The Cost of a Toxic Company Culture

A toxic corporate culture is often a company’s Achilles’ heel. Unlike more quantifiable organizational risks—like poor financial performance—bad culture is generally insidious. It lies undetected in financial statements and public records, and then reveals itself without warning in the form of sexual harassment, high employee turnover, workplace bullying, illicit sales tactics, and other reputation- and value-destroying behaviors.

That is why executives and boards of directors charged with ensuring the long-term health of their companies can’t afford to ignore the current—and long overdue—conversation on corporate culture. On the contrary, they should embrace it because, in the words of renowned management expert Peter Drucker, “culture eats strategy for breakfast.”

For public companies, the costs of having an unhealthy culture can be widespread and devastating. When hidden risks manifest, they can easily expose publicly traded companies to investor activism, extreme volatility, and destruction of market capitalization. All these issues can result in a major distraction to executives and boards. Companies with culture problems will typically underperform their peers with stronger cultures, resulting in problems like poor sales growth, increased costs associated with staff turnover, and morale issues. While having a strong, positive culture does not guarantee success, the opposite almost certainly guarantees failure.

See also:

• Corporate Ethics: More Than Good Karma
• Cultural Changes Can Upend Corporate Reputations
• Collaborative Culture Underpins Treasury Transformation

A general awareness of the risks of a toxic corporate culture is one thing; detecting the early warning signs of a culture going off the rails is another thing entirely. Even the most engaged and forward-thinking executives, boards, and investors may lack effective tools to accurately assess the health of an organization’s culture. The symptoms of toxic culture—workplace complaints, employment lawsuits, high staff turnover, reduced productivity—can emerge in separate parts of an organization, at different times, and under disparate managers. In the C-suite and the boardroom, the festering issues may go undetected or, worse, suppressed.

Accordingly, acquirers and investors are increasingly focused on proactively understanding the culture of a target company because failure to do so can be embarrassing and financially ruinous. In the eyes of the public and shareholders, ignorance is no longer a defense. The only smart defense is a good offense: to identify and mitigate dysfunctional internal issues before they hit the headlines—or the bottom line.

For decades, private equity firms, corporate merger and acquisition (M&A) teams, and investment banks have been conducting background checks with a focus on management prior to making an acquisition or investment. The due diligence that potential acquirers or investors conduct on a company is typically focused on such issues as the performance of the executives; the competitive landscape; or the strength of the product, technology, or intellectual property. Sometimes this process can uncover issues such as resume embellishment, fraud, and other malfeasance, but not every issue is reflected in the public record. In fact, the intense focus on individual executives can often miss issues with the overall culture of a company.

As a result, a more investigative, probing approach is warranted. Some areas to consider in such investigations include the type of systems and governance frameworks in place to report issues, and proof of clear, timely communication at all levels of the organization. Conducting discreet interviews of former employees, specifically those who directly experienced the culture on a daily basis, and asking the right questions can provide invaluable and actionable intelligence. This process complements the diligence that the lawyers, bankers, and accountants perform, and it provides invaluable insights into the “water cooler chatter.”

In addition to uncovering defects, such an examination sometimes yields real upsides—an understanding of corporate strengths previously unacknowledged. In a recent culture check performed by Kroll, numerous former employees of the target company and external industry professionals stated that the target company was in a league of its own regarding the many female engineers it employed. This was a distinguishing data point which could be used positively in recruiting and speaking to potential customers and potential investors.

Corporate culture is like the air we breathe; we are so accustomed to it that we don’t often think about it. But like the air we breathe, pollution levels matter, and the only way to determine air quality is to check it, a task that requires specialized tools to do correctly. The good news is that bringing in clean air is restorative, to personal—and corporate—health.

Betsy Blumenthal is a senior managing director in the Business Intelligence and Investigations practice of Kroll, a division of Duff & Phelps. She is frequently engaged by multinational corporations, PE firms and high-net-worth individuals for her investigative and advisory expertise, and leads a multidisciplinary team on a substantial array of business transactions including culture checks.

From: Corporate Counsel