By Stuart R. Levine
Published in Forbes
A company’s intangible assets, including talent and culture, are now estimated to make up 52% of a company’s market value and for some companies it can be as high as 90%.* Companies like State Street, BlackRock and Vanguard are actively focused on these issues.
On September 18, 2019 we hosted a webinar featuring Brian Rivel, Chairman and CEO, The Rivel Group, to discuss the issue of measuring and transforming corporate culture to minimize risk and improve valuation (Stuart Levine & Associates Webinars). Culture with a lack of oversight and governance attention, can turn into a challenging barrier for achieving results and strong valuations. Jay Clayton, SEC Chairman, is exploring new disclosures that seek to “modernize and improve our disclosure framework, including recognizing that intangible assets, and in particular human capital, often are a significantly more important driver of value in a global economy”. This is an important trend that requires serious conversations about the impact of this intangible asset. Absent a good culture, changes required to remain agile can’t occur and strategies can’t be implemented.
When asked how often companies should measure the strength of their organization’s culture, the results were sobering. 50% of participants said they never measured this. The right answer is more frequently than it’s being done now, and certainly investors are moving towards receiving quarterly updates. Once a year employee engagement surveys are not enough and then when gaps need to be solved, this takes even more time.
Rivel finds that 82% of investors responsible for proxy voting now look for culture information in their research and are asking CEOs and board members for this information. Questions such as: what is your company culture; how would you describe it; how does your board influence it; do you use it for recruiting; and how do you gather data on it to bring about change. Rivel sees culture as a driver of investment decisions. Boards need to know what data they should be asking for on a regular basis, such as employee satisfaction, retention, consumer satisfaction and talent succession planning – not just with the CEO, but with the top 50 people below the CEO as well.
You can’t have a strong culture without an embraced vision, mission and core values. Shared values are foundational from the Boardroom to the Mailroom to ensure the effective execution of strategy. Core values are the “guard rails” that help employees make the right decisions. Companies need to ensure that they collect independent data that measures any gaps in values alignment and culture. Then closing these gaps is critical to ensure that your company improves performance, doesn’t leave itself open to headline risks, but on the positive side, ensures employee engagement, the best talent recruitment and effective execution of strategy.
Shockingly, according to Gallup, only 27% of employees strongly believe in their company’s values. Combine this with another Gallup statistic that shows only 35% of U.S. managers are engaged in their jobs, and having disengaged managers creates disengagement with employees – costing $398 billion annually. In some cases, cultural deficiencies have created up to a 40% loss in valuation. Employee replacement costing 50% to 250% of annual salary plus benefits (SHRM). Companies with the highest levels of engagement were 22% more profitable and 21% more productive. And, operating margins are up to three times higher in the most engaged companies (Willis Towers Watson).
Your organization should be asking these questions: Is culture on your CEO and Director’s dashboard; What is your Board’s role in culture management and ensuring risks are being addressed; What is your Board’s integrity and willingness to challenge and shape culture; What are you doing to measure culture and values alignment effectively and close the gaps; What are you doing with the data to close the gaps; Have you set the right foundation to strengthen your culture; Is senior leadership positively impacting culture through actions and strategic communication?
Culture starts at the top of the organization. It begins with a review and affirmation of vision, mission and core values to ensure there is a common understanding, agreement and common language. A defined culture element must be a measurement on the CEO dashboard with robust strategic communication driving it. Data must be collected on an ongoing basis to measure cultural alignment with your organization’s core values. Resources must be prioritized to close any significant gaps based upon criteria, including risk, to ensure that these gaps are owned and solved. Monitoring afterwards is key to ensure adjustments are made for sustainability.
Helping Boards and CEOs to embrace culture as part of managing risk, improving valuation and achieving strategic success is an important part of strategic thinking and the new world order of governance. Governing these new sources of risk, including board integrity, board culture, organizational culture, the implications for socially responsible capitalism, Environment, Social and Corporate Governance (ESG) and the war for talent, all impact your organization’s value. According to a 2019 study by AON and Ponemon Institute, intangible assets used to be 17% of the S&P market value in 1975. By 2018 they skyrocketed to 84%. Intangible assets include intellectual property, brand value and human capital.
“Despite the importance of corporate culture, we have found that few directors can adequately articulate a company’s culture and demonstrate how they oversee and influence change when necessary; this is partly because corporate culture, as an intangible asset, is difficult to measure.” (State Street Global Advisors). Organizational core values can now be measured across an organization. Gaps can be quantified and addressed in order to improve performance and a company’s ability to execute on its long-term strategy. The CEO’s primary duties are to drive performance and mitigate risk to ultimately improve valuation. It only makes sense that culture, a critical performance driver, be on the CEO and Board’s dashboard.
State Street Global Advisors in January 2019 continues on this theme; “Corporate culture is critical to long-term success of a company. When aligned with long-term strategy, corporate culture can help enable organizations to achieve their goals and differentiate them from competitors; when misaligned with long-term strategy, corporate culture can hinder performance.”
The ability within an organization to have challenging but respectful discussions about innovation and new products and services requires a trusting environment that is founded on a firm foundation of shared values. Constructive debate becomes extremely difficult within organizations that have a culture that either lacks core values or is not aligned on its core values. If you study cultures where values went awry, such as Well Fargo and Volkswagen, established and successful organizations were almost sunk when internal decisions were made solely on meeting aggressive sales or revenue targets. Employees need to hear a clear, regular rhythm of communication from senior leadership on core values and what it means to their daily actions. They need to create a context for employees to operate within that is grounded in shared values.
Leaders should be able to assess values alignment on their teams and make adjustments where needed. Continuous measurement of core values allows you to uncover where your organization is at risk; identify issues before they become unmanageable; improve performance and ultimately valuation; and discuss the strength of the culture with internal and external shareholders.
Culture is a strategic weapon and values alignment is a key ingredient in the culture “soup”. Having both high standards for talent and having the courage to hire people based upon values that align with those of your organization are critical. Harvard Business School’s Clayton Christensen recently observed that every decade almost 50% of Fortune 500 companies go away. Just as individuals should go for a physical once a year, look at your business in the same way. Collect the data on the health of your organization’s culture and then act on the markers set down for you to ensure you can effectively execute your strategies and deliver on the expectations of your customers and shareholders.
Are you doing all that you can to strengthen your organization’s culture? A question you should be asking is: Do we have the courage and will to learn as fast as the world is changing? You can only participate in value creation if you continue to learn.
*Jonathan Hasket and Stian Westlake, Capitalism Without Capital: The Risk of the Intangible Economy, (Princeton University Press, 2017)