Don’t underestimate the importance of culture

people talking in silhouetteLast week Greg Smith resigned from his position as an Executive Director at Goldman Sachs where he ran the firm’s US equity derivatives business in Europe, the Middle East and Africa. The manner of his resignation made headlines around the world and became a trending topic on Twitter: instead of the generally accepted norm of writing to his line manager he chose to publish a very frank account of his reasons for leaving in The Opinion Pages of The New York Times.

Describing the environment at Goldman as being “as toxic and destructive as I have ever seen it” he claimed that the firm’s working practices and leadership style prioritised making money over the interests of its customers.

Smith went on to attribute the toxic environment to changes in the company’s culture which had traditionally been based on “teamwork, integrity, a spirit of humility, and always doing right by our clients” but which was now just about “making money”. And for this he blamed Goldman’s CEO and President who, he said, had “lost hold of the firm’s culture on their watch.”

So why is culture important? As Smith says “If clients don’t trust you they will eventually stop doing business with you.” And as Smith’s departure demonstrates, if your employees don’t enjoy the working environment they will leave. And whilst in the short-term a company can replace customers and staff that leave, in the long run a company with high turnover of staff and customers will find it difficult to survive; it’s a very expensive way of doing business.

Whether we can believe Smith’s view of the culture and its impact at Goldman remains to be seen but there are some important learning points from his departure that are valid for any organisation. Firstly, your customers will be aware of your culture and if they do not like it they will take their business elsewhere; secondly, if the culture is not right then you will lose the loyalty of your staff and they will either remain with you and be less productive or they will leave causing disruption to the business; and thirdly, responsibility for defining, shaping and maintaining the culture rests with the CEO and the senior leadership team.

CEOs don’t set out to create a negative or poor culture. But it is clear that some CEOs do not understand the importance of culture. They do not see how their own actions set the tone for the rest of the company. If, for example, they are obsessed with making money at all costs this will be evident on a day-to-day basis through their actions and words, the type of senior executives they appoint, how they respond to challenges and issues, the decisions they make. And all this will be evident to the employees. Staff will quickly learn what it takes to get promoted or get a bonus thereby reinforcing the poor environment. The employees who don’t conform will leave either voluntarily or be forced out by the new management. And before long the company’s customers will see the change in direction, they will start to experience the ‘commercial’ focus and feel less valued as a result. In time their own loyalty will be tested and many of them will start shopping around. And so the downward cycle starts.

A poor culture will adversely affect the performance of a business. CEOs that don’t think about and develop a positive culture are neglecting a key area of their role. They are not building a sustainable business and are failing in their duty to shareholders as a result.

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