Does a strong corporate culture create long-term value?


In 2005 billionaire hedge fund manager Eddie Lampert acquired a much of Sears Holdings, the parent company of Sears and Kmart, among other brands. In 2008, Lampert reorganized the company into 30 stand-alone business units that would operate as independent companies, with their own IT contracts, marketing agents and, most importantly, annual financial statements. The idea was that having each unit compete for resources would promote better decision making and increase overall benefits. The exact opposite has happened. Divisions turned on each other, making decisions that benefited their divisions at the expense of others. The year after Lampert’s acquisition of Sears, the business flourished, but two years later profits plummeted, the stock price plummeted, and hundreds of stores were firm. As Jillian Popadak explains in a new article on corporate culture and business value, the erosion of corporate culture can be to blame.

It’s not the case that decentralization is always bad – some big tech companies are taking this approach – but in Sears’ case, the reorganization has changed the norms and culture of employees, discouraging collaboration at the expense of the business. in general. Popadak notes that former Sears employees are talking about it: they said the change created a “culture of warring tribes” that lacked cooperation and that “the result was confusing for the customer.” Media accounts tell a similar story. Accounts detail managers cut floor staff to save money, intense rivalries over space in the weekly flyer resulting in absurd product combinations and a paltry one percent investment in capital spending. Popadak argues that this is an example of the importance of implicit standards when striving to create value in the business. When the explicit focus on performance was introduced, it “dominated the implicit values ​​of collaborating, keeping the customer happy, and not acting selfishly”.

How can you tell if a company’s culture is creating long-term value, or even measuring something seemingly unquantifiable? Popadak argues that while corporate governance measures are designed to change the explicit rules in a company, culture is a set of implicit rules that govern employee behavior: employee expectations of what it takes to be successful in the business. In his article, Popadak collected millions of reviews on job boards like Glassdoor.com, Payscale.com, and CareerBliss.com by year and company, then used the text of the reviews to create measures of culture. enterprise based on six categories: adaptability, collaboration, customer orientation, detail orientation, results orientation and integrity. She then assessed how those metrics changed when a company underwent a change in governance.

Popadak writes of this graph: “The figure shows that companies with stronger shareholder governance showed statistically significant increases in results orientation, but decreases in customer orientation, integrity. and collaboration during the year following the change of governance ”. In the short term, a results orientation drives sales growth and short term earnings, but in the long term there are “significant declines in intangible value, customer satisfaction and brand value.” . Ultimately, Popadak concludes that sacrificing corporate culture for short-term benefits may not be worth it.


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