Does Your Company’s Culture Improve Your Bottom Line?
It may sound surprising that the head of one of the world’s most successful companies lists culture as their number one priority. But that’s exactly what Microsoft CEO Satya Nadella said as he moved his organization’s market cap from $300 billion to over $2.7 trillion.
Nadella isn’t standing alone on the mountaintop with his opinion. A Korn Ferry survey reveals that two-thirds of leaders of top companies worldwide attribute at least 30 percent of their companies’ value to culture, and one-third say it signifies 50 percent or more.
In addition, 72 percent of respondents to a PWC survey said a solid culture is instrumental for successful change initiatives. Prioritizing culture seems like an obvious decision for business leaders since change is inevitable and even necessary to retain a market advantage and remain profitable.
However, organizational culture doesn’t work its magic as a stand-alone attribute. CEOs like Nadella understand that it’s integral to every aspect of their business, and he cites it as the primary reason behind Microsoft’s ascent. Nadella and other top leaders grasp that they unleash culture’s power when they align it with their business strategy.
When Pushing Culture Fails to Boost Profit
It’s impossible to run a business and not hear about the importance of workplace culture. The topic dominates every industry’s news and is the focus of countless books, articles, podcasts, seminars, and workshops. Most of these sources zero in on improving the quality of company culture. However, many don’t discuss the relationship between culture and profit.
Researchers at Hendrick & Struggle (H&S), a global leadership consultancy, report that this disconnect may be why many CEOs don’t maximize their culture’s potential to vitalize their bottom line.
In their survey of 500 leaders of top companies around the world, 82 percent of respondents reported that culture was important to them. However, 74 percent said other aspects of their business (like strategy and leadership) control profitability. In a recent article, the H&S team notes:
“Our findings suggest that most CEOs make culture a priority, as we believe they should. But, surprisingly, we also see that most aren’t particularly intentional in their pursuit of culture as a driver of financial performance, even when they try to be.”
Without understanding culture’s potential to impact revenue, leaders’ initiatives to improve culture can only hit basic goals.
Correlating Culture with the Bottom Line
In further examination of their survey data, the H&S team discovered an interesting subset of companies: those that approached their culture initiatives with a strategic intent. Labeling them “culture accelerators,” they found that these organizations followed a people-first approach across the board and had a better financial performance than the rest of the surveyed group. H&S reports that culture accelerator companies’ compound annual growth rate (CAGR) was 9.1 percent vs. 4.4 percent.
They also learned that this phenomenon occurred in companies of all sizes in every sector across the globe. They concluded:
“In our experience, companies often know they need to align strategy, operating models, and culture, but they don’t know where to start. This isn’t the case with culture accelerator CEOs; only 19 percent said that focusing on operating models was among the top-three positive influences on financial performance, compared to 40 percent of other CEOs. In addition, 48 percent of culture accelerators said they focused on culture to reinforce a change in strategy or direction, compared to only 22 percent of others.”
Culture accelerators are particularly attuned to maximizing the personal touch to enhance the customer experience and build stakeholder relationships. They also work to generate a high level of collaboration and trust among their team members. Additionally, the H&S survey found that 48 percent of culture accelerator companies prioritized diversity, equity, and inclusion efforts, compared to 30 percent of other organizations.
Not surprisingly, two-thirds of these companies reported meeting or exceeding their culture goals. Their more robust financial performance and strategic approach suggest that companies would be more successful by infusing culture into their strategy from the start rather than eventually working on their culture as a separate entity.
According to H&S, a smaller, elite group within the culture accelerators embraces their culture on an even deeper level. Calling them “culture connectors,” these companies demonstrate intense interaction with their culture.
“Their employees are mostly or entirely engaged in applying the company’s culture in their day-to-day work.” These organizations focus even more tightly on clear, effective communication, both internally and externally, and go the extra mile to engage all their people.”
H&S reports that culture-connector organizations had a higher three-year revenue CAGR than all the other companies they surveyed.
Using Culture as a Catalyst
The H&S researchers found that CEOs of culture-connector companies believe a strong culture strengthens financial performance because it inspires people to exceed expectations. They noted two best practices that enabled companies to generate a high level of performance and enthusiasm:
- Engaging people at all levels of the organization
- Communicating at scale
Almost two-thirds of the culture connector CEOs in the H&S study said appreciation and recognition were key aspects of their culture and that these elements directly impacted financial performance. This percentage is 26 percent higher than the culture accelerators and significantly higher than the rest of the companies surveyed.
It may be hard for some leaders to connect the dots between showing appreciation for their team members and increasing their profitability. However, many expert sources list meaningful acknowledgment of staff as one of the most impactful ways companies can build employee engagement.
And according to Gallup, “employee engagement is strongly connected to business outcomes essential to an organization’s financial success."
Another way culture connector companies generate engagement is by challenging employees to take responsibility for living the organization’s culture. Initiating this positive accountability reinforces a team-wide effort to encourage and support one another to achieve results.
Culture-connector CEOs systematically implement multiple methods to reinforce their culture. They stay in tune with their workforce via micro to macro-level communications, from one-on-one dialogues and coaching to large-scale discussions. They look for ways to build continuous alignment with the culture and to deter toxic situations that might cause the culture to erode.
This focused, ongoing, and multifaceted communications approach helps a company manifest its culture and gives everyone a stake in its success.
The H&S survey also revealed that CEOs of culture-connector companies practice a more subtle but powerful way of communicating culture—they lead by example. Their researchers report:
“When asked how they communicate at scale, 80 percent of these CEOs selected ‘personal commitment to focusing on culture,’ compared to 66 percent of culture accelerators and 45 percent of other companies.”
The Role of Culture in Strategy
Korn Ferry recently surveyed almost 500 leaders of the World’s Most Admired Companies (WMAC) and other top organizations. The consensus among respondents was that culture was the most underrated source of a company’s future success.
These executives plan continued emphasis on culture within their organizations and listed related priorities as they plan ahead, including learning, customer focus, collaboration, accountability, and long-term perspective. As Laura Manson-Smith, the global leader of Korn Ferry’s Organizational Strategy Consulting practice, observed:
“Ultimately, we see a shift from what to how. Most Admired Company executives are preparing for a future where they’re not purely focused on end outcomes. Instead, they’re taking more time to question how they’ll deliver results.”
These leaders are giving culture a leading role in their business strategy, which will be crucial for their ongoing success. This interrelationship is vital, as a survey by the Economist Intelligence Unit found that cultural misalignment was why 90 percent of major businesses failed to meet strategic goals. However, companies that sync their strategy with culture empower and inspire their teams to meet and exceed objectives.
For example, Korn Ferry reports that businesses that abide by this alignment see a 117 percent greater return on investment than those that don’t. They also get a 145 percent higher return on their assets and a 56 percent greater return on their equity.
Legendary management consultant Peter Drucker famously warned business leaders that “culture eats strategy for breakfast.” But it doesn’t have to be that way. Culture can and should be strategy’s most important component. As former IBM CEO Louis Gerstner noted,
“I came to see that culture isn’t just one aspect of the game, it is the game. In the end, an organization is nothing more than the collective capacity of its people to create value.”