Bad vibrations
Why company culture counts
''Good culture is more than promoting diversity, inclusion and openness.''
You would think corporate New Zealand would have learned – poor corporate culture can cause serious financial loss.
But the turmoil at Fletcher Building, and potentially the troubles at listed insurer CBL, show it’s a lesson that business leaders appear to forget with frightening regularity.
The train wreck of the 1987 share market crash is fading into distant memory, but most of the country’s business leaders today will recall the failure of carpet maker Feltex.
Ahead of its NZX listing in 2004, Feltex took potential institutional investors on a factory tour that was meant to reinforce the case for buying its shares.
But for several fund managers, it did the opposite. They were surprised to see factory windows looking like they’d been left broken for some time. It suggested a lackadaisical attitude had filtered right down to the factory floor.
Even prior to the tour they were sceptical, but the windows, messy floors and nonchalant attitude of workers confirmed their thinking. And they were right.
Feltex, which listed with a market value of $250 million, collapsed two years later.
Although Fletcher Building is a long way from suffering a similar fate, there are strong parallels.
The massive cost overruns on key projects such as the International Convention Centre and Christchurch’s justice and emergency services precinct can, to a significant extent, be traced back to poor culture.
The evidence appears compelling including reports of high staff turnover, managers repeatedly agreeing to unprofitable contracts, and gaps in information flowing from management to the board.
The result has been massive destruction of shareholder value. Even though New Zealand is still in the middle of its largest ever building boom the company’s building and interiors unit lost an estimated $660 million this financial year alone.
And around $2 billion of market value has been wiped out since problems first emerged in February 2017.
Good culture is more than promoting diversity, inclusion and openness, it is also systematically reviewing and improving the capability of company leaders.
Strong corporate culture helps to foster growth, innovation, talent retention and recruitment success.
The challenge for companies and investors is that culture is intangible. Unlike assets such as buildings or even patents and brands, culture is hard to value. But its value is clear.
As Brian Chesky, co-founder of Airbnb, wrote to employees, ‘‘if you break the culture, you break the machine that creates your products.’’
While Fletcher Building highlights the dangers of getting it wrong, there’s no limit of steps you might take for getting culture right.
Encouraging new ideas and sensible incentive structures are a must. Left-field but popular ideas to build culture and openness include dog-friendly work places (Google), free meals and snacks (LinkedIn) and seven paid days volunteering each year (Salesforce).
Culture is an on-going and long-term project for which there no quick fixes when problems occur.
In 2015 Germany’s VW was found to intentionally programme some car engine software to activate emission controls during laboratory testing.
It was intentionally cheating emissions tests. The scandal saw VW plead guilty to US federal fraud and conspiracy charges and has paid over US$30 billion (NZ$40.9b) in fines and compensation.
You’d think VW would promptly clean up their culture, but it’s not there yet.
Earlier this year it came to light that VW had locked monkeys in airtight chambers exposed to diesel exhaust, and exposed human volunteers to nitrogen dioxide, a noxious diesel byproduct.
Investors can only hope the management at Fletcher Building are faster learners.
John Berry is co-founder and CEO of Pathfinder Asset Management, a boutique responsible investment fund manager. Pathfinder’ invests in Google, Microsoft (which owns LinkedIn) and Salesforce.