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  1. 1. strategy+business The Value of Corporate Values For further information: editors@strategy-business.com Booz & Company from strategy+business issue 39, Summer 2005 reprint number 05206 Reprint
  2. 2. A Booz Allen Hamilton/Aspen Institute survey of corporate behavior finds that leading companies are crafting a purpose-driven identity. The Value of content management CorporateValues by Reggie Van Lee, Lisa Fabish, and Nancy McGaw 1 Corporate values are in vogue — but what does executives of 365 companies were polled, almost one- the fashion tell us about enduring corporate practice, as third of whom were CEOs or board members. (See it is and as it could be? “Methodology,” page 13.) The purpose of the survey Increasingly, companies around the world have was to examine the way companies define corporate val- adopted formal statements of corporate values, and sen- ues, to expand on research about the relationship of ior executives now routinely identify ethical behavior, values to business performance, and to identify best honesty, integrity, and social concerns as top issues on practices for managing corporate values. their companies’ agendas. The survey’s most significant finding was that a The meaning of this new emphasis on values, how- large number of companies are making their values ever, is less obvious than the trend itself. So to explore explicit. That’s a change — quite a significant change — how deeply these values are embedded in organizations from corporate practices 10 years ago. The ramifications strategy + business issue 39 and to examine the role that values are playing, in 2004 of this shift are just beginning to be understood. Booz Allen Hamilton and the Aspen Institute, a non- At Xerox, CEO Anne Mulcahy says that corporate profit and nonpartisan forum focused on values-based values “helped save Xerox during the worst crisis in our leadership and public policy, conducted a global study history,” and that “living our values” has been one of of corporations in 30 countries and five regions. Senior Xerox’s five performance objectives for the past several
  3. 3. Illustration by Red Nose Studio 53 content strategy & competition
  4. 4. Reggie Van Lee Lisa Fabish Nancy McGaw Also contributing to this (van_lee_reggie@bah.com) (fabish_lisa@bah.com), who is (nancy.mcgaw@ article were Booz Allen Senior is a senior vice president based in Booz Allen Hamilton’s aspeninstitute.org) is deputy Vice President Paul Kocourek with Booz Allen Hamilton in McLean, Va., office, has exten- director of the Aspen Institute’s and Vice President Chris Kelly; New York. He has extensive sive experience working with Business and Society Program, Judith Samuelson, executive experience in developing and clients to identify strategic which is based in New York. director of the Aspen implementing major growth risks through wargaming and She directs the program’s Institute’s Business and strategies and change scenario-based planning. research projects on corporate Society Program; Ann Graham, programs for media and leadership and trends in man- deputy editor of strategy+ high-tech companies. agement education. business; and Julien Beresford, president of the Beresford Group research company. years. These values — which include customer satisfac- If the new attention to values were simply a transi- tion, quality and excellence, premium return on assets, tory reaction to the business scandals of recent years, or content management use of technology for market leadership, valuing merely a public relations device to direct or deflect employees, and corporate citizenship — are “far from media and investor attention, it would be worth little words on a piece of paper. They are accompanied by spe- note. But more companies are going well beyond simply cific objectives and hard measures,” adds Ms. Mulcahy. displaying values statements: They are engaging in According to market and social trend analyst Daniel values-driven management improvement efforts. Yankelovich, the public’s widespread cynicism toward Among those efforts are training staff in values, apprais- businesses today is the third wave of public mistrust ing executives and staff on their adherence to values, and about corporations in the past 90 years. The first, set off hiring organizational experts to help address how values by the Great Depression, continued until World War II; affect corporate performance. the second, caused in part by economic stagflation and Moreover, companies are showing little patience for the Vietnam War, lasted from the early 1960s until the executives who place their businesses at risk by crossing early 1980s. In each of these periods, Dr. Yankelovich the line from prudent to unethical behavior. A recent wrote in the May 2003 report “Making Trust a example was the prompt decision by Boeing’s board to Competitive Asset: Breaking Out of Narrow oust CEO Harry Stonecipher over a sexual affair he was Frameworks,” companies tended to be reactive, blaming having with an employee. Mr. Stonecipher had been 3 “a few bad apples,” dismissing values as “not central to appointed to the top job 15 months earlier to help what we do,” or ignoring opportunities to improve improve Boeing’s standing with the Pentagon, its largest because “we don’t have to make major changes.” customer, after a series of ethics breaches. The board The current wave of disapproval began in 2001 did not specifically indicate what ethical rule Mr. with the bursting of the dot-com bubble, the ensuing Stonecipher had violated, but it was clear that in the cur- bear market, and the financial scandals involving Enron, rent climate, any obvious ethical lapse would be an WorldCom, Tyco, and others. But this time, according indiscretion that the company could not tolerate and to the survey, the response appears to be different. More that would affect the bottom line. and more companies are looking inward to see what has As Pfizer CFO David Shedlarz says in CFO gone wrong and looking outward for answers. They are Thought Leaders: Advancing the Frontiers of Finance questioning the quality of their management systems (strategy+business Books, 2005): “It is critically impor- and their ability to inculcate and reinforce values that tant to do right. It is not adequate to meet the letter of strategy + business issue 39 benefit the firm, its various constituencies, and the the law — the spirit and the intent are what have to be wider world. Rather than wall themselves off from crit- kept keenly in mind.” ics, more companies are listening to them and looking For the purposes of this study, we defined values as for new ideas. And more firms are taking action to turn “a corporation’s institutional standards of behavior.” their corporation’s values into a competitive asset. Generally, companies follow the same “values cycle”:
  5. 5. Successful companies are more likely to believe that social and environmental responsibility affect financial performance. They articulate a set of corporate values and attempt to and operations. Companies that report superior finan- embed them in management practices, which they hope cial results emphasize such values as commitment to content management will reinforce behaviors that benefit the company and employees, drive to succeed, and adaptability far more communities inside and outside the firm, and which in than their peers. They are also more successful in linking turn strengthen the institution’s values. values to the way they run their companies: A signifi- The fundamental findings were: cantly greater number report that their management • Ethical behavior is a core component of com- practices are effective in fostering values that influence pany activities. Of the 89 percent of companies that growth, and executives at these companies are more have a written corporate values statement, 90 percent likely to believe that social and environmental responsi- specify ethical conduct as a principle. Further, 81 per- bility have a positive effect on financial performance. cent believe their management practices encourage ethi- • Values practices vary significantly by region. cal behavior among staff. Ethics-related language in Asian and European companies are more likely than formal statements not only sets corporate expectations North American firms to emphasize values related to the for employee behavior; it also serves as a shield compa- corporation’s broader role in society, such as social and nies are using in an increasingly complex and global environmental responsibility. The manner in which legal and regulatory environment. companies reinforce values and align them with com- • Most companies believe values influence two pany strategies also varies by region. 4 important strategic areas — relationships and repu- • The CEO’s tone really matters. Eighty-five per- tation — but do not see the direct link to growth. Of cent of the respondents say their companies rely on the companies that value commitment to customers, 80 explicit CEO support to reinforce values, and 77 per- percent believe their principles reinforce such dedica- cent say such support is one of the “most effective” prac- tion. Substantial majorities also categorize employee tices for reinforcing the company’s ability to act on its retention and recruitment and corporate reputation as values. It is considered the most effective practice among both important to their business strategy and strongly respondents in all regions, industries, and company affected by values. However, few think that these values sizes. (See “Leaders Make Values Visible,” page 7.) directly affect earnings and revenue growth. • Most companies are not measuring their License to Operate “ROV.” In a business environment increasingly domi- In recent years, Booz Allen and the Aspen Institute nated by attention to definable returns on specific noticed a marked increase in discussions about the prin- investments, most senior executives are surprisingly lax ciples that govern commercial enterprises. Both organi- in attempting to quantify a return on values (ROV). zations also realized that more research was needed to Fewer than half say they have the ability to measure a systematically identify how companies define, apply, direct link to revenue and earnings growth. measure, and benefit from their corporate values, and • Top performers consciously connect values how this varies by region. Our survey was an attempt
  6. 6. customers, employees, and shareholders. The point is, we are a global company and we want everyone to work together by the same sets of ethics and values to achieve the company’s goals.” After ethics, the most prominent feature of corpo- rate values statements is the set of values relating to com- pany functions, rather than values that relate to the company’s broader role in society. Commitment to cus- tomers, for example, is nearly as prominent in values statements as ethics, and commitment to employees and teamwork/trust are not far behind, with each articulated by more than 75 percent of companies. Social responsi- bility/corporate citizenship is cited by two-thirds of respondents, but environmental responsibility and com- mitment to diversity are articulated by fewer than half. to begin to fill the gaps between a growing practice and Interestingly, some of the values often closely asso- its results. ciated with revenue or earnings growth — such as ini- content management The survey found that 89 percent of respondents globally possess written values statements, and that Exhibit 1: Values Included in Corporate Values nearly three-quarters believe that both executives and Statements (All Respondents) employees are under significant pressure to demonstrate Ethical behavior/integrity strong corporate values. The vast majority of respon- 90% dents’ corporate values statements — 90 percent — Commitment to customers emphasize ethical behavior and integrity. This holds true 88% whether the company is public or private, whether it is Commitment to employees large or small, and regardless of its country of origin. 78% (See Exhibit 1.) Teamwork and trust Ethics-related language in formal statements has 76% long been a priority for many business executives; in Commitment to shareholders 1943, Johnson & Johnson promulgated its famed one- 69% page Credo, which articulates the company’s “first Honesty/openness responsibility” to “the doctors, nurses and patients, to 69% 5 mothers and fathers and all others who use our products Accountability and services,” as well as to “the men and women who 68% work with us throughout the world,” “the communities Social responsibility/corporate citizenship in which we live and work and to the world community 65% as well,” and “our stockholders.” The prevalence of Innovativeness/entrepreneurship 60% ethics-related language today appears, though, to do more than set corporate expectations for employee behav- Drive to succeed 50% ior; it is, effectively, a part of a company’s license to oper- ate in a more complex regulatory and legal environment. Environmental responsibility 46% The importance of these statements of belief has grown so quickly that many companies now can’t imag- Initiative 44% ine doing business without them. “We’ve developed a set strategy + business issue 39 Commitment to diversity of values that everyone understands and that have real 41% meaning,” says Lisa Colnett, human resources chief at Adaptability Celestica, the Canadian electronics manufacturing com- 31% pany. “They are prescriptive and explicit and, at the same time, cover a wide range of stakeholders, including Source: The Aspen Institute and Booz Allen Hamilton
  7. 7. Exhibit 2: Values Included in Corporate Values Statements, by Region Ethical behavior/integrity 95% 84% 85% Commitment to customers 87% 90% 86% Commitment to employees 81% 77% 69% Teamwork and trust 79% 64% 83% Commitment to shareholders tiative, adaptability, and innovativeness — appear in 67% only 30 to 60 percent of the respondents’ formal values 74% content management 68% statements. Honesty/openness But “financial leaders” are different. We asked 77% respondents to self-identify financial leadership (excep- 64% 56% tional business results), and then tested the results by Accountability scrutinizing financial statements for the publicly traded 67% companies. Among these confirmed financial leaders, 74% 62% 98 percent include ethical behavior/integrity in their values statements, compared with 88 percent for other Social responsibility/corporate citizenship 58% surveyed public companies. Far more of the financial 69% leaders include commitment to employees (88 percent 74% versus 68 percent), honesty/openness (85 percent versus Innovativeness/entrepreneurship 50% 47 percent), and drive to succeed (68 percent versus 29 73% percent). Forty-two percent of the financial leaders 64% emphasize adaptability in their values statements, com- Drive to succeed pared with a mere 9 percent of other public companies. 47% 6 58% There are also striking regional differences in the 46% values companies emphasize, which we believe reflect Environmental responsibility differing traditions and expectations about business’s 34% 55% role in society. (See Exhibit 2.) Nearly three-quarters of 56% Asia/Pacific firms include social responsibility/corporate Initiative citizenship in their values statements, followed by 40% European firms at 69 percent. Only 58 percent of North 52% 42% American companies include social responsibility. Commitment to diversity Environmental responsibility also ranks significantly 50% higher in Europe and Asia/Pacific than in North 41% 23% America. North American companies, however, are sig- Adaptability nificantly more likely to cite ethical behavior than firms 26% in Europe and Asia — a reflection, we believe, of both 34% 35% the recent attention to corporate scandals in the United States and media scrutiny of business in the U.S. North America Europe Asia/Pacific Of particular interest is the discovery that some of Source: The Aspen Institute and Booz Allen Hamilton the values most closely linked to growth and perform-
  8. 8. Leaders Make Values Visible by Marshall Goldsmith The corporate credo. Companies have rity,” “respect for people,” “quality,” It didn’t really matter. Despite the wasted millions of dollars and count- “customer satisfaction,” “innovation,” lofty words, many of Enron’s top exec- less hours of employees’ time agoniz- and “return for shareholders.” Some- utives either have been indicted or are ing over the wording of statements times companies get creative and toss in jail. that are inscribed on plaques and in something about “community” or The situation couldn’t be more dif- hung on walls. There is a clear “suppliers.” But since the big mes- ferent at Johnson & Johnson. The assumption that people’s behavior will sages are all basically the same, the pharmaceutical company is famous change because the pronouncements words quickly lose their real meaning for its Credo, which was written many on plaques are “inspirational” or cer- to employees — if they had any in the years ago and reflected the sincere tain words “integrate our strategy and first place. values of the leaders of the company values.” There is an implicit hope that Enron is a great example. Before at that time. The J&J Credo could be when people — especially managers the energy conglomerate’s collapse in considered rather quaint by today’s — hear great words, they will start to 2001, I had the opportunity to review standards. It contains several old- exhibit great behavior. Enron’s values. I was shown a won- fashioned phrases, such as “must be content management Sometimes these words morph as derful video on Enron’s ethics and good citizens — support good works people try to keep up with the latest integrity. I was greatly impressed by and charities — and bear our fair trends in corporate-speak. A company the company’s espoused high-minded share of taxes” and “maintain in good may begin by striving for “customer beliefs and the care that was put into order the property that we are privi- satisfaction,” then advance to “total the video. Examples of Enron’s good leged to use.” It lacks the slick PR customer satisfaction,” and then deeds in the community and the pro- packaging that I observed at Enron. finally reach the pinnacle of “cus- fessed character of Enron’s executives Yet, even with its less-powerful tomer delight.” were particularly noteworthy. It was language and seemingly dated pres- But this obsession with words one of the most smoothly professional entation, the J&J Credo works — pri- belies one very large problem: There presentations on ethics and values marily because over many years, the is almost no correlation between the that I have ever seen. Clearly, Enron company’s management has taken words on the wall and the behavior of spent a fortune “packaging” these the values that it offers seriously. J&J leaders. Every company wants “integ- wonderful messages. executives have consistently chal- 7 ance and conventionally associated with American cul- notoriety of the scandals, it is perhaps not a surprise that ture are more esteemed outside the U.S. For example, a huge segment of the respondents believe that articu- almost three-quarters of European companies value lated values are essential to mitigating legal and regula- innovativeness and entrepreneurship; only half of U.S. tory risk. Ninety percent agree that a strong corporate companies articulate this principle — a counterintuitive statement addressing ethical values is critical in encour- finding that should prompt introspection among aging individual employees to take appropriate actions American executives. and to inform their managers when something seems wrong. Eighty-one percent say they have management Values in Action practices in place that are “considerably effective” or The last three years have seen a relentless succession of “very effective” in fostering ethical behavior and integ- stories about the harm companies and their shareholders rity among individuals. have suffered from ethical breaches and noncompliance However, the benefits of corporate values transcend strategy + business issue 39 with regulatory standards and legal norms. Billion- legal and regulatory compliance. We asked executives to dollar fines, protracted lawsuits, criminal convictions of specify the factors that are important to their business executives, severely tarnished corporate reputations — strategy, and also to pinpoint which of those factors can even the evaporation of large companies — have be affected positively by the active management of val- become distressingly familiar. Given the frequency and ues. Their responses show clearly that values are deemed
  9. 9. lenged themselves and employees not express its view of how leaders should ship behavior, companies should just to understand the values, but to act — in vain. I am sure that the first ensure that leaders get (and act upon) live them in day-to-day behavior. draft would have been just as useful. feedback from employees — the peo- When I conducted leadership training At many companies, performance ple who actually observe this behavior. for J&J, one of its very top executives appraisal forms seem to undergo the Rather than wasting time on changing spent many hours with every class. same careful scrutiny as credos. In performance appraisal forms, leaders The executive’s task was not to talk fact, more effort seems to be given to need to learn from employees to about compensation or other perks of producing the perfect words on an ensure that they are providing the J&J management; it was to discuss appraisal form than to managing em- right coaching. living the company’s values. ployee performance itself. I worked Ultimately, our actions will say My partner, Howard Morgan, and I with one company that had used at much more to employees about our recently completed a study of more least 15 different performance ap- values and our leadership skills than than 11,000 managers in eight major praisal forms and was contemplating our words ever can. If our actions are corporations. (See “Leadership Is a yet another change because the pres- wise, no one will care if the words on content management Contact Sport,” by Marshall Goldsmith ent sheet “wasn’t working”! If changing the wall are not perfect. If our actions and Howard Morgan, s+b, Fall 2004.) the words on the page could improve are foolish, the wonderful words post- We looked at the impact of leadership the performance management pro- ed on the wall will only make us look development programs in changing cess, every company’s appraisal sys- more ridiculous. executive behavior. As it turns out, tem would be perfect by now. each of the eight companies had dif- Companies that do the best job of Marshall Goldsmith (marshall@ ferent values and different words to living up to their values and develop- marshallgoldsmith.com) is a founder of describe ideal leadership behavior. ing ethical employees, including man- Marshall Goldsmith Partners, and the But these differences in words made agers, recognize that the real cause of author or coauthor of 18 books on lead- absolutely no difference in determin- success — or failure — is always the ership and coaching. His most recent ing the way leaders behaved. One people, not the words. book is Global Leadership: The Next company spent thousands of hours Rather than wasting time on rein- Generation (Financial Times Prentice composing just the right words to venting words about desired leader- Hall, 2003). 8 most critical in two strategic areas: reputation and rela- and worker replacement costs — another form of risk. tionships. Strong brand equity and the overall standing Recent client work by Booz Allen demonstrates that risk of the company correlate highly with a commitment to management is important both in protecting against corporate values. So does the robustness of the firm’s potential problems and in taking advantage of opportu- associations across its extended enterprise, from suppli- nities. Of the top 20 enterprise risks measured on share- ers to employees to customers. (See Exhibit 3.) holder-value impact in one recent case, more than half Although previous studies have shown a strong rela- involved corporate reputation; brand; or relationships tionship between values-based management and risk with suppliers, customers, and employees — all ele- management, our findings were ambiguous. The lack of ments that companies in this survey cited as being awareness by companies of the relationship between val- strongly affected by values. In light of the massive share- ues and risk management is puzzling. In recent years, holder destruction that has taken place over the last sev- companies around the world have understood and acted eral years, we find it troubling that more companies do on risks that exist outside the traditional confines of not recognize the existence of the relationship between financial risk and operating risk. Today, firms spend articulated values and risk management. abundantly to protect against reputation risk; the “war Financial leaders appear to be doing a better job for talent” among companies has made them aware of than other companies in linking corporate values to the importance of their work forces, their capabilities, corporate operations. For example, nearly all financial
  10. 10. Exhibit 3: Factors Important to Business Strategy and Strongly Affected by Values Adaptability to changing conditions 81% 36% Corporate reputation 78% 76% Customer loyalty 78% 64% leaders (94 percent) say they have practices in place to ensure that their values are aligned with those of their Operational efficiency/productivity content management 78% suppliers, distributors, and partners, whereas only 64 37% percent of other public companies do. Financial leaders Earnings growth are also significantly more likely to report that their 74% 30% Product quality/innovation “By making values fundamental to your 72% 53% organization. . . you can reduce risks in most situations.” Employee recruitment and retention 69% 61% The British mobile telecommunications company Revenue growth Vodafone views its commitment to values as a first 66% line of defense against risk. The company believes 28% in four primary values: “passion for customers,” Risk management “passion for our people,” “passion for results,” and 60% 35% “passion for the world around us,” underpinned by a 9 Brand equity commitment to six primary business principles. More 55% than any set of systems or processes, these rules of 40% behavior can protect a company from harmful inci- Supplier relationships dents that could potentially damage performance or 41% 30% reputation, says Vodafone director Devin Brougham. “By making values fundamental to your organiza- Important to business strategy tion. . . you can reduce risks in most situations,” Mr. Both important to strategy and strongly affected by values Brougham says. “If you don’t have a culture of ethical Source: The Aspen Institute and Booz Allen Hamilton decision making to begin with, all the controls and compliance regulations you care to deploy won’t nec- essarily prevent ethical misconduct.” management practices are effective in fostering a variety The challenge is to ensure that these values take of behaviors related to better business performance — including the core operating behaviors that influence strategy + business issue 39 hold. “Training, senior management advocacy, and values-focused performance evaluation are all part growth. Seventy-five percent, for example, say their of our approach,” says Mr. Brougham. “And impor- management practices are very effective in encouraging tantly, our employees have a clear understanding of teamwork and trust, compared with fewer than half of working in this expected framework.” the other public companies. About 60 percent of the financial leaders say their practices are very effective in
  11. 11. promoting initiative, adaptability, and innovativeness/ entrepreneurship, compared with about 30 percent for “Values are the key to making money.” content management the other public companies. Financial leaders also believe social responsibility Martin Carver, CEO of Bandag Inc., a retread tire and environmental responsibility have a positive fi- company based in Muscatine, Iowa, says that “values nancial impact. Nearly half (49 percent) believe that are the key to making money,” but only if a company environmental responsibility has a positive impact on truly takes values seriously. Not enough do, he adds. financial performance in the short run, compared with “Loads of companies will tell you they have values,” 34 percent for the other public companies. Sixty-six per- Mr. Carver says. “More than likely they’ve got their cent of financial leaders see a positive short-term impact values plastered all over the walls. But very few from social responsibility, compared with 54 percent for companies clearly see the correlation between suc- other public companies. cess and values, so they never really embrace, define, and then drive them into the organization with any Measuring Return real passion.” It’s possible that a majority of companies have difficulty Many companies use Six Sigma techniques to connecting values to operational results because values achieve quality, adds Mr. Carver, but “without a foun- such as honesty/openness, initiative, and entrepreneur- dation of trust, ethics, and genuine statements of and 10 ship seem intangible. Even the most advanced non- commitment to core values, you just can’t design real financial measurement tools are still quite limited in quality into your processes. We can point to the many their ability to show a clear connection between princi- ways our commitment to a clearly defined set of ples, such as trust, and business goals, such as adapta- beliefs delivers a positive impact to our business, our bility, efficiency, and growth in revenue and earnings. employees, our customers, the local community, and More than two-thirds of companies report that they the world.” collect some form of information for assessing the long- term financial impact of upholding values. However, there is little commonality among these companies as to in everyday action. As a result, such surveys may be fail- the type of information collected. (See Exhibit 4.) ing to capture important information about people, per- Measurement is most commonly used to assess how formance, and strategy. values affect employee retention and recruitment: More Indeed, metrics are distinguished more by what is than half of respondents indicate that their companies missing than by what is present. Even activities that address the issue by employee satisfaction surveys. respond well to values-based management are infre- However, many such surveys are limited in their scope, quently measured. For example, although nearly two- measuring only satisfaction, and missing the opportun- thirds of respondents agree that values can strongly ity to measure the degree to which values are embedded affect customer loyalty, far fewer actually measure their
  12. 12. customers’ attitudes toward and perceptions of their val- ues. Fewer than one-third of companies use consumer “I see the value of values every day.” content management preference data regarding their company’s values and/or social impact. And in their strategic planning process, France’s Bongrain, one of the world’s largest cheese fewer than one-quarter use customer preference models companies, doing business in 100 countries, is con- to assess the impact of upholding corporate values. vinced that the importance of good values to a com- pany’s performance cannot be overestimated. “I see Practice Makes Perfect the value of values every day,” says division head How do companies align values and strategy? In other Thomas Swartele. “The communication, the innova- words, which management practices reinforce values in tion, the adaptability, the coherence: Those are the the organization and which factors enable executives to value of values. Because you are approaching mar- make decisions consistent with their corporate values? kets, problems, and business opportunities from a Our survey shows that the behavior of the chief execu- shared basic belief system, a values-based business tive officer is critical. approach becomes extremely efficient and powerful.” Eighty-five percent of the respondents say their This is best illustrated by Bongrain’s relationships companies rely on explicit CEO support to reinforce val- with its suppliers. The company sells premium foods, ues, and 77 percent say CEO support is one of the “most and it requires the highest quality in all of the prod- 11 effective” practices for reinforcing the company’s ability ucts that it purchases from local farmers around the world. As a result, the company forms close part- Exhibit 4: Information Sources Used to Assess nerships with these suppliers, collaborating on such Long-Term Financial Impact of Upholding Values issues as livestock diet and feed and housing condi- Employee surveys addressing impact of values tions. “These are living products, and the slightest on employee retention and recruitment variations can have a dramatic impact on quality,” 53% says Mr. Swartele. “Our approach might cost a bit Consumer preference data regarding company’s values and/or social impact more, but it not only satisfies our values, it helps us 30% to achieve the quality that justifies the higher margins Data on values-related regulatory trends that we want in the business.” 21% Ultimately, adds Mr. Swartele, “Our success is tied to their success.” strategy + business issue 39 Community stakeholder surveys on potential reactions to company’s practices 18% to act on its values. (See Exhibit 5.) It is the leading None of the above choice across geographies and industries, regardless of 30% company size. In contrast, although a substantial major- Source: The Aspen Institute and Booz Allen Hamilton ity of the respondents say they use practices such as cor-
  13. 13. Of the top 20 enterprise risks, more than half involved reputation, brand, or relationships. porate values statements, performance appraisals, inter- Exhibit 5: Management Practices to nal communications, and training to reinforce values, Reinforce Values content management fewer than half call these practices the “most effective.” Explicit CEO support Why do companies continue to employ these prac- 85% 77% tices if they are not as effective as CEO support? Like any other business objective, successful management of Corporate values statement 81% values cannot be executed through a strong top leader 37% alone; it also requires a “virtuous circle” of management Performance appraisals where dispersed leadership, strategy, practice, and meas- 77% urement are mutually reinforcing. 43% For example, although only 37 percent of compa- Internal communications 74% nies see a values statement as one of the “most effective” 32% practices in and of itself, 81 percent still feel the need for Training such a statement, in part because it is the basis for re- 72% inforcing other, sometimes more important, practices. 34% (For a chief executive to show explicit support for the Nonmonetary rewards company’s values, for example, it helps to have a values 56% 26% 12 statement to which the CEO can refer.) Similarly, if per- Recruiting and hiring formance appraisals nominally include values, but there 54% is no senior support behind them, then they are likely to 20% be empty words on a piece of paper. And if the CEO Internal monitoring/audit is communicating a set of values, but performance 53% 25% appraisals undermine his or her message, the CEO’s communication is less effective. Incentive compensation 50% Regional variations on the factors that help align 30% practices and values are significant, although globally, Third-party review of management two top the list: the behavior of the company’s CEO, 24% 8% and corporate strategy itself. In North America, it’s per- sonal. Seventy-three percent of respondents in the U.S. Reinforce values Most effective and Canada say that “my personal values system” is a pri- Source: The Aspen Institute and Booz Allen Hamilton mary enabler for aligning values with decision making, compared with 60 percent who cite corporate strategy. In Europe and Asia/Pacific, only 47 percent and 35 Beyond these enabling factors, no factors score higher percent, respectively, select “my personal values system” than 40 percent among North American respondents. as one of the top five factors enabling decision making
  14. 14. consistent with corporate values. Among Asian compa- other public companies, however, more than half are nies, values-based decision making is driven much more deterred by the short-term costs. content management by corporate strategy (78 percent) and customer demand (53 percent) than is the case at companies in Embracing Opportunity North America and Europe. Our survey shows that values are seen by the corporation As for factors that inhibit the alignment of values as a critical component of establishing its license to oper- and management decisions, one stands out. Among ate. However, the research suggests that while the logic financial leaders, fewer than one-third say short-term in relating values-based management to business per- economic costs hinder alignment with values; among formance has a strong following among executives Methodology Booz Allen Hamilton and the Aspen Our respondents are predominantly ments and divisions make up 32 percent Institute invited approximately 9,500 sen- from large companies based in North of the sample. Risk management and ior executives from around the world to America, Europe, and the Asia/Pacific general counsel respondents comprise 5 participate in this global study. The objec- region. Half of these respondents (47 per- percent of the sample. Ten percent of tive of our research was to understand cent) are based in North America, 27 per- respondents classified their job function how companies are dealing with the chal- cent represent companies based in as “other.” lenges of managing values: Europe, and 24 percent represent compa- Respondents represent many indus- 13 • What are the dimensions of corporate nies based in the Asia/Pacific region. tries: financial services and manufactur- values? One-fourth of the respondents are from ing lead at 26 percent and 25 percent, • What are the factors that enable and companies with annual revenues exceed- respectively, followed by consumer-relat- hinder executives in making decisions ing US$10 billion. One in six (16 percent) ed companies (including consumer prod- based on their corporate values? are from companies with annual revenues ucts, media, and retail) and technology • What is the value of corporate values? between US$5 billion and $9.9 billion. One (including both technology hardware/ • What are the best practices for applying in four (25 percent) are from companies equipment and telecommunications), corporate values? with between US$1 billion and $4.9 billion each at 11 percent. Utilities (7 percent), Phase One of the invitation process in revenues, and another 25 percent are transportation (7 percent), and energy (5 involved the mailing of 8,000 English and from companies with revenues under percent) make up the balance, along with Japanese invitations and surveys in early US$500 million. The remaining 10 percent 8 percent in miscellaneous or unclassified July 2004. Phase Two included the mailing are from companies with revenues industries. of 300 German, 750 Chinese, and 400 sup- between US$500 million and $999 million. Financial leaders in this report are plemental Australian invitations. These More than three-quarters of the those companies that categorized them- findings reflect the 365 completed surveys respondents are top leaders in their com- selves as leaders in their industries and received (both in print and on the Web), panies. CEOs and managing directors whose publicly reported financial results strategy + business issue 39 which represent a 3.5 percent response make up nearly a fourth of the sample (24 for the past three years were at least rate (net of undeliverables). percent), with other C-level executives 10 percent ahead of those of industry In October and November 2004, we (CFO, COO, CAO, chief ethics officer, or competitors. We compared the survey conducted phone interviews with 20 of the CHRO) accounting for another 22 percent responses of this group of financial lead- individuals who responded to the survey, of the sample. Board members represent ers with the responses of other public all C-level executives from major multi- an additional 7 percent of the sample. companies. national corporations. General managers and heads of depart-
  15. 15. around the world, the management practices and meas- companies to better measure and align their values with urement techniques related to the values are works in their strategies. content management progress at most companies. Specifically, there seems to So the next set of imperatives is for business leaders be a lack of recognized “best practices” in establishing to move from talking about values and viewing them linkages between values and both long-term strategic defensively to embracing them in order to drive corpo- goals and shorter-term results. There is also relatively lit- rate performance and change — and for executives at tle agreement on what works and what doesn’t work, companies that have figured out the linkages to do a both in aligning values with strategy and in embedding better job of demonstrating their success. Consumers, values in management processes. investors, and other constituencies become leery of cor- Executives generally see the impact of values on porate imperatives that don’t deliver demonstrable important strategic objectives relating to corporate rep- results, and corporate values are no exception. A com- utation and relationships, as well as to product quality. mitment to corporate values may be in vogue, but the However, most have a harder time seeing how values public will remain suspicious until corporations both directly affect the top and bottom lines. This is not sur- understand and can demonstrate that they are commit- prising, because business has always had a hard time ted to using values to create value. + dealing with intangibles. Consider, for instance, the Reprint No. 05206 decades’ worth of discussion, academic debate, and trial 14 and error that have gone into defining and measuring the returns on investment in brand, research and devel- opment, and training. In the same way that techniques have been developed to measure the returns on these Resources intangibles, leading companies are beginning to develop Mitchell Pacelle, Martin Fackler, and Andrew Morse, “For Citigroup, ways to measure the return on values. Scandal in Japan Shows Dangers of Global Sprawl,” Wall Street Journal, The study does show that companies that can be Dec. 22, 2004 called financial leaders have come further in under- Anne M. Mulcahy, Keynote Address, Business for Social Responsibility annual conference, New York, N.Y., Nov. 11, 2004 standing the relationships between values and perform- ance, that they are doing a better job of exploiting them, Daniel Yankelovich, “Making Trust a Competitive Asset: Breaking Out of Narrow Frameworks,” a report of the Special Meeting of Senior and that their more comprehensive approach to values is Executives on The Deeper Crisis of Trust, New York, N.Y., May 15–17, associated with superior financial performance. This 2003; www.viewpointlearning.com suggests that, although all companies may be convinced CFO Thought Leaders: Advancing the Frontiers of Finance, edited by Rob that values are important for avoiding risks, many have Norton (strategy+business Books, 2005) yet to discover how to use them to grasp opportunities. Lynn Sharp Paine, Value Shift: Why Companies Must Merge Social and It also suggests that there is substantial scope for identi- Financial Imperatives to Achieve Superior Performance (McGraw-Hill, 2003) fying a set of best practices that may some day enable all
  16. 16. strategy+business magazine is published by Booz & Company Inc. To subscribe, visit www.strategy-business.com or call 1-877-829-9108. For more information about Booz & Company, visit www.booz.com Originally published as “The Value of Corporate Values” by Reggie Van Lee, Lisa Fabish, and Nancy McGaw. © 2005 Booz & Company Inc.

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