Culture as a Risk Factor, Not a Value Statement

David: Boards and senior executives are navigating a world where strategy ages quickly, talent is stretched thin, and technology is reshaping leadership itself. In this season of Pearl Meyer Unscripted, we're exploring the real conversations happening today in boardrooms and the C-suite, and the new rules and adaptations required for executive leaders to be effective. 

Culture is often described in aspirational terms: values on the wall, engagement scores, and leadership behaviors. But in many high-profile failures, culture shows up very differently. It's a source of risk. Regulatory breaches, ethical lapses, and performance collapses are frequently traced back to cultural issues that boards either underestimated or didn't see clearly. Or where CEOs themselves underestimated the need for a strong corporate culture as an ingredient in company performance.

In this episode, we're going to explore when culture stops being a soft topic and becomes a real governance issue. We'll look at how boards and CEOs can assess culture more rigorously, how culture risk actually manifests, and what steps can be taken to avoid turning directors into the culture police.

Today's guest is Lisa Shall, a managing director at Pearl Meyer, a trusted colleague and an expert CEO advisor. She has spent the last two decades working directly with CEOs and their teams on their most important needs facing individual leaders, teams, and organizations as a whole. She is an executive coach, a succession planning expert, a partner with executive teams on their effectiveness, and someone with a particular skill for helping companies with culture-related challenges. Lisa, great to be speaking with you today.

Lisa: Thanks so much for having me, David.

David: So personally, I've had the pleasure of engaging in this topic, both as a leader and as an advisor. And I must admit, culture is an oft-misunderstood topic. So, I think before we dive into the risks that can be created by misalignment, or cultural misalignment, I'd like to just start with a clean, crisp definition of culture.

Lisa: Sure, this is definitely something that everybody can define a hundred different ways, right? If you ask somebody about a culture of a place. To me and the way I think about culture and the way that I work with CEOs and boards is around the thought that culture is "the defined and shared norms and behaviors that define how the work actually gets done in service of the business strategy." And here's the key, especially when no one is looking. So, it's not words on a wall. It's not the holiday party. It is really how the work actually gets done within an organization to ensure successful execution of the business strategy when no one is looking.

David: Understood. For me, a great corporate culture not only binds the organization, but it provides a sort of foundation for driving business and financial results. Would you agree?

Lisa: Completely.

David: So, what is something that only a CEO can do to help shape culture that no one else really can?

Lisa: Yeah, great question. So, the tone completely comes from the top. You can say that you want a certain type of culture. You can set out the expectations and create rules. But unless you're actually seeing that being lived by the CEO, it's not going to stick. So, for example, if you want a culture of accountability, the CEO has to hold his or her people accountable. If you want a culture of transparency, the CEO needs to make his or her decisions clear and communicate them clearly. The biggest thing is not telling the company what you want it to do but embodying that and letting people see that for themselves.

David: Makes sense. I have a client, for example, who desires a strong safety culture. And as the CEO, they start every major meeting with an update on safety: safety stats, any new process steps, investments in safety or innovation. It is pervasive through that organization. So, I understand. 

So, let's continue. How can the CEO and their leadership team ensure their culture isn't just owned or driven by HR, but actually owned and driven by the full executive team?

Lisa: So, David, that's one of the most frequently asked questions that I get by CEOs and executives that I work with. The ‘kiss of death’ for our culture transformation or defining a culture is having it lived and executed by HR. Per our previous topic, this really has to be driven by the CEO. So, you have to start by clearly defining your strategy. What is the strategy of the organization and therefore what do we need to do as an organization to execute on that effectively?

The second thing is really defining what a leader looks like at the company. Not today, right? But what is a leader going to need to look like in order to execute the strategy over the next three to five years?

When you think about where you want to be as a company in five years, what do we have to be doing differently in order to make that execution flawless and work and achieve the goals and the financial results that we've set forth? And so, we’ll work with organizations to define what's called a strategic profile. What are those eight to twelve, usually, behavior expectations of executives that are going to get us in the how we get there, right? Not just the what the results are, but how we achieve those results and really hold people accountable to what those expectations are.

And then the last thing is clearly defining the tactics that employees need to follow to get there. People want to know what's expected of them, not in just what their work is, but how they get the work done. And by being explicit about that, the executive team can drive that further down in the organization and hold their people accountable to how they need to work together in order to execute its goals.

David: I'm with you, and it does sound a lot easier than it actually is, as we're both aware. And so if I go back and I think about some of examples that we're all aware of when company culture has failed them and so I'm curious about board intervention and at what point does culture shift in your mind from kind of the people topic and you talked about defining the behaviors that we would be looking to develop in our leaders and employees throughout the organization. But at what point does culture shift from being a people related topic to one where the CEO and their teams are directly accountable?

Lisa: Yeah. So, there's a couple of red flags that we see that are points where you would raise that topic. So, number one, obviously when performance is not hitting results, right? When you're missing the mark. Another one is seeing high rates of turnover. So, and that's regrettable losses, right? There's going to be turnover in any organization that's healthy and needed, but when there's that regrettable attrition.

And then last is when folks are quote-un-quote ‘not playing nice in the sandbox.’ When you're seeing those behaviors because you're not hitting results, that people are having sharper elbows, not collaborating well. Those are warning signs. This is around how the CEO is holding people accountable for certain things for hitting results for the right behaviors. Is the CEO holding his or her team accountable for the behaviors they want to see?

And then lower down, are middle managers then holding their people accountable? So, the tone at the top becomes the behavior on the ground, to our earlier point, right? And so, if the CEO is not holding folks accountable those are some of the behaviors that you would begin to see.

David: Makes sense. I mean, and if I think about that accountability, are there times, in your opinion, when companies unintentionally create different cultural risk or additional cultural risk through this accountability, or through incentives, or performance pressure?

Lisa: Yeah, so one of the biggest missteps that is made is when people focus on that smaller group of people in the organization who are underperforming or quote-un-quote ‘not on the bus.’ Okay, so think about a company in three different segments. There are the “early adopters.” There are people who are leaning into change. They are leaning in quickly. They are all about it. And that's about 20 to 30% of the organization.

Then there is about 50 to 60% that we referred to as the “movable middle,” if you will. They're going to follow whatever leaders reinforce and they are going to get on the bus if you explain to them the ‘why’ and you bring them along.

There's really typically about 10 to 20% of what we call “the resistors.” And these are the people who, no matter what, are not getting on board with what you're saying in terms of how you should act, what change you should adopt, et cetera. And companies spend a lot of time on that 10 and 20% because it can create a lot of noise. So, the goal is not to convert to 100% people on board. That is not realistic, right? So, what we want to do is we want to continue to focus on winning the middle through clear messaging and consistent reinforcement. We want to use those early adopters. Some people will call them “change champions,” right? As the visible role models, here this is what good looks like and reward for that. And then deal with the resistors in a decisive way. Don't let that go on forever because that can be toxic to a culture. You can try coaching them. You can try moving them to a world that's better suited for them, or you may just have to exit them if it's clear that they're never getting where they need to be. If there's too much pressure on the what in terms of the results and not that how, there's going to be those reverse impacts on culture that you don't want to see.

We've all seen that top player, that top sales contributor, for example, who has a negative attitude, who doesn't want to adopt certain ways of behaviors or ways of working in a culture, but they have such high results that it's like, okay, are they an “untouchable?” Right? They might still get rewarded regardless of that negative behavior. That's not showing accountability from the top. Accountability from the top is really holding everybody accountable to that how in terms of cultural behaviors regardless of their what performance.

David: I'm sure you've experienced this as well. And my experience is it's highly visible to others in the organization. Why isn't something being done about this person? How are we supposed to have a culture of client centricity if we have somebody who's only thinking about him or herself? 

So, Lisa, let's get tactical for a minute. What practical mechanisms can CEOs and their executive teams do to monitor, or in some cases, I guess, course correct culture? And I'm thinking beyond more posters on the walls, right? What are some specifics?

Lisa: Yeah, there's a few. And when you use a combination of these, you're really able to see if something's going off course sooner than later. You hear a lot about engagement surveys. That's a tool, right? However, that can be exhausting in the organization if you do that with too much frequency. And so rather than doing full engagement surveys, or in addition to those that are spread a little more sporadically, do a quick pulse check that can more frequently be helpful as a check-in, especially around time of change, especially if there's been a significant change in strategy or leadership at the top within the organization.

There's mixed commentary out there right now on the value of performance reviews, but I find that performance reviews and talent reviews can be really helpful when you're looking at both the what and the how, and that that what and how are both directly aligned to how companies are seeking to have their culture evolve, right? So, it's not today in the how, it's today and what are we going to need three to five years from now. And that can be used as a measurement of how well the company is doing with fostering the culture that they want to create.

And lastly, is the talent review. Some people use the nine box, for example, but a talent review where you're looking at what is possible for the potential of leaders, not just what they're doing now and thinking about forward-looking and making sure you're using those cultural norms and behaviors as the how that you're measuring there as well.

David: Right. This accountability point is important. You know, when CEOs ask you about “how do I create this accountability? How do I get this deeper into the organization without over emphasizing or statements of the words and turning culture into sort of compliance theater?” Is there advice that you could give those CEOs?

Lisa: Yeah, so that's a tough question that folks struggle with, right? “How do I hold people accountable but make it not a check the box exercise?” If you push too hard on accountability, you get more box checking. And if you get too little, then culture becomes optional and not something that’s expected. 

So, you really create accountability through consequences and consistency, not just measurement. I'm not the comp expert, but there's a component of variable comp in this instance. You go back to that salesperson example and it's not just what they're delivering, but how they're delivering, that can also be used to drive certain behaviors.

I would also say that repetition is a really important element to this. So, not just repeating phrases or the words on the wall, but using the same rubric to justify decisions that you're making on folks. So, making sure that the behaviors and the programs and policies are aligned with the rubric that you've set. And along the lines of repetition, there's this Rule of Five. So, people have to hear the same thing five plus times in order for it to stick. That doesn't mean me saying things the exact same way. It's through email. It's through something they're measured on. It's through a communication, right? So, recognition, one-on-one conversations, an email acknowledging that people are exhibiting the how in the way that you'd like.

And then the last thing I'd say to this is, when people aren't seeing change in culture enough, they put the foot on the gas even more from the accountability standpoint. And the important thing to remember is that culture doesn't get broken or transformed in the direction that you want overnight. It takes at least two to three years to see real strides and real significant adoption of a culture that you're trying to create. So, being patient, but also knowing that with a few missteps of not holding people accountable, it can break very quickly.

David: Makes sense, right? I mean, it's not like you're running a sale and I can do a two for one. I mean, it's about this repetition, embedding change and embedding culture shifts in an organization.

Well, in the time we have left, I'd really like your thoughts on one assumption that chief executives should let go of right now regarding their own culture initiatives?

Lisa: Chief executives and their executive teams need to let go of the idea that everybody is going to live and breathe this culture the exact same way they would. They have this in their mind, that's not going to look the same for everybody. That is only going to lead to their disappointment since there's a wide range of expressing these how behaviors that make up a culture and really think about how this diversity of expression can make a culture stronger and less formulaic or check the box.

David: Thank you, Lisa, terrific discussion. Thanks for joining.

Lisa: Thanks for having me.

David: My thanks again to Lisa for her insights into how a great corporate culture, when driven authentically and with accountability from the top, provides a foundation for driving business and financial results.

On our next episode, we're going to look at human capital from the perspective of private equity. The PE due diligence process is typically characterized by heavy investment in a number of areas. But in some instances, by the time these firms turn their attention to human capital due diligence, it may already be too late.

My colleagues Kim Kroll and Annie Czarnecki will join me to examine human capital due diligence as a PE value creation lever. I hope you'll join us.