Knowledge Center: Publication
Chief Executive Officer & Board of Directors
When the company pivots, make sure the culture pivots with itSubscribe to Chief Executive Officer & Board of Directors 2/17/2016 Jim Hart and John S. Wood
In the world of start-ups, a pivot is a sharp course correction in a fledgling company’s business model, often in response to initial setbacks or as a result of new strategic insights. Big public companies, too, must sometimes pivot. And the need to do so can be as urgent for them as that of a start-up burning through cash.
That need can arise from any of a number of circumstances, planned or unplanned: the sudden appearance of an activist investor, a big acquisition or divestiture, a major failure in the market, an industry disruption (such as the emergence of new technology that radically changes the terms of competition), or, as happened with the great recession, earthshaking economic developments. And the need to pivot comes faster than ever. The average life span of a company listed in the S&P 500 index of leading US companies dropped from 67 years in the 1920s to 15 years today, according to Richard Foster of the Yale School of Management. In some cases these companies died because they failed to pivot, but in many cases they disappeared because they pivoted so successfully that they became new companies.
Given the magnitude and urgency of the task, culture may be the furthest thing from directors’ minds as they oversee a significant strategic shift and the restructuring that usually accompanies it. Boards rarely discuss culture under any circumstances, and directors resist the subject for many reasons (for more, see “How board governance and company culture intersect,” Directors & Boards, First Quarter 2014). But unless the culture pivots with the strategy, the results are likely to disappoint. Fortunately, lately, we’ve seen several Fortune 500 boards take a hand in making sure culture follows strategy.
For these boards, culture is not a fuzzy, abstract concept but something quite specific: the behavior of people in key leadership positions in relation to strategy. The question for the board is the extent to which people in the organization exhibit the behaviors required to make a new strategy work. These farseeing boards want to ensure that the top team’s actions are aligned with the new direction of the company.
Getting it right or missing the mark: A contrast of two companies
Consider the case of a technology company facing shrinking margins for both of its two quite different divisions: one of them manufacturing a basic technology component and the other providing large turnkey system solutions. Cost cutting had kept the company afloat, but a flood of cheap imports from Asia was threatening to take it under. The markets for both businesses were in free fall, and the two divisions were competing for shrinking capital and resources. Further, the product business was cyclical, while the solutions business was relatively constant, resulting in even more tension when it came to the allocation of resources. With the stock price at an all-time low and the specter of bankruptcy looming, the board stepped in, replacing the CEO, who initiated a strategic pivot intended to grow both businesses in order to fund a greater emphasis on the solutions business.
The shift in behavior the new strategy demanded was particularly difficult, moving leaders, especially the product leaders, from making decisions that maximized their individual lines of business to making decisions for the good of the entire enterprise. With the support of the board, the new CEO reconfigured the executive committee, adding the division heads to the group, which would at least get them in the same room together for critical discussions. The board and the CEO understood, however, that structural change by itself would not necessarily change the behavior of the division heads or that of the other members of the executive committee, all of whom would need to work together in a new way.
Working through the CHRO, the board and CEO made sure that initially the culture of the senior team would pivot in sync with the new strategy and structure, with middle management to follow. The CEO and senior team identified the specific behaviors that would be required to increase collaboration among all executive committee members: accept joint accountability for each other's parts of the business, share information that would enable better enterprise-wide decisions, and create a faster decision-making process that nurtured healthy and respectful debate while ensuring that once decisions were made the whole company aligned on them quickly (versus the slower, more consensus-based approach that existed before). Finally, the senior team worked to ensure it was projecting confidence, optimism, and resiliency to the organization while leading it through turbulent times.
To get there, an objective third party was engaged to assess both the team and each of the team members for their propensity to exhibit the new behaviors — conducting, in effect, a cultural gap analysis. A process for aligning the team was established, and team members with worrying shortfalls in critical behaviors were provided with coaching designed to help them change their behavior in line with the requirements of the new strategy.
Within nine months the entire organization had been engaged in the cultural pivot, and in 18 months the turnaround was complete. The stock price had increased dramatically. The increased collaboration had helped produce healthy businesses for each division. And the board was then able to spin off the product division so that each business could focus more effectively on its own market. Thus from one ailing business two new successful businesses were born, delighting shareholders.
Contrast the technology company’s commitment to making the strategic and cultural pivot necessary with the course taken by a major bank. Unlike the technology company, the bank stopped at changing its structure. Hobbled by a monolithic bureaucracy and outperformed by nimbler competitors, the bank determined that it needed to give its operating units more autonomy, enabling them to respond more quickly to customers in their retail operations and seize opportunities in their commercial operations.
Encouraged by the board, the company reorganized in line with those aspirations. But neither the board nor the CEO took any steps to change the culture of the senior team, which was marked by cynicism, fear, mistrust, and turf battles. Team members continued to behave as they always had, renegotiating decisions around the water cooler after a team meeting, exercising a “silent veto” of decisions they disagreed with, and continually reopening issues that had presumably been settled at previous meetings.
Further, they used the bank’s focus on analytics as an excuse for passive-aggressive behavior — demanding more data when they didn’t like a course of action and then arguing endlessly over the validity of the data, stalling decisions and undermining the agility that had been the aim of the strategic pivot. Despite the new structure, the bank continued to underperform against its peers. But instead of insisting that the underlying cultural issues be addressed, the board ratified another restructuring of the organization, which, like the first restructuring, merely passed on the existing cultural DNA and with the same dispiriting results.
As these examples suggest, no one structure and no one set of behaviors fit every strategy. The technology company created a tighter, more integrated structure and the bank a looser, less matrixed structure. But the real difference between the two companies lay in the degree of their boards’ involvement in overseeing culture.
The failure of the bank’s board to take on culture and the behaviors of its top team is, to some extent, understandable. Only in recent years have boards come to see the oversight of strategy as a central part of their fiduciary duty to shareholders. Culture, however, has been regarded as beyond the board’s purview, though the execution of strategy vitally depends on the behavior of leaders. Further, if urgent concern about culture at the top originates with the board rather than the CEO or CHRO, uncomfortable conversations may follow, since the CEO shaped the team in the first place.
Nevertheless, when the company is pivoting strategically, the lead director or chairman (on boards where the chair/CEO role is split) owes it to the shareholders to make sure that the company is also pivoting culturally. That cultural pivot starts with the top team, and it is the board’s responsibility to see that it is set in motion.
Jim Hart is a senior advisor and former president and CEO of the culture-shaping firm Senn Delaney, a Heidrick & Struggles company.
John Wood (email@example.com) is a vice chairman and a member of Heidrick & Struggles’ Chief Executive Officer & Board of Directors Practice.
This article was originally published in Directors & Boards magazine.