The Board and Corporate Culture:
How to Ensure More Successful M&A and CEO Selection
Format
• Introduction by Jim Kristie, Editor &
Associate Publisher, Directors & Boards
• Time for questions (enter them from your
computer) during and after the presentation
• 60 minutes
• Presentation will be emailed to all
participants after the webinar.
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Speakers
Andrew Goldberg is Executive Vice President and head of Makovsky Corporate Advisors, which provides change
management and reputation enhancement solutions. He has advised major corporations for over two decades, in
some of the most challenging matters: mergers and post-merger integration, management and structural
realignment within corporations, CEO and C-level succession, governance issues and major litigation. In addition,
he has been involved in the realignment of marketing and brand strategies in most regions.
Philip R. Lochner, Jr. currently serves on the Boards of Directors of the following public companies: CLARCOR Inc.
(which is in the filtration and packaging businesses), CMS Energy Corporation, where he is the Presiding Director
(an electric and gas utility), Crane Co. (a diversified manufacturer) and Gentiva Health Services (a home healthcare
and hospice company). He has previously served or currently serves as Chairman of the Audit, Compensation,
Compliance, Nominating, Governance and Litigation Committees of boards of public companies. Mr. Lochner has
previously served as a member of the Board of Governors of the National Association of Securities Dealers and of
the American Stock Exchange. He has also served as a member of the Board of Advisors of Republic N.Y. Corp., a
New York banking corporation, and as a member of the Boards of Directors of, among others, American Television
and Communications Corporation (a telecommunications company), Apria Healthcare Group (a healthcare
company), Brooklyn Bancorp (a bank) and Gtech Holdings (an IT company), all of which were public companies
when he served. In addition, Mr. Lochner joined and served on the board of Adelphia Communications after that
company filed for bankruptcy in Chapter 11.
Warren L. Batts is Chairman of the Board, Methode Electronics, Inc. (NYSE: MEI) and the Cook County Helath &
Hospital System. Adjunct Professor University of Chicago Graduate School of Business where he teaches
Corporate Governance and First Time General Management. Retired Chairman and CEO of Premark Intl. Inc. and
Tupperware; earlier served as CEO of two other companies. Retired director of Allstate, Cooper Industries, Sears,
and Sprint, where he was either chairman or a member of the compensation committees, in addition to having
served on the boards of 12 other public companies. Also a retired director of the Art Institute of Chicago, NACD,
Northwestern University, and Children’s Memorial Hospital. Past chairman of Advisory Board of Georgia Tech,
Children’s Memorial Hospital, National Association of Manufacturers and the School of the Art Institute of Chicago;
and past member of The Business Roundtable.
Jim Kristie is editor and associate publisher of Directors & Boards, the only major independently-owned journal of
corporate governance thought leadership in North America. He is the longest-tenured editor (at 30 years) serving
this field. In addition to his editorial duties, Jim teaches journalism at Temple University.
Why Culture is Critical
What Do We Mean By “Corporate Culture?”
Corporate Culture: rules, behaviors and ideas,
which promote collaboration and conflict, ethics
and fairness, and the achievement of merit and
the assignment of reward
Products of Culture: new ideas, products and
processes
Most Companies die young; only 10% of companies
survive 40+ years
Adaptive, energized cultures promote longevity
Most companies fail from within, as cultures lose their
adaptability
Management often in denial when culture is collapsing
Few succeed in transforming culture
Who Made it?
Who Didn’t?
Skin of Their Teeth
At Risk
Boards Need to Step In…
Growth
Transformation
Flatline
Maturation
Growth
Time
Before organizations flat line!
Culture: Boards Must Be Ahead of Management
Culture more than “tone;” transcends ethics and
social optics
Eroding culture eats away at shareholder value
Cultures can deteriorate at the biggest brands: HP,
Yahoo!, RIM, MF, Goldman, Newscorp, Walmart
Challenges
Problem: Cultural symptoms often ignored by Management
Result: Boards discover culture issues through weak performance
Remedy: Early, accurate diagnosis via independent audit;
spearheaded by culture committee
Don’t Count On Warning
What is surprising is that we are surprised
Market liquidity and financial engineering often disguise
terminal illness
M&A: often used to bypass cultural gridlock
• Results in two combined problem cultures
Post Mortem Results: Toxic Cultures
Shrinking innovation
Declining IP
Morale and ethical issues
Disengaged C-Level
Dis-intermediated innovators
Risks flare up throughout the organization
Culture Eats Strategy
Boards tend to review strategies, not ability to implement
The best strategies are destroyed by failing cultures
Management often misreads culture’s ability to enable
strategy
Need to get “underneath the hood”
Culture Eats M&A
Cultural due diligence is essential for a successful merger
Cultural factors don’t show up on a balance sheet;
but can be inferred by performance metrics
Examples:
Ideal characteristics for healthy culture
Where Employees Feel Engaged
Efficient yet flexible
Focused while also innovative
Strategic and supportive
Driven & disciplined yet open-minded (listener) and spontaneous
Hierarchical yet collaborative
Recognition-based (rational) while also empathetic (emotional)
Engaged Cultures Drive Performance
Metrics*
Culture Focused
Companies
Hierarchical
Focused
Companies
Revenue growth
682%
166%
Employment Growth
282%
36%
Share Price Growth
901%
74%
Net Income Growth
756 %
1%
*Harvard analysis over 20 years
But most companies aren’t engaged
Performance Correlates with Culture
Culture
3%: “self governance” guided
by core principles, values, trust
43%: culture is top down/
command and control
Financial Response
Q: How would you gauge your
company’s financial performance
relative to its competitors?
Percentage who responded “Much
Above Average” or “Above Average”:
54%: skilled leadership but
communication still top down/
carrot and stick model
* Based On a Boston Research Group Study
92% Self-Governance
77% Informed Acquiescence
52% Blind Obedience
A cultural diagnostic for Boards of Directors
Boards Need Transparency
Lead directors need to go beyond assessment of tone
Frank dialogue with CEO: organizational and people issues
in critical business functions
Need to request an outside perspective on organizational
performance
Boards Need Adequate Tools
Independent culture audit: once or twice yearly
Examining cultural metrics: values vs. performance
But what tools to use?
Organizational Network Analysis for Boards
Organizational Network Analysis
ONA : A well recognized process of mapping
organizational strengths and weaknesses
- applied to variables such as collaboration,
knowledge management, post-merger-integration,
organizational changes and innovation
A sound culture exists where formal and informal
organizations align: An illustration
Formal organization and structures
A healthy culture requires:
A good fit between strategic
goals, incentive systems and
performance measures
Performance
Incentives
Strategic focus
Governance
Projects
Process
Informal organization
Perfomance measures are fair
and transparent
Employees awarded highest
performance ratings are viewed
as true top performers by peers
Distance
Availability
Competencies
Other barriers
Results
Trust
Energy
©
I N N O V I S O R
Network analysis quantifies intangible aspects of an
organization in an unbiased form
Network Analysis offers :
– Match: formal and informal
– Direct feedback
– Identify employees who
are seen as top performers
by their peers
collaborative patterns: size of circle indicates how many times an
employee has been mentioned by peers as someone sought out for advice
©
I N N O V I S O R
Diagnosing cultural health
… an upward sloping plot indicates a strong fit between manager and employee perception of star performance – strong
performance is fairly rewarded
” Rating-performers”
”True high-performers”
Median score
Official employee performance score
… a downward slope indicates problems: employees do not feel true performance is properly rewarded
”Hidden stars”
”Others”
Median score
Shape = Hierarchy
Peer performance score
(Trust and professional contribution)
©
I N N O V I S O R
Lessons from the cultural crossroads
CEO Selection and Retention
Traditionally based on financial acumen; ignored culture
Cultural compatibility and mobilization are critical for
building healthy companies
Leaders with track record of building sustainable cultures
are optimal choices for CEO
A Call for Board Action
Warning signs are hard to read
Timely renewal is tough
Boards have an active responsibility to safeguard cultural
health
Leadership, access, transparency and the right tools are
essential for board success
Thank you! Questions?