Guest Article: A Brand-New Culture Culture for the Merged Firm

The drivers of the large deals of the late 20th and early 21st Centuries define new challenges for postmerger culture integration. Deals driven by media convergence or by other disruptive technologies require successor companies to operate in new technology space and adapt aspects of their targets’ “Silicon Valley” culture. Previous public- and private-sector bureaucracies are being pulled into aggressively competitive new market environments by acquisitions now allowed in deregulating or privatizing industries. Mergers inspired by globalization have added to the usual corporate culture integration challenges the differences and even resentments between national cultures. Even knowing all of this, the architects of many of the largest deals are trying the hardest culture trick of all – to create an entirely new corporate culture for the combined organization. They have chosen a complete makeover rather than leaving the cultures separate or allowing one culture to dominate. They have recognized that keeping the cultures separate is not a viable option unless the synergy can be achieved without extensive integration, and that adopting the culture of the acquirer is fraught with risks that the purchased value will be eroded in the process. Moreover, for those that have chosen to build a new corporate culture, such as Nortel Networks and Bay Networks, the creation of Novartis through the merger of Ciba-Geigy and Sandoz, and the combination of Chrysler and Daimler-Benz, the stated intent to create a new culture from the merger has even been argued as part of the rationale for the deal. Is this a worthy goal? Why have so many attempts failed? Can a new culture be engineered for success? Some degree of integration and culture change is inevitable in the current deal environment. Industries are being redefined by technology, deregulation, and globalization so that, unlike the financially based m&a activity of the 1980s, today’s deals are most often driven by strategic imperatives or opportunities. Clearly, since the value of most of these deals cannot be realized without integration, this in turn cannot occur without some degree of culture integration. While the degree and nature of required integration varies, the objectives of scale, industry consolidation, and globalization cannot be realized without a significant interaction of people. Therefore, there must be a basis of values, work processes, and leadership to facilitate their interaction, i.e., there must be a governing corporate culture for the integrated business. The Makeup of Corporate Culture Corporate culture is an interconnected composite of values, work rituals, and leadership. Each is largely composed of more concrete elements that can be designed and managed. Integrated design and management of the key levers of culture is a pragmatic left brain solution to the right brain problem of culture development. This is not a formula for original masterpieces but a means to engineer desirable and predictable outcomes. There are a total of nine concrete elements under the three key areas of corporate culture (see Figure 1). Values Collective values are largely determined by the people who comprise an organization, by what is understood about corporate values, and by what is reinforced or motivated. While individual values are said to be determined very early in life and are difficult to change, the collective values of an organization can be managed by managing people selection, communications, and rewards. If an organization defines the desired collective values, it can select people with consistent individual values in the recruiting process. For example, if the corporate environment requires more entrepreneurial collective values, we can select people with higher individual tolerance for risk. If the environment calls for a brisk pace, we can select for people more likely to act than analyze. The most brilliant organization “collective” is not simply composed of brilliant people but, rather, a combination of intelligence and other intrinsic characteristics that can be managed for ideas, innovation, and action. Given the right collection of people, communications and rewards (financial and non-financial) define and motivate the desired collective values. For example, in a merger of two privately held consulting firms, there was a desire for greater collaboration by people at the predecessor firms in client development. The organizations were largely composed of collaborative people, but additional effort and risk were required to work with unfamiliar people from the offices of the “other” company. Communicating that such collaboration was highly valued had a minor impact, but a new reward system with shared revenue credit rapidly created a more collaborative culture, and the previous boundaries soon blurred. Three years later, however, increased attention was directed at “leadership credit” and divisional results. The shared revenue credit reward system remained in place, but collaboration was undermined by measurement and communication of individual and divisional results. So, collective values are not merely the sum or average of individual values. They are defined by people, communications, and motivation. When the issue is put in these terms, it is clear that leaders have many levers with which to manage collective values: hiring and severance practices; performance evaluations and rewards; training and career development; statements of mission, vision, and values; communications through company events, publications, and other media; the way the leadership communicates and behaves. Work Rituals The term “work rituals” represents “the way things get done around here.” This is the second important determinant of corporate culture. “The way things get done around here” is largely determined by business processes, decision processes, and less formal, but definable, norms and standards. Decision processes are particularly relevant to culture changes in mergers. In merger environments, decisions need to be made faster than before, and changing how decisions are made – to make the right decisions faster and often closer to the front line – is a key instrument of culture transformation. Norms and standards are the informal elements of business and decision processes. The credit union loan officer, for example, has scope of discretion on temporarily extending a good customer’s credit line. But there are standard criteria for assessing the circumstances and there are norms as to the frequency that such a benefit would be extended to a single customer. More subtle are the norms and standards that define the internal work environment. What time do people arrive and leave? Do people typically have lunch in the cafeteria or do they lunch at their desks? How casual is casual dress? Do professionals type their own letters, get their own coffee? Are executive doors open or closed? The answers define the work ethic and the nature of the hierarchy and internal relationships. Changes in these norms and standards can be designed to achieve deliberate cultural outcomes. Therefore, leaders have several direct and indirect levers to change work processes, decisionmaking, and accepted norms and standards: process redesign; authority levels and approval processes; decision units, committees, and councils; policies and procedures; and the work ethic, hierarchy, and collaboration exemplified by the leaders. Deliberate and directed action on these levers, ideally in combination, will determine “the way things get done around here” after the merger. Leadership Leadership is both a major component of corporate culture and an agent of change. The selection of leaders, their positions and accountability, and their development largely comprise the nature of organization leadership. Different leadership qualities are required at different times. The command and control skills required in a major project or turnaround may be unnecessary or even detrimental in an early phase of development or a function requiring creativity and innovation. These are choices of both required skill set and desired culture. Structure and accountability of leadership are also familiar instruments of culture. Flattening of organizations has been used to create cultures of greater freedom, while narrowing spans of control in sales organizations, for example, have been used to create organizations more responsive to changes in direction or opportunity. The least well understood design lever of leadership is leadership development. Most organizations assume that their chosen leaders will know what to do and how to behave during integration. While truly exceptional leaders seem to know how to lead in any situation, a merger involves many “ordinary” leaders. Ordinary leaders can be developed into better leaders, and through well-designed leadership development, their actions can be aligned with defined intentions for corporate culture. Leadership is arguably the most important of the three components of corporate culture because of its effect on the other two. But it is not a panacea. Individual leaders can be rejected or made ineffective by their own organization if their actions seem misaligned with the perceptions of the intended or required direction of the corporation overall. Companies must get the leadership model right – through leadership selection, organization structure, and accountability and development – while at the same time manage the change levers of collective values and work rituals. Successful Culture Integration Management There is no single solution because every deal is different. What ultimately needs to be done to succeed is highly dependent on the deal logic. However, we can illustrate how the nine elements of corporate culture can be used to affect values, work rituals, and leadership by contrasting three general cases for the intended cultural outcome: Case A: The combined firm takes on the culture of one of the merging companies This is often desirable when complete integration is required, as in bank mergers in the same market, or when one culture is clearly dominant, such as the RBC Dominion Securities’ acquisition of securities industry rival Richardson-Greenshields. It may be necessary to go to the market as one entity, and processes and structures must be completely integrated. Case B: Cultures remain independent This may be the case when the synergies are “end to end,” such as selling investment banking services to corporate banking clients. As the commercial banks have acquired investment banks, many processes and structures have remained independent. In most cases, each component continues to go to market as a separate entity. Case C: A new culture is formed that is different from both previous cultures This is the most difficult to achieve, but it is often a stated objective of acquisitions in changing industries. Such is the case in many utility industry mergers. The merger of Scottish Power and Southern Water in the U.K. was, at least in part, a catalyst for culture change required by both companies to compete in the newly deregulated utilities industry. Values The value levers to achieve each outcome must be managed differently. For example, when executives from Hollinger, owner of leading daily newspapers in major markets such as London and Jerusalem, attended one of the early budget reviews of the newly acquired Southam Newspapers in Canada, Hollinger president David Radler reportedly interrupted the local publisher’s presentation of his paper’s mission statement and held up a bill from his wallet, pronouncing that “from now on this is to be the mission.” Like it or not, this was a powerful communication of the intended collective values that quickly spread around the underperforming Southam, muting traditionalists and motivating greater focus on financial performance – the values of the acquiring company (This was an example of Case A). By contrast, Nortel publicly embraced the entrepreneurial values of Bay Networks and defined a separate division to retain and develop the target’s Silicon Valley culture (This was an example of Case B, albeit with the broader intent of moving Nortel’s culture into the IP space.). Novartis pushed people at both Ciba-Geigy and Sandoz to create a new company with a unified mission and image (An example of Case C). In CEO Daniel Vassela’s words: “Creating a merged company is like having a child: Each parent looks for resemblances in the eyes and face. But it has its own identity. Both sides will need to step back a bit and not impose their own culture on it.” They set tough goals to motivate a performance culture and overcome integration turf wars. Work Rituals When International Business Machines purchased the phone technology company ROLM in the 1980s, it announced its intention to keep the cultures separate, but it failed to protect ROLM from the IBM business and decision processes. In reality, IBM’s culture dominated, and the ROLM deal became a Case A failure. With more recent acquisitions, IBM has gone to some length to protect the cultures it intends to keep separate by leaving offices, business processes, and decision processes in place and even placing limits on who at the parent can call whom at the operating units. Creating a new culture through business process redesign is often too big a task. Imperial Oil and Texaco Canada got bogged down for months reinventing everything. If a new culture is required, early impact will more likely come from changing decision processes and informal norms and standards. Selected process redesign can come later. Leadership It is well understood that leadership appointments send clear messages to the organization about the intended culture. TransCanada Pipe Line and NOVA talked about a “merger,” when they combined but the post-deal role and style of TransCanada’s CEO George Watson soon signaled to managers and staff that in reality the transaction was a takeover of NOVA. Intended or otherwise, this had a direct impact on who decided to polish resumes rather than apples. The popularity of the co-CEO solution, such as in the Citicorp/Travelers deal, is an indication of the sensitivity to the leadership issue, even though executive theorists believe it represents a dilution of authority, accountability, and decisionmaking. However, this should not be used as a cop-out for making a choice between the two CEOs and the intended culture. The sharing of the office may obscure the intended choice between independent cultures or a new culture and, in the latter case, what the intentions of that new culture are. Again, the solution is to be deliberate, i.e., to define which culture and leadership capabilities are required to be successful in the restructuring industry and then to plan and manage the selection and development of leaders to arrive ultimately at the intended culture. Preparing management for their roles in restructuring industries is a major task. Some acquirers have begun to use leadership development programs to prepare management for the mergers ahead. Deliberate management of corporate culture, in mergers or other transformations, can be carried out in five steps. An objective, facts-based cultural audit In an acquisition, this would take the form of cultural due diligence. There should be an open assessment of the current values, work rituals, and leadership, identifying both advantages and potential incongruities of the current culture with the imperatives of success defined by the industry environment and the chosen strategy. Define the new culture required for success The new culture should be defined in terms of the nine elements of corporate culture: * Values defined in terms of people, communications, and motivation; * Work rituals prescribed by business processes, decision processes, and informal norms and standards; * Leadership characterized by selection criteria, structure and accountability, and priorities for leadership development for the new culture. Develop a coordinated plan to effect culture change First, there should be a realistic assessment of the gap between the current and desired culture, measured by the nine elements. In a merger, the gap would be defined for each company. Then initiatives should be identified for each of the key levers of culture change that will close the gap. Dedicate a cross-functional team Culture change is often delegated to the human resources function. HR cannot do this without the commitment and active involvement of the line organization. The work is not that great in magnitude, but by definition it will not be “natural” to the organization and will, therefore, require a sustained focus. While HR might coordinate such a program, without the commitment and ongoing actions of line management. HR will be a voice in the wilderness. Manage the change like a project Do not let this be regarded by the organization as “another program” with speeches, workshops, newsletters, etc., but no deliverables. Part of the value of the nine elements of culture is that specific measurable goals can be defined for each. The specific actions to pull the levers of change should be scheduled and monitored. Actions will have far greater impact if they are coordinated and directed at established goals. The effect of the project on the nine key elements should be measured and communicated broadly to reinforce the goals of the change. Development of corporate culture to compete in restructuring industries is an important challenge for today’s executives. Culture transformation is critical to shareholder value, and in m&a strategies, culture management is a key to successful integration and value extraction. Fortunately, most of what determines this seemingly vague notion of corporate culture can be defined in terms of more concrete elements. Thus, corporate culture can and must be designed with strategic intent; changed directly and deliberately; and managed for shareholder value.