1) The document discusses the most important factor for an investment decision - assessing a company's organizational culture. 2) A sustainable organizational culture supports innovation across all employees and adapts to changes, rather than relying on rigid procedures. 3) Monetary incentives often focus on short-term goals and undermine creativity, instead of intrinsic motivation, commitment to values, and identification with long-term goals. Assessing a company's culture is crucial for predicting their success over decades.

1. Juha Peltoniemi, 17 June 2015
The most important question
for the investment decision
Imagine you have another billion to be invested. You have been
presented several innovative growth-oriented enterprises that seek
funds to expand their production and to build a gigantic laboratory for
research, innovation and product development to support their future
product lines. How do you decide where to put that money, were it
yours or your employer's or client's?
Certainly you check their balance sheets. You scrutinize their strategies, test
their products, evaluate their existing and potential markets, and compare to
competitors. You make risk analysis and stress tests. You read their guidelines for
corporate governance and seek at internet for signs of dishonesty among the key
persons. These are all important, even vital things to do, but they are not
sufficient.
What to you investigate then? You have to find out that the management is up
to their tasks, that the directors know how to steer the executive officers and the
executives know what to do.
What is the very most important task of a CEO? It is not to build a successful
strategy, not to hire the best people, not to report to the board, not to sell products,
not to give the annual speech. These are important, even vital things, and in a way
get included in the very most important task, which is to create and maintain a
sustainable organizational culture.
What is a sustainable organizational culture. It means – beside the obligatory
ethical demands – that the organization supports the innovability of all its
employees and maintains a capability to adapt to all imaginable changes in the
business ambient. A sustainable organizational culture is free from fundamental
core rigidities that would cement the function to existing procedures, habits and
manners, even products. In a changing world, it is not the strongest who wins but
the one who can most rapidly adapt to slow or abrupt changes and who can first
use suddenly emerging possibilities.
The organization culture defines the future beyond decades. While the balance
sheet tells whether the company survives the next months, the product quality
predicts the performance within the coming year and the investments in research
and development hint for the success in the next year, they fail to foresee what

2. happens during the next decade. There are sufficiently many examples of leading-
edge companies with huge R&D spending, unquestionable dominance in the
market and unbelievable profits who have later disappeared from the market. It is
due to bad management, of course, but then what was bad in the management. In
most cases, the management failed to lead the culture.
Organizational cultures escape easy measurements. No short-time account
measure, were it quartal or annual, tells about the culture. Investigating the culture
requires hard work inside the enterprise. Nevertheless, you can get rather reliable
prediction with a few well-aimed questions or observations.
First just go and ask the directors. If they have no clue about the organizational
culture or its importance, forget the company, unless you have the possibility to
change the board with your billion. Ask if the chief executive knows his primary
task. If not, their chance lies in finding a replacement.
The most important clue may be the incentive system. Many if not most listed
companies believe in monetary incentives to press the managers to do their best.
By setting the assumed interests of the managers equal to those of the owners, the
owners believe to gain control of managers work. A lot of research work has been
devoted to build incentive systems that align the interests. Most incentive systems,
however well designed, fail to produce sustainable results.
Why monetary incentives fail? First, they are often based on wrong measures.
The incentives are usually based on short-time indices, like profit or stock-value.
Quartal or annual sales, profits or growth figures may be most misleading, as it is
relatively easy to temporarily boost the productivity by cannibalizing the future
possibilities. Stock-values might tell more about the future expectations, if the
buy-sell decisions were based on true knowledge about the organizational
capacity to reinnovate itself. Are they? I doubt it. Given the volatility on the stock
market, the decisions may be based on rather superficial information.
If monetary incentives are used, I would recommend coupling the future
pensions of the manager after retirement to the performance of the firm then. That
would motivate the manager to build long-term sustainability. However, I want to
present serious doubts about monetary incentives altogether.
Recent research in leadership emphasizes the intrinsic and identified motives
of the employees, including managers. People do most effectively what they
regard interesting and important. Particularly, people behave naturally according
to their values and spontaneously achieve goals that they identify with.
Identification brings commitment.
All extrinsic motives undermine creativity. While threats focus attention to
avoiding and escaping the threat, hence completely destructing creative thinking,
also positive rewards decrease creative performance significantly. They impose
feelings of being controlled, hence reducing the conception of autonomy, and also
focus attention to the reward itself, instead of the task. This has been observed in

3. several controlled experiments as well as longitudinal studies of career paths.
Today more and more employees have to think creatively and heuristically as the
algorithmic and routine tasks are given to computers and robots.
Employees doing creative work should not be controlled with incentives.
Material rewards may, however, be decisive for taking the task or accepting the
job offer. Disproportionally low salaries are also dangerous because they trigger
feelings of unfair treatment. Fair play is an absolute requirement for the
employees to identify with their work and commit to the task, so any unfair act
may spoil all the good achievement in the leadership.
What about the leaders then. Many tasks in the middle management may be
rather routinary, so there is not that much creativity to be destroyed by the
incentives. Another law states that most creative employees do not even raise into
higher management because stable, predictable and systematic persons are
perceived as better prototypical leaders. However, if the firm is supposed to
maintain its ability to adapt into changing conditions, it has to preserve every bit
of creativity even in the upper echelons. Moreover, negative attitudes towards
creativity necessarily flow from up to down – it is very difficult to separate the
creative levels from bureaucracy. In any case the future of the enterprise depends
crucially on the creativity at the top executive levels. Reducing this by monetary
incentives endangers the long-term existence of the company.
To summarise, before investing a cent to a firm, you have to ask how they can
develop an organizational culture that sustains the creativity, adaptability and
integrity of they employees and managers.