Corporate culture: Lofty aspirations - FT.com From the ground up: while activities such as indoor climbing (above) can reinforce company values, the UK regulator called in 2010 for Bob Diamond as Barclays chief executive to "set the right culture" at the top On July 4, Bob Diamond, Barclays" former chief executive, spent just under three hours answering questions from a House of Commons committee about the UK bank's role in the industry-wide rigging of benchmark interest rates. Committee members and Mr Diamond himself kept coming back to one lofty concept, directly referred to 50 times during the hearing: culture. There is a lot of it about. Culture was the "secret sauce" at Goldman Sachs, of which there is now "virtually no trace," according to Greg Smith, a disgruntled former employee of the US investment bank. The "ingrained conventions of Japanese culture" were behind the crisis at the tsunami-hit Fukushima nuclear plant, says the man chairing the probe into the disaster. British pharmaceutical group GlaxoSmithKline has made "a culture of putting patients first" a priority, having clamped down on aggressive selling and marketing of blockbuster drugs that this month resulted in a $3bn settlement with the US government. Five years after the global financial and economic crisis began, political and regulatory reforms have either not yet taken effect or have failed to allay public fury and frustration about corporate excess. In the financial services sector, dissonance be­tween banks" traditional image as prudent and conservative, and successive revelations of misselling and misbehaviour - particularly in investment banking operations, such as those at Barclays - has fuelled the anger. It has also shifted the political rhetoric from a focus on legal and regulatory solutions to a wider debate about the need to change a corporate culture focused on short-term profits and bonuses. As Texas Democratic Representative Rubén Hinojosa told Jamie Dimon, JPMorgan Chase chief executive, at a June congressional hearing into a trading fiasco that has cost the US bank $5.8bn this year: "There needs to be an evaluation of not only prudent regulations but also the broken culture of Wall Street." Increasingly, bad culture seems to be the obvious culprit at organisations and industries in crisis, and good culture the potential saviour. If only it were that simple. Culture is not hard to define, though it took until the 1980s for its application in business to be properly explored. Roger Steare, who advises companies from UK financial group HSBC to London-listed energy group BP on leadership, culture and ethics, says: "It describes the way human beings behave together - what they value and what they celebrate." But while creating a culture - say, at a start-up - is relatively easy, sustaining a healthy one as the company grows is a challenge. Changing the culture when bad behaviour or bad attitudes are embedded is even harder. Among possible approaches are structural reform, regulatory intervention and change of leadership. The shape and form of companies does contribute to their culture. Family-owned enterprises are the clearest examples of organisations with an inbuilt cultural strength. Partnerships are also, historically, fierce guardians of strong cultures, which is one reason why mergers between them are rarer than between listed companies. Such deals often founder on differences - or never reach completion, as in 2010, when partners of Roland Berger, the German management consultancy, decided not to ally with the consulting arm of Deloitte Touche Tohmatsu. Critics of Goldman Sachs have pinned some of the blame for the perceived decline in its old-fashioned values on its transformation from a partnership to a publicly listed company in 1999. While the original owners of family or founder-controlled companies do sometimes buy out minority shareholders, taking a large quoted group private often proves difficult. Instead, big companies - particularly those seeking to compete with smaller, faster-growing rivals - may try to encourage a fresh culture by carving out new divisions. Spanish telecoms group Telefónica, for in­stance, is establishing a digital arm in London's Soho, home to innovative media groups, rather than on its campus in unglamorous Slough, 20 miles to the west. Kraft plans to spin off its snack business as Mondelez International, a name Irene Rosenfeld, chief executive, says will "build on our higher purpose - "to make today delicious"." The financial crisis and recent rate-rigging scandal surrounding Barclays and its global competitors have increased calls for structural solutions that would fully separate utility-like retail banking from an institution's investment banking and trading operations. But, as the UK's Vickers commission pointed out in recommending the lesser step of "ringfencing" those divisions, "they would have distinct governance arrangements, and should have different cultures." As one former director of Schroders points out, even before the venerable UK financial group sold its investment banking arm, it had a strong culture, overseen by the board, but distinct subcultures in its asset management and merchant banking divisions. So deep is the crisis of confidence in financial services that regulators have explored whether to intervene to influence corporate culture. Letters released this week show that in 2010 Hector Sants, then chief executive of Barclays" regulator, the Financial Services Authority, was concerned, in assessing Mr Diamond's suitability to become chief executive, that he should "set the right culture" for the bank. His letter echoes speeches made around the same time in which Mr Sants expressed his personal view that the watchdog could intervene to modify an unacceptable culture. "I think we do have the means of intervention," he told a conference in June 2010. For example, influencing the composition of management; influencing incentives for good behaviour; influencing the training and competence regime; and deterring poor behaviour. Mr Steare, whose work was cited in Mr Sants" speech, believes supervisors can ask boards to provide evidence of healthy culture, such as functional whistleblowing regimes, positive customer and employee engagement surveys, and a system for challenging "group think" at board level. However, he adds: "I don't believe the regulator should be enforcing culture because it's a contradiction in terms: if you enforce culture, you get a police state with compliance on the surface and subversion underneath." Management theory: A second wind for softer values Corporate culture is as old as companies themselves, but it became a management fashion in the late 1970s - invoked by executives, puzzled over by academics and, inevitably, peddled by consultants. After years focusing on strategy, structure and other hard concepts, companies identified softer elements, such as shared values and history, that could enhance performance. Business Week magazine drew attention to the concept in 1980 with a cover story featuring Easter Island statues in suits and ties on "the hard-to-change values that spell success or failure." But it was McKinsey consultants Tom Peters and Robert Waterman who popularised culture as a management tool with their 1982 analysis of the best US companies, In Search of Excellence. "Without exception, the dominance and coherence of culture proved to be an essential quality of the excellent companies [we identified]," they wrote. Moreover, "the stronger the culture and the more it was directed toward the marketplace, the less need was there for policy manuals, organisation charts, or detailed procedure and rules." It is no coincidence that today's obsession with culture coincides with concerns about whether multinationals have become too big to manage, just as the earlier vogue bloomed as companies became more complex and global. In an echo of the Peters and Waterman findings, Bob Diamond, former Barclays chief executive, said in a speech last year: "For me the evidence of culture is how people behave when no one is watching." But even the original studies pointed out that a strong culture could be dangerous if it led to "group think," or mutually reinforcing bad behaviour. One of the drivers behind the 1980s analysis was the realisation in the US that successful Japanese groups boasted strong shared values. Yet in recent months, the Olympus scandal - in which directors helped chairmen of the Japanese photographic company keep accounting tricks secret for years - has been blamed on the same close-knit local culture. This month, the chairman of the commission looking into the Fukushima disaster laid the blame for the 2011 nuclear plant failure on Japan's "reflexive obedience; our reluctance to question authority; our devotion to "sticking with programme"; our groupism; and our insularity." Paradoxically, a good corporate culture only lasts if its adherents are also allowed, even encouraged, to challenge it. In other words, structural solutions are unavailable - or ineffective - and interventionist regulatory action is likely to be unacceptable or counter-productive. But outside experts and executives point to an obvious third way, which is to combine strong leadership with the existing internal elements of a healthy corporate culture. The good news for companies assailed by allegations of bad behaviour is that, while it may take as long to create a good culture as it does to establish a good reputation, a strong set of values is usually harder to destroy unless the company is itself dismantled or taken over. Jordi Canals, dean of Spain's Iese Business School, points to Siemens, the German industrial group that suffered a reputational battering after a foreign bribes scandal erupted in 2006. The company has rebuilt its culture under Peter Löscher, the current chief executive. He didn't change everything. He got the right people in the right places - mostly executives who had been at Siemens for years. [The company's] renewal was based on Siemens" culture," he says. US manufacturer 3M is another company with deep roots and a strong culture of innovation. When former General Electric executive Jim McNerney took over as chief executive in 2001 - the first outsider in the job - he improved the group's financial discipline. But by concentrating on cost-cutting and GE-style efficiency management, critics say, he pushed 3M's long tradition of experimentation and innovation underground. His successor, Sir George Buckley, who has just retired, is credited with having restored these inherent scientific strengths. Both examples show that cultural change - positive and negative - comes from the top. Kal Patel, who until last year was a senior executive at Best Buy, says the US electronics retailer's success was strongly linked both to the Lutheran philosophy of chief executive Brad Anderson and the creative tension between Mr Anderson and founder-chairman Richard Schulze. "It was hard to go off the rails, because there was this tone set from the top," says Mr Patel, who now works for LRN, a consultancy advising companies on corporate culture. He adds that after Mr Anderson stepped down in 2009, this open, constructive debate at senior level ended. Mr Patel believes the combination of industry pressure on Best Buy and the disappearance of a culture of "challenge" on the board contributed to the departure this year of Brian Dunn, Mr Anderson's successor, who had a "close personal relationship" with an employee. Mr Schulze himself had to step down as chairman because he knew about the relationship but chose not to tell other directors. With new leadership and a fresh start, Mr Patel believes, Best Buy could revive its strong sense of purpose. The same could happen at Barclays, where investors are calling on the company to replace Mr Diamond and Marcus Agius, the chairman, who is also set to resign, with outsiders who could instil a new culture from the top and revive the Quaker values of its founders. Executives and academics agree, however, that this is easier said than done. One long-serving FTSE 100 chief executive recalls setting out, on taking over the top job, to "create the sort of company I wanted to work for," communicating from the start the values staff were expected to follow. But to achieve changes in attitude, this executive says, the message needs to be constantly reiterated, in person. Experts point out, too, that a strong corporate culture will not on its own protect a company that has a bad strategy, poor governance or a weak business idea, let alone one that takes the wrong operational decisions. In their 1982 book, In Search of Excellence - one of the first attempts to identify and explain the correlation between a positive corporate culture and strong performance - Tom Peters and Robert Waterman pointed out that "poorer-performing companies often have strong cultures, too, but dysfunctional ones. They are usually focused on internal politics rather than on the customer, or they focus on "the numbers" rather than on the product and the people who make and sell it." Thirty years in which the obsessive pursuit of shareholder value has dominated the priorities of many listed companies have only reinforced the strength of that observation. Mr Steare says he always asks directors with whom he works what the purpose of their business is: "If they respond "To make a profit," I know we've got a problem."