Hong Kong: Change Management - Is Corporate Culture Important?

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:

CCSS Outcomes and benefits included:

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.