Citation:

Trouble Right Here

The Role of the CEO

A Better Leadership Paradigm

A study of 200 blue-chip enterprises in 22 industries over an 11 year period by Kotter and Heskett of Harvard Business School found that organizations with strong cultures had significantly higher performance than firms with rigid or weak cultures. The organizations with the strongest “adaptive” cultures saw their revenue grow four times faster, experienced job creation seven times faster, enjoyed stock prices that increased twelve times faster, and had 750 percent higher profit performance.Values guru Richard Barrett found that the return on assets and return on equity in companies with the best cultures was higher than the S&P 500 from 1991 through 1997.⁷ NIST research on the comparative performance of Malcolm Baldrige award winners against benchmark industry performance over a five-year period showed a statistically significant level of out-performance of as much as 34 percent.

Examining 950 businesses across sectors, Denison Consulting also found a correlation between strong culture and the bottom line. Such cultural traits as involvement, consistency, adaptability and mission were positively linked to operational performance measures, including return on investment, product development, sales growth, market share, quality and employee satisfaction. One Denison study found that the average return on equity for organizations with the lowest culture scores was six percent, while the average return on equity for organizations with the highest culture scores was 21 percent. Hospital Corporation of America (HCA) recently found that its 12 highest financially performing hospitals were also its 12 highest culturally performing hospitals, enjoying an employee engagement ratio of 5.68, as compared to an average of 2.44 for the entire system (173 hospitals) and 1.83 for its lowest performing hospitals. HCA also found a steadily decreasing employee turnover rate of 16.6 percent for the highest performers versus a steadily increasing turnover rate of 23.3 percent for the lowest performers.

In a 2005 article, Eric J. Sanders and Robert A Cooke, Ph.D., from Human Synergistics/Center for Applied Research, Inc., revealed more convincing findings on how “culture change initiatives can lead to real financial returns.” They found:

• Strong correlations between constructive (as apposed to defensive) cultures and business success (i.e., higher earnings/sales ratios and lower volatility).
• Retail stores with more constructive cultures showed stronger growth in revenue and higher revenue than their defensive-culture sister stores.
• Newspapers with constructive cultures had higher satisfaction, more cooperation and teamwork, lower stress, better readership, and higher profit.
• A large university medical center, over a 4-year period, was able to move its culture from defensive to constructive through leadership development and an organization-wide emphasis on culture change resulting in improved research, education and patient care performance, a 50% increase in budget, and movement from $40 million deficit to a $7 million surplus.
• A large liquid manufacturing company gained strong financial returns on their investment to redirect culture (beginning in 1996) and for eight years has reported increases in revenues, earnings before interest, taxes and amortization (EBITA), and net profit after taxes (NPAT, before significant or abnormal items).

And finally, in our own research, the Superperformance Fund, comprised of 10 organizations demonstrating not only process but also cultural out-performance, outperformed the S&P 500 over a 20 year period by a margin of five to one!