Every organizationâwhether a business, a not-for-profit entity, or governmentâreflects and operates from a unique culture. Itâs an inherent and essential element that brings order to the internal and external environments1 and reduces uncertainty2 among members of the group. The quality and strength of cultures explain many of the differences in organizational performance. But culture often operates below the surface of an organization, so that studying the abstraction of culture is elusive.
Organizational culture is especially important to the workings of a knowledge transfer business, such as investment management, because much of the work produced is intangible, and the environment changes so rapidly. Accordingly, culture is a critical component of any professional service firm, and we have made culture the introductory topic for this book.
Culture is a subject that has occupied management consultants and academics since the 1950s. One definition that we have found useful was put forward by Edgar Schein, an early scholar on culture and leadership, and today professor emeritus of MITâs Sloan School of Management. He writes:
âThe culture of a group can . . . be defined as a pattern of shared basic assumptions learned by a group as it solved its problems of external adaptation and internal integration, which has worked well enough to be considered valid and, therefore, be taught to new members as the correct way to perceive, think and feel.3 . . . Culture is to a group what a personality or character is to an individual.â4
Schein adds that culture often is those principles and beliefs a founder or leadership set has imposed on a groupâand which have worked out well: â[The] dynamic processes of culture creation and management are the essence of leadership, and make you realize that leadership and culture are two sides of the same coin.â5
The owners or managers of an organization might consciously work at developing a culture, or a culture may evolve on its own as the result of years of decision making, but a culture is present in any setting where people are working toward common goals. In a new organization, culture can be very strong, as it is one of its few assets, and crucial to its early efforts.
Employees have a hand in corporate culture as well. âNot all of corporate culture is created from the top down,â wrote Andrew Lo, a professor of finance at Massachusetts Institute of Technology, in a paper on corporate culture in finance. âA culture is also composed of the behavior of the people within it, from the bottom up. Corporate culture is subject to compositional effects, based on the values and the behaviors of the people it hires, even as corporate authority attempts to inculcate its preferred values and behaviors into its employees.â6 Indeed, an organization benefits from a diversity of opinions to prevent âgroupthink.â
âMost companiesâ culture just happens; no one plans it. That can work, but it means leaving a critical component of your success to chance,â wrote Eric Schmidt and Jonathan Rosenberg, executive chairman and adviser to the CEO, respectively, at global technology giant Google Inc.7 They observe that the right time to plan a culture is early on, because after it takes shapeâconsciously or notâthe founding principles are likely to reinforce themselves, as like-minded people will be attracted by them to join an organization, and those with other viewpoints may not.
The values and principles of a culture permeate every aspect of a business: operating strategy; products, services, and relationships with customers; firm structure and business model; âpeople processesâ; and governance. Culture determines relationships among authority and peers, an organizationâs common language, granting rewards and status, and the measures of success.8
Thus, culture is a shared view of how to carry out day-to-day tasks, as well as dealing with unusual conditionsâhow the firmâs long-term principles inform short-run actions. Culture also determines how a firm treats its customers and employees, and how the employees treat each other. Accordingly, organizations fortunate enough to arrive at the right culture gain a competitive advantage that carries the firm toward its long-term goals. In this section, we will consider the different approaches firms take to building and expressing culture and, in particular, its importance to success in the investment management industry.
The Original Organizational Culture: Command-and-Control
Cultures vary according to the sizes and activities of individual groups, and are intertwined with an organizationâs structure. One combination of structure and culture, however, has prevailed during most of the evolution of corporate America, and probably for most of human history: âcommand-and-control.â (Itâs often illustrated in management textbooks by a pyramid, but anyone reading this book has seen that image a thousand times, so we donât repeat it here.)
The command-and-control structure assumes that one person, or a few people, at the top of an organization can determine the best direction, and that subordinates should carry out leadersâ decisions without inserting any ideas of their ownâa principle called the great person theory.9 Itâs the operative, and necessary, culture in any sort of military operation, or police and firefighting unit, where lots of people have to be trained to do the same thing, in exactly the same way quickly and without doubt or question, often in dangerous settings.
âIn corporate cultures that lack the capacity to incorporate an outside opinion, the primary check on behavior is the authority,â wrote Andrew Lo: âFrom within a corporate culture, an authority may see his or her role as similar to the conductor of an orchestra, managing a group of highly trained professionals in pursuit of a lofty goal.â Others looking from the outside in might see a particular organizationâs authority as blatantly forceful.10
Command-and-control became the favored form of culture in American business starting in the late nineteenth century, when standardized processes and behaviors were essential to the rapid growth of the manufacturing economy. The idea was advanced by Frederick W. Taylor, who was very successful as an engineer but also invented the profession of management consulting. For a growing manufacturing sector that had lots of workers, who possessed varying levels of skill and were accustomed to carrying out their work by hand in their own different ways, he developed a structure that imposed defined tasksârewarding successful workers with high pay and terminating those who failed.11
Command-and-control cultures still prevail in most industries12 because, in many settings, a rigid hierarchy is useful and desirable. For instance, manufacturing organizations often need central control over the use of resources and quality control over processes, and to be able to respond swiftly to emerging problems. It also can work well in single-line businesses operating in stable markets, where little flexibility is called for. The short leash of command-and-control also is essential in situations where the organizationâs goal is cutting costs.
Itâs also suitable where creative thinking and initiative can create risks.13 For instance, a pharmaceutical maker has to follow strict controls over the manufacture of its products, and how they are sold: a drug firmâs Western region sales head could hardly decide to come up with his own custom version of the companyâs big cholesterol drug. Organizations such as electric and gas utilities or hospitals must adhere to well-defined practices to ensure reliable service and the safety of their customers and employees. Similarly, bank credit officers have to follow standardized processes for lending, with decisions and approvals at several levels, to allow for systematic credit rating and proper allocation of the firmâs capital. Accordingly, command-and-control structures and cultures are often present in highly regulated industries.
Drawbacks of Command-and-Control
Although command-and-control allowed the industry of a young America to flourish, in the past couple of decades the structure has been discredited. Command-and-control is not an agile form, and in industries that are rapidly changing, a few senior managers donât have enough time to micromanage an entire company. Moreover, the structure is not equipped to allow individuals further down in an organization to contribute their ideas upstream: a one-way information flow from the top of the pyramid to the bottom can result in significant missteps or missed opportunities. In many cases, people in the field may have better information about product and competitor dynamics, while those at the top may possess the least relevant information and therefore lack the insights needed for optimal decisions.14 The gap between the leadership team and the customer or clientâthat is, an organizationâs layers of managementâis often too wide in command-and-control cultures. Some firms have layers of reporting structure numbering into the teens. Many management consultants recommend a maximum of six to eight.
In human terms, employees in command-and-control structures have well-defined boundaries, duties, an...
