Poor company culture increasingly recognised as causing poor performance

SINGAPORE (Jan 21): On Jan 16, David Solomon apologised to the Malaysian people for the role that Goldman Sachs’ former managing partner in Asia, Tim Leissner, played in the defrauding of the 1Malaysia Development Bhd fund. Solomon, the investment bank’s CEO, reiterated in an earnings call that Goldman had been given assurances by Leissner and Malaysian officials that turned out to be untrue. In short, it was Leissner’s fraud and Goldman had been taken in as the Malaysian people had.

On the other hand, in his statements to the court in New York last August, Leissner had effectively blamed the bank for his actions. “I conspired with other employees and agents of Goldman Sachs very much in line with the culture of Goldman Sachs to conceal factors from certain compliance and legal employees of Goldman Sachs,” he said.

Even before Leissner’s allegation, however, Goldman already had reason to examine its corporate culture, which has been demonised by many as being short-term profit-seeking above all else. Still, Goldman is not alone in this. In the aftermath of the global financial crisis, the big banks were under fire for the “bonus culture” that many blamed for the market meltdown — bankers took excessive risks in return for handsome bonuses. More recently, in Australia, the banks have come under fire for a culture of greed and associated poor behaviour, which led to scandals such as wealth advisers charging dead people for services.

After 2008, regulators in the US began to push for improvements in corporate culture and employee behaviour, as a way of stemming risk across the financial system. In the UK, the revised corporate governance code emphasises the need for companies to have a clear purpose and strategy aligned with healthy corporate culture.

But this is not just for the financial institutions. Quite apart from the damage to reputation that a poor corporate culture can inflict, it is evident that the culture of a workplace — be it a bank, corporation or public organisation — has great bearing on how the organisation functions, or performs. As we report in this week’s issue, workplace culture may be difficult to measure or define. But, while a good culture — one that encourages initiative and nurtures its employees, for instance — can give an organisation a competitive edge, the consequences of a bad one can be devastating.

At SMRT, for instance, “deep-seated cultural issues” were cited as being partly to blame for the severe disruptions to the train network in the past few years. “Many of our major disruptions in the past have been attributed in some part, or all, to human error or failure,” the train operator’s former CEO Desmond Kuek said at a press briefing in October 2017, which was attended by Transport Minister Khaw Boon Wan, after service disruptions caused by a flooded tunnel. The pumps to remove rainwater from the tunnel had not been serviced for a year and maintenance records had been falsified. “Much progress has been made with the inculcation of a positive work culture, but there remain some deep-seated cultural issues within the company that has needed more time than anticipated to root out.”

Interestingly, a year later, SMRT’s newly appointed CEO Neo Kian Hong said the issues Kuek raised did not exist in the organisation. “That’s not my experience when I engage with the ground,” he told reporters last November as he laid out the reorganisation of the public transport group.

More recently, a committee set up to look into the events that led to the massive data breach at public healthcare services provider SingHealth has recommended that the public healthcare sector’s IT agency, Integrated Health Information Systems, look into its governance practices. The committee also questioned to what extent the behaviour of an employee, who had failed to raise the alarm, was shaped by the organisation’s culture.

Ultimately, as organisations today are increasingly under pressure to deliver results, the erstwhile practice of pure, financial incentive-based system may no longer work. For one, compensation-driven performance would be unsustainable and may be counterproductive; an employee may only perform to a level that he deems is commensurate with his salary.

In any case, the call to focus on developing a good workplace culture is strengthening, and coming from multiple fronts. First are the regulators, which see corporate culture as an element of governance and a way of curbing wrongdoing and its consequences. Second, institutional investors are piling on the pressure, with culture forming part of the intangibles meant to create long-term value. Just this month, State Street Global Advisors called on boards to review companies’ cultures and ensure alignment with corporate strategy. The world’s third-largest asset manager said it “has seen the downside when culture is not aligned to strategy”.

Third, jobseekers are prioritising culture over compensation, as demonstrated by the results of a recent survey conducted by recruitment site Glassdoor. In it, the firm asked jobseekers what they thought was more important to them: finding the right workplace culture or earning more money. Four in five respondents picked workplace culture.

Finally, researchers at the London School of Economics have even developed a tool to measure corporate culture. This takes into account several areas. One is a company’s investment in R&D, which is an indicator of its willingness to innovate and a competitive advantage. Another is the number of employee strikes, which clearly shows an unhappy workforce. Yet another measure is whether the CEO’s bonus is adjusted according to the company’s performance. A full bonus is a negative indicator.

The need for good culture has been overlooked for too long and led to egregious corporate and market behaviour. Getting the culture right is tough, and there is no straightforward way to do so. But it is necessary to begin.

This story appears in The Edge Singapore (Issue 865, week of Jan 21) which is on sale now. Subscribe here