Every
category of feedback has improved. |
The General Manager conducted a survey
of staff perceptions in year 2000 before CCSS commenced and conducted the
same survey at the end of 2002. The difference between the two surveys shows
a statistically significant
improvement on all 14 categories. In addition, the categories that
were most improved were related to the areas covered by the CCSS initiative. The following percentages indicate the
degree of improvement for the top six categories:
|
|||||||||||||||
Continuous Learning
& Embracing Change: 22.3% increased participation in Training &
Development. |
During the period of the
programme, the number of attendees at training increased by 22.3% (excluding
the CCSS Event and CCSS Leadership workshops). This signifies an increased
desired to develop and embrace change in the workplace and move towards
becoming a Learning Organisation. |
|||||||||||||||
Continuous Improvement: Value of suggestions implemented
HK$16.1m. |
The Bank operates a staff suggestion scheme for
improvements in work practices. During the period of the CCSS initiative, the
scheme evidenced an increase in the number of suggestions and the value of
bottom-line improvements gained from those suggestions is as follows:
|
|||||||||||||||
Customer
Satisfaction: Every measure has increased.
The highest level of improvement was 27%. |
Customer satisfaction is measured by telephone
Surveys and Questionnaires to existing customers. Over 7,000 customers are
contacted each year to gain their views against 11 key service categories.
The Bank also runs a Mystery Shopper programme to assess the reception given
to an anonymous customer. They are therefore able to provide regular feedback
to every Branch and the Call Centre on the quality of their service. Over the
2.5 years of the CCSS initiative there has been consistent improvement on all historical measures. The highest
level of improvement was 27%. |
|||||||||||||||
Communication &
Transparency: Average number of visits to the CCSS intranet 10,000 per month and rising. |
The CCSS web-site has proven to be a popular form of
internal communication. The number of visitors to the site has increased from
a monthly average of 4,851
in 2001 to 7,166 in 2002 and 10,223 in 2003. The `Ask Top Management’ forum of the website has received 549 questions to
date, all answered by top management within 10 days. The number of questions is a
healthy sign of increasing dialogue and transparency on the issues that
concern staff from across the Bank. As a result of these questions, the top
team has made policy changes that have increased the welfare of staff and
benefit to customers. |
This
enormous feat was achieved over 2.5 years in an economic environment where
mergers, redundancies and pay-freezes and the demise of major organizations
were all too common. Clearly corporate
culture management is important and facilitates sound corporate
governance.
Conclusion
In the traditional
business model, the workforce is positioned at the bottom of the pyramid and is
the first to feel the pinch when there is a keen focus on costs. “People related” initiatives are the first
to be targeted, when the going gets tough.
Yet reputable studies and best practices have proven that corporate
culture can have a significant impact on a firm’s long-term economic
performance. Organisations with
cultures that emphasize all the key managerial constituencies, (customers,
stockholders and employees) with leadership from managers at all levels
outperformed, by a large margin, organisations that do not. Toxic corporate culture will over-ride
policy and procedures to bend and twist them, and can ultimately destroy even
well-established organizations, with strong brand image, overnight. A healthy corporate culture will
differentiate an organization from the competition to create a sustainable
difference and enhance value.
Gabrielle
O’Donovan headed the successful culture change programme “Together, We Win” for
HSBC, Hong Kong plus subsidiaries.
Copyright:
Gabrielle O’Donovan 2003
1 Toffler, B. (2003), Final
Accounting, Broadway Books
2 Jung, C.G. (1959), Basic
Writings; Modern Library
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.