Many company cultures shifted during the past few years’ economic challenges, and the resulting stress has caused fault lines to appear in their cultural framework. But today’s business environment requires that companies understand organizational culture and make it a top priority on the strategic initiatives list.
When cultures shift, they often produce a level of discontent with the talent pool that is a breeding ground for frustrated and angry behavior. Cultural fault lines, if not examined and repaired, eventually can lead to unrest among employees, which can be significant to the organization — most notably in a loss of an organization’s best performers. The advent of social media often helps spread negative energy more quickly.
This kind of discontent is often a result of significant changes in the organization, such as installation of a new leadership team, a merger or acquisition. These kinds of changes often force top talent to re-evaluate how they feel about working for the organization. Culture, therefore, can no longer be an afterthought or byproduct of leadership’s actions; it must be elevated to a strategic priority.
Too often, however, culture is closer to the bottom of strategic concerns, an aspect quickly dismissed if need be because of its reputation as a touchy-feely component of organizational life and business, belonging solely to human resources. The challenge is getting senior leadership to buy into the idea that culture is a valuable asset and should be treated like other key performance indicators (KPI).
In some organizations, cultural assessment or transformation are on the strategic initiatives list. However, they are typically identified as tasks or deliverables versus strategies that require a systemic and holistic approach to understand an organization’s identity.
Definitions of organizational culture vary, but essentially it is a collective behavior of humans in an organization, formed by similar values, visions, norms, language, systems and symbols. Culture also may be interpreted as the way people — employees, clients and stakeholders — interact with one another in the organization.
A chief executive reading this definition is likely to latch onto the word “stakeholder.” Therefore, that is the lens talent leaders should use when presenting items surrounding culture and culture strategy and importance to senior executives.
Organizational culture is created by leaders’ actions, what leaders pay attention to, what gets rewarded and punished and the allocation of resources.
No two cultures are the same because no two leadership teams are the same. Particularly when involved in merger and acquisition activity, cultural due diligence should be an imperative to align the executives of both organizations. Ideally, organizations should take the best attributes of both cultures and create a unified front. This isn’t always the case, however. What tends to happen is the acquiring company will impose its culture onto the other. That may be the quickest or most expedient way to move forward, but it’s not necessarily the most strategic. A more strategic approach to merging two cultures would be to leverage the culture of the acquired firm and keep it intact until a cultural assessment can be conducted.
According to the Journal of Business Strategy article “The Big Exit: Executive Churn in the Wake of M&As,” companies can expect to lose 21 percent or more of their executives each year for up to 10 years after an acquisition. This suggests culture is especially vital to an organization’s success or failure during an acquisition. Organizations should not wait until they acquire a company before considering how best to transition cultures.
While venture capitalists are focused on return on investment, there is almost always a conversation around cultural compatibility, because they know the deal can sour quickly and permanently if it’s not properly addressed.
A classic example of this is the merger between Daimler-Benz and Chrysler that created DaimlerChrysler, a deal consummated for $37 billion in May 1998. Nine years later, Daimler-Benz sold Chrysler to Cerberus Capital Management, which specializes in restructuring troubled companies, for $7 billion and lost 80 percent of the deal’s original value. In this instance, it could be argued that cultural compatibility, or lack thereof, contributed to the acquisition’s ultimate failure. Chrysler wasn’t high-end like Daimler-Benz; Daimler tried to retain much of its culture after the merger while ignoring Chrysler’s. The firms’ cultural clashes, coupled with a recession — which led to lagging sales — eventually spelled a recipe for disaster for the two firms.
Why, then, are lenders, venture capitalists and investors not demanding that cultural due diligence be required during the acquisition process? Why do failures like DaimlerChrysler keep happening? The goal is to mitigate as much risk as possible, but it appears there is no standard or defined process to follow. The traditional approach to M&A, some could argue, is outdated by not including factors like culture. By including cultural and human system fit as part of cultural due diligence, and the impact those systems have on the bottom line, an organization can help to maximize a merger’s true potential (Figure 1).
For the sake of argument, let’s assume that by including cultural due diligence organizations could mitigate shareholder risk by 25 percent. Again, using the numbers from the previous example, cultural due diligence could have saved nearly $30 billion in losses. It’s safe to say this process wouldn’t have cost even a small percentage of that figure.
Talent leaders involved in a merger or acquisition should pay attention to cultural compatibility and conduct a formal cultural due diligence process. Can an organization conduct cultural due diligence before the deal is closed? Yes and no. Talent leaders can certainly become more educated on the culture of the target company. During the letter of intent stage, for instance, the integration team can request data that will provide cultural insights. That might include:
•Employee engagement survey results.
•Documents that convey the company’s mission, vision and values.
•Performance evaluation templates to determine if there is accountability for employees and leaders to live the values and to quickly assess the level of leadership support for those values.
•The career site. What is and is not on this site is an insight into employees’ daily lives.
Acquisitions are inherently risky, and without the proper strategy, mergers can get ugly. Cultural due diligence is necessary in the acquisition process to ensure maximum shareholder value is achieved. This process should be deployed within the first 90 days of the close (Figure 2).
Ideally talent leaders should start the process by assessing and defining the cultures through a validated cultural assessment. This allows the organization to:
•Preserve the deal and achieve the benefits first envisioned following the acquisition.
•Identify ways to take full advantage of the positive aspects of each organization’s culture.
•Allow leadership to have quantitative data displaying organizational health by demographics such as leader, location and department.
•Design a plan to accentuate the positive and eliminate or mitigate unhealthy aspects in both organizations’ cultures.
•Identify unhealthy areas of the cultures that hinder or undermine strategic goals.
•Assess areas of employee engagement and disengagement by leader to identify the most effective leaders in both companies.
•Create a solid, actionable plan that can be measured and benchmarked over time.
This activity should be conducted for the entire employee population of the acquired company and not just a statistically valid sample size. The newly acquired employees’ first impression of the combined company should not be one of exclusion — invite everyone to participate.
Lizz Pellet is vice president, U.S. Group, for management consulting firm Felix Global. She can be reached at firstname.lastname@example.org.