Culture - The Consequence of Governance and the Team at the Top
Whereas entrepreneurial enterprises have few internal barriers, larger institutional enterprises risk forming organizational silos that cause fragmented communications, and foster internal competition among members of management. To build a sustainable enterprise with a strong positive culture, the Chief Executive Officer must establish a team at the top. When stated and enacted values are consistent among members of management as a team, a positive culture will emerge throughout the enterprise. However, the reward system impacts both performance and culture.
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The Chief Executive Officer (CEO) has the overall responsibility for the administrative and operational activities of an enterprise, and is accountable to the board of directors, which in turn is accountable to the shareholder investors. Collectively, the CEO and the board comprise the Governance function, from which all constituencies expect leadership, and to which the investors look for results. Top management consists of executives with major areas of authority and responsibility for functional or business units, supported by other managers, supervisors, and staff.
If the CEO is an effective leader, the enterprise will follow, and the appointed leaders will be respected. If not, emergent leaders will develop from within the organizational units based upon needs.
Entrepreneurial enterprises have limited resources and are focused on survival and growth. Institutional enterprises risk becoming large bureaucracies operating according to multiple internal agendas instead of the needs of the marketplace. To build sustainable advantage, the CEO must focus the organizational units and the individuals within them on a common agenda in line with enterprise's objectives, goals, and longer-term targets. The process starts by ensuring that the executives are functioning as a team.
The culture of the enterprise is the consequence of governance. Culture comprises knowledge and skills learned from leaders and role models, and consists of shared values, attitudes, behaviors, and beliefs that influence future behaviors. Culture cannot be manufactured. Every enterprise forms its own culture over time, which is hard to change.
The CEO must strive to ensure that the organizational units and the individuals within them are aligned with the values, mission, vision, and value proposition of the enterprise, and with each other. Alignment is a function of leadership - the ability of the CEO to:
- Aspire - communicating purpose
- Inspire - influencing the achievement of results
- Establish an environment for motivating teamwork
Ideally, the enterprise is one team with shared values and vision. In reality, the notion of an enterprise as a team is hard to achieve, especially in large institutional enterprises. Teamwork is harder to establish at the top of an enterprise than at the bottom because of competition between organizational units. Even though the leaders may preach teamwork, it will be hard to achieve if the performance evaluation and compensation policies reward individuals over teams and the enterprise itself.
The more the evaluation and compensation policies skew towards individual performance, the more competitive and less collaborative the employees become. The more the policies skew towards the enterprise, the greater the likelihood of team motivation. Therefore policies must be set in terms the enterprise's objectives and goals, the expectation for teamwork, and for results that are individually controllable.
Effective performance evaluation and compensation policies have fixed and variable components. The fixed component is a salary or wage; the variable provides performance incentive awards including bonuses, commissions, profit sharing, option and stock awards, and phantom stock programs. The variable component has three attributes: the individual, the organizational unit, and the enterprise. The role and responsibility of the individual, and their influence on others, affects the proportion of fixed to variable compensation, and the weightings between the attributes. For management, awards based upon organizational unit and enterprise performance must reflect long-term value building versus purely short-term gains, and therefore may be paid out over several years. For tipped employees, the payout is immediate.
For individual contributors, the weightings skew towards personal contribution. For salespeople who are operating truly autonomously, the variable component should be high to stimulate continued performance - periodically raising the bar for expected performance helps too. Incentive-based competition should always be encouraged among salespeople, provided such programs are not detrimental to the enterprise and other individuals within it.
For those that influence the ability of the enterprise to achieve its objectives and goals, the weightings should be blended. Compensation for executive management should be heavily incentive-based, reflecting both the performance of their organizational units and the enterprise as a whole. Unless the enterprise attribute has a significant weighting, it is difficult to encourage teamwork at the top. Almost all of the CEO's compensation should be incentive-based, solely reflecting the performance of the enterprise.
The integrity of incentive-based compensation policies is based upon the effectiveness of the managerial accounting and reporting system. The policies within such systems must be clear, especially with respect to cost allocation and transfer pricing. Endless debates about managerial accounting policy should be avoided. Care must be taken to ensure that incentive compensation programs and the managerial accounting and reporting system are not being abused to favor specific organizational units, or individuals within them, at the expense of others. Attention should also be paid to out-of-pocket expense management policies.
If management is not functioning as a team, the enterprise will fracture and organizational silos will form. The employees will become cynical of management, trust will be lacking, and the culture will be weak. Learning within the enterprise will be based upon the limited sharing of "tribal knowledge" on a need-to-know basis within political camps. It is difficult for an enterprise to be sustainable when fragmentation exists. However, teams will form under emergent leaders for anywhere within the enterprise in order to get work accomplished, even on a cross-functional basis.
The CEO can take several actions to build teamwork within the management and throughout the enterprise:
- Ensuring that roles and responsibilities of each member of management are clearly defined, understood, and communicated
- Ensuring that policies for performance evaluation and compensation are aligned with accountability, and balance individual, organizational unit, and enterprise performance
- Ensuring that the managerial accounting and reporting system is aligned with performance evaluation policies
- Regularly communicating values and guiding principles, mission, vision, value proposition, and performance updates throughout the enterprise via town hall meetings, newsletters, cross-functional employee round tables, and an intranet (ensuring that sensitive and confidential information such as competitive strategy is protected)
- Ensuring that new employees are rotated through multiple functions according to predefined career paths adjusted for individual preferences, and that cross-functional experiences and learning are shared
- Ensuring that exceptional performance that benefits the enterprise and its constituencies is recognized and rewarded
- Encouraging feedback from employees through suggestion programs, an ombudsman, and values surveys, because not all employees express their views and opinions publicly for fear of retribution
The CEO must encourage the executive team to take the same actions and cascade the process throughout the enterprise. When the team at the top "lives the values" and "walks the talk," role models will emerge from which a positive culture will form.
Executive team building is an enterpriship (entrepreneurship, leadership, and management) competency.
