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Martin Winterkorn. Photo: Reuters
Martin Winterkorn. Photo: Reuters

When corporate culture goes toxic, from Lehman to Volkswagen

Most corporate failures do not start in the boardroom, but stem from deep inside the company, its values and its culture

It is an ancient and time-honoured rule of business: when things go wrong, throw the CEO overboard. When American regulators charged Volkswagen with deliberately falsifying emissions tests for diesel cars, it was almost inevitable that the first casualty would be Volkswagen Group CEO Martin Winterkorn. He resigned a few days after the news broke.

Winterkorn was just the latest in a long line of CEOs and chairmen who have paid the price for the failings of their companies. Sanjay Aggarwal of Kingfisher Airlines, Thorsten Heins of BlackBerry, Bob Diamond of Barclays Bank and Tony Hayward of oil firm BP are just a few of the high-profile bosses who have been forced from office in recent years after their businesses went disastrously wrong.

Aggarwal had little choice but to resign after it became clear that there would be no bailout for the airline. Heins paid the price for BlackBerry’s failure to respond to the dominance of Apple and Samsung. Diamond was held responsible for Barclays’s involvement in the Libor rigging scandal, and Hayward’s response to the Deepwater Horizon fatal fire and oil spill was considered by the press and public opinion—and BP’s shareholders—to have been weak and failing to address public concerns.

Few would argue with the idea that the leaders of business should pay a penalty when things go wrong. Leaders must be accountable and must bear the consequences of their companies’ failures. It is no good arguing as Diamond attempted to do in the aftermath of the Libor scandal that, especially in large organizations, the leader cannot possibly know what is going on and therefore failures are not the leader’s fault. Not knowing is not good enough.

It is less clear, however, whether feeding the boss to the sharks really helps the company in the long run. There is doubtless a short-term cathartic effect, and shareholders and public opinion will be appeased. In many cases, sacking the CEO or the chairman only addresses the symptoms of failure, without touching the causes.

Most corporate failures do not start in the boardroom. To be sure, there are exceptions. Satyam was brought to its knees in 2009 by corruption in the boardroom, a scandal that led to the imprisonment of the chairman and several senior executives. Canadian clothing manufacturer Lululemon Athletica had to get rid of its embarrassing chairman, Chip Wilson, after he made a number of public statements insulting the company’s mainly female customers.

Cultures of failure

In many other cases, though, the seeds of failure stem from deep inside the company, its values and its culture. Those seeds sometimes lie dormant for years, even decades.

Take, for example, the case of one of the most famous business failures in recent years, the collapse of Lehman Brothers. Founded in 1850, the firm was in the early years famous for its high-minded culture that put service to clients and value creation first, and profits and growth second. Lehman Brothers didn’t just lend money to clients, it built partnerships with them and enabled those clients to grow. That idea, for more than a century, was at the heart of Lehman’s culture.

After the death in 1969 of Bobbie Lehman, the last of the original founding family to run the bank, the culture of Lehman Brothers began to change. The new leaders of the bank were unable to resist demands from bankers and traders for higher pay and performance-related bonuses. New performance metrics were introduced, linking bonuses to profit and growth.

Within a couple of decades, profit and growth had become the purpose for which Lehman Brothers existed. Clients were now of secondary importance; they were merely the means by which these goals were achieved.

Under the leadership of executive chairman Richard Fuld, this trend intensified. Lehman Brothers pursued growth at all costs, regardless of the warning signs in the world economy. Just a few months before the crash of Lehman Brothers in September 2008, Fuld was investing heavily in expansion, ploughing much of the bank’s remaining cash into a venture in the United Arab Emirates.

Richard Fuld. Photo: Bloomberg
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Richard Fuld. Photo: Bloomberg

It is easy to argue that Fuld was responsible for the failure, and in part he was, but only in part. Fuld was also a part of the high-performance, profit and growth-driven culture that emerged after 1969. He came up through the ranks in Lehman Brothers, and was imbued with that culture.

It could be said that in Fuld, Lehman Brothers got the leader it wanted, and perhaps the leader it deserved. His tenure as executive chairman merely reinforced the existing culture and drove the bank further and more swiftly towards disaster.

Another famous culture of failure developed at IBM in the 1970s and ’80s. Big Blue, as the company was (not always affectionately) known, was the world’s largest computer firm. IBM was also probably the smartest company in the world. It invested vast sums in R&D, including blue-skies research. In 1986, two of its researchers won the Nobel Prize for physics.

IBM bosses believed their company was invulnerable thanks to the quality of its people. Above all, they prided themselves on having a culture of innovation. The bosses like to talk about a special kind of IBM employee, the wild ducks, free spirits who challenged orthodox views and were ready to think the unthinkable in the quest for new and better products.

The only problem was, this culture no longer existed. Years of stifling bureaucracy at the middle levels of the company had crushed the independent spirits under a mountain of regulation and red tape. Conformity was the order of the day, and those who questioned the rules were forced out. “What happened to the wild ducks?" ran the question in IBM. “They all got shot."

But the leaders of IBM were so out of touch with their own company that they did not realize this. They still thought they were running a vibrant, innovative, forward-thinking company. Had they stepped out of the C-suite and looked around, they would have understood that their company had turned into a bureaucratic monster.

Those same leaders were also unaware that fast, agile competitors were beginning to run rings around them, taking away their market share. By the early 1990s, IBM was teetering on the edge of bankruptcy. Chairman John Akers was forced to resign and a new chairman, Lou Gerstner, brought in.

A file photo of Lou Gerstner (left) with Michel Bon of France Telecom. Photo: AFP
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A file photo of Lou Gerstner (left) with Michel Bon of France Telecom. Photo: AFP

But Gerstner discovered the same problem that existed at Lehman Brothers, an entrenched culture of conformity and rules that resisted any attempts at change. It took Gerstner five years, and he had to make thousands of people redundant, before he could turn IBM around.

Are we looking at the same problem at Volkswagen? Winterkorn’s successor, Matthias Müller, appears to have inherited an Augean stable of illegal test results, defeat devices and dishonest behaviour by employees. It may not be enough to just fire a few managers. Müller and his team may well have to change an entire culture, and that will not be easy.

Cultures of blindness

At IBM and Lehman Brothers, the corporate culture stopped emphasizing value creation and the need to serve customers, which was what had made these companies great in the first place, and started focusing instead on things that mattered to the company—growth, productivity, targets, conformity to rules and, at IBM, what Northcote Parkinson identified as the desire of bureaucracies to perpetuate themselves.

In other cases, companies get wrapped up in their own products and their own technology and become so focused on these that they take their eye off the world around them.

There is no doubt that BlackBerry was one of the great innovators in the mobile phone market. Its stylish products were well ahead of their time in both design and functionality. But BlackBerry got carried away by its own success. It believed in its product, and in the end, the attention to detail of the product started taking precedence over what customers wanted.

The culture at BlackBerry was all about the phone, not about the customer; while at Apple and Samsung, the emphasis was the other way around. BlackBerry may well have been producing technically superior products, but Apple and Samsung made phones that people wanted.

This was not the first time this has happened in the mobile phone market (and it may well not be the last). Twenty-five years ago, Motorola dominated the market in mobile phones and was the undisputed king of analogue phone technology. Motorola’s culture was all about developing analogue phones to a high art.

So focused were its engineers and managers on their own product that they neglected to look around and see the development of digital technology as a real threat. Only when the company had lost its dominant position in the phone market to Nokia did Motorola wake up and realize the danger; and by then, it was too late. Motorola survived the crisis, but has never regained its once-powerful position.

Breaking bad cultures

Companies such as IBM, Lehman Brothers, BlackBerry and Motorola were not driven to failure by their leaders. There is no single howling error, no one great strategic decision that turned them from among the most successful companies in their fields into basket cases. Their leaders were guilty of neglect but not deliberate error. They took their eye off the ball, and let the cultures of their companies slide.

At Volkswagen, there has been no suggestion that Winterkorn ordered engineers to break the law. But somewhere along the line, a culture developed that seems to have not only permitted cheating on emissions tests, but even encouraged it.

What can be done once a toxic culture has taken root? The brutal truth is that sometimes, as in the case of Lehman Brothers, little or nothing can be done. But even if companies can be saved from extinction, the road back to corporate health can be a long one. As noted, it took IBM five years to achieve a definitive turnaround.

Delta Airlines, once famous for the excellence of its customer service—the airline was routinely voted one of the top three in America in passenger surveys—suffered a collapse of its corporate culture when its leaders introduced cost-saving measures that slashed corporate training budgets and staff perks.

Almost overnight, Delta staff went from being happy people famous for their smiles to grumpy, indifferent people who were no longer motivated to care about customer service. Customers noticed at once, and voted with their feet.

In just three years, Delta went from being one of the best American airlines to bankruptcy. Rescued, Delta began to trade again, but it took years for a new corporate leadership to rebuild that old culture of hospitality and excellent service. Even so, Delta has not regained its former position in the affection of air passengers.

The IBM and Delta cases show that recovery is possible, but requires three things: time, strong and inspirational leadership and ruthlessness. Time is required to get people to understand the need for cultural change. Strong and inspirational leadership is necessary if they are to coalesce around the new leader and break the shackles of the old culture; at IBM, Gerstner spent much of his time talking to his staff and building coalitions of those who shared his vision and were willing to follow him. And finally, ruthlessness is needed to weed out those people who are reinforcing the old toxic culture and blocking change.

As is so often the case, the best remedy is prevention, not cure. If companies are aware of the dangers of toxic cultures, they can take steps to prevent them from developing in the first place.

Andrew Grove, former CEO and chairman of Intel, is an example of a leader who was very much alive to the danger and reminded his staff constantly to be wary of complacency. Under Grove, Intel was not just a maker of microprocessors; it was part of the Internet revolution, part of the great wave of technology that was changing the face of the planet.

Apple and Google have developed very similar cultures in recent years. At both these companies, working for them is not just a job: it is a profession, almost a vocation. People believe in the value they create. They believe they are working for other people, not just to make money for themselves or hit targets for their companies.

At the same time, a dose of humility is also important. At Intel, Grove never failed to remind his staff that no matter how good they were, disaster could still be waiting just around the corner. The title of his book, Only the Paranoid Survive, is a good indication of his management philosophy.

What are the signs that a toxic culture might be taking hold? Based on these and other cases of failure, here are a few questions that executives might consider asking themselves:

• How does the company set performance targets? If targets are based on performance in terms of customer service, value creation for customers or customer satisfaction, then staff are more likely to be motivated by a desire to serve customers. On the other hand, if performance is measured primarily or solely in financial terms or in market share or percentage growth—and especially if pay and bonuses are keyed to this performance measurement—then staff are more likely to put the interests of the company and themselves above the interests of customers.

• What are the company’s (real) values? Never mind what is written in the values statement, what does the company really believe in? Why does it think it exists, and what is its purpose? If the purpose is merely to make money, then there could be a problem. Long-lived, successful companies nearly always have a higher purpose connected with customer service and societal benefit.

• What (genuinely) is the company’s view of its customers? Again, ignore the guff in the annual report about ‘customer care is our first priority’. Does the company see customers as partners in value creation, or as people with needs and wants that can be satisfied? Or does it see them as cash cows to be milked in order to boost the earnings figures for the quarterly report? No prizes for guessing which option is more likely to lead to a toxic culture.

• Why do people come to work here? This is really a question about employee engagement. Do people care about their jobs? Do people care about the customer? Or do they simply turn up in order to do the minimum essential work, collect their pay and go home? The latter is all too common, and very dangerous. Disillusionment and cynicism are probably even greater dangers to productivity than corruption and theft, and certainly more widespread.

It is too early to say whether Volkswagen can turn itself and its corporate culture around. What is certain is that Matthias Müller, and very possibly his successors, have many years of hard work ahead of them.

Morgen Witzel is a writer on business and a fellow of the Centre for Leadership Studies, University of Exeter, UK.

Comments are welcome at feedback@livemint.com

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