Culture reporting research: Performance and strategic progress
The third article in our series exploring culture reporting asks the question, “How well is culture defined as a strategic or performance driver?”
Our review of annual reports found that most companies don’t recognise culture as part of an objective or priority for delivering against their strategy. Similarly, culture is not often identified as a risk that would impact the company’s performance or strategic progress.
In our research, we found that only 11% of companies have culture and values as an element of delivering their strategy.
What does this mean?
So, if culture is a major differentiator, then leaders are either underestimating the power of culture, or are struggling to understand it and as a result, capture and report on the value it adds. I lean towards the latter.
Virtually every company understands that people are a key resource as part of their business model. Most will say "we’re a people business" or "we have family-feel culture". They all acknowledge that its people who make the difference between success and failure. Yet they fail to clearly articulate how that happens in the annual report.
For investors, and especially employees, social channels such as Glassdoor, Indeed, Google, or even Instagram are a better indicator of the culture than what is officially expressed by the company themselves.
Why does it matter?
There’s a well known saying, ‘culture eats strategy for lunch’. The idea being that culture actually drives business forward, not strategy. The shared values, behaviours, systems, practices, beliefs, traditions, interactions and attitudes add up to what you deliver.
IBM’s former CEO, Lou Gerstner, said: “I came to see, in my time at IBM, that culture isn’t just one aspect of the game – it is the game.”
Yet, the reality is that strategy is what is measured, through progress, KPIs and targets. And these targets (and incentives) drive behaviours. Maybe an organisation has an ambitious growth or revenue target? Achieving this may drive behaviours to get sales at any cost, sacrificing margin, or process, or overpromising. These behaviours become the culture because they are visible and rewarded. What gets measured gets done is the truism.
We estimate about 30-50% of companies have innovation (technology, new product development, or R&D) as part of strategy. It’s not a new concept, and in fact way back in 2008, Science Daily reported that culture is the most important factor in driving innovation.
Innovation is always about people and ideas. Breaking new ground requires a team ethic of tenacity, desire, commitment and belief, which is essentially culture. But this cultural side of innovation is rarely seen in any corporate communication. Most focus is on the product or outcome, rather than the culture that enabled it.
Ultra Electronics is one organisation focused on people and culture. “Preserving Ultra’s culture (underpinned by its behaviours of LEAP: leadership, entrepreneurship, audacity and paranoia) and attracting, developing and retaining the right people who have the domain expertise and who embrace Ultra’s culture is critical to the Group’s strategic objectives.” They state that “failure to maintain a strong ethical culture would increase the Group’s exposure to legal and regulatory breaches.”
Therefore, culture and strategy should work together. “Culture is simply strategy in action.”
We also looked at risk and asked ‘Is culture or employee engagement a stated business risk? Does the company refer to its values/purpose/culture when discussing how risks are managed?
We found that only 10% of those we researched specifically list culture or employee engagement as a principal risk. That is surprising given the number of high-profile corporate scandals that centred on ethical breaches and misjudged behaviour.
Culture lies at the heart of strategy and performance, so it is important to integrate risk into how companies assess and design programmes.
Employees, and leaders, need to understand the positive behaviours that drive culture as well as the behaviours that undermine or impact the business, reputation and performance.
SSE is one company that identified people and culture as a principle risk in their 2018 report, citing that they may be "unable to attract, develop and retain an appropriately skilled, diverse and responsible workforce and leadership team, and maintain a healthy business culture which encourages and supports ethical behaviours and decision making." SSE set out to mitigate the risk with inclusion and diversity policy and plan, a guide to ethical business, leadership succession planning and an employee communication forum.
Commit to culture as a key element of your business strategy. Define it, measure it and report on it.
Allow employees time to think about your values and how they will work together to deliver the strategy - let them translate it into their reality.
Gather examples and evidence of your culture and values in action delivering the strategy to include in the annual report and ongoing internal and external communications.
Follow our culture reporting research
Over the next few weeks we'll be releasing the findings of our research and tackling the topics that matter:
Measuring and demonstrating culture
Alignment and linkage to business model
Engagement and employee voice
To receive the full research findings, email Sarah Eklund at [email protected].