How Culture Drives Business Value -Value Examiner July/ August 2012

1. A P R O F E S S I O N A L D E V E L O P M E N T J O U R N A L f o r t h e C O N S U LT I N G D I S C I P L I N E S
v a l u a tio n
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Company Culture Drives Business Value
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By Scott T. Wait, CPA, and Mark A. Dayman, CPA, ABV, CFF, ABAR, CVA
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hat does company culture have to do with value? Valuation pro- a distinct performance advantage. The
fessionals have been taught that value is ultimately driven by the Booz study found that companies that
level, strength, and predictability of earnings and free cash flow, highly align their cultures to strategic
applied within the context of common valuation approaches. goals achieve higher rates of growth in
However, a company’s culture—the shared values and practices of a company’s both gross profit and enterprise value.
Companies with highly aligned cultures
people—is one of the least understood Who Says Elephants Can’t Dance? Over generate 16.7 percent higher enterprise
but most critical value drivers. The the next 19 years, IBM transformed it- value based on five-year compound an-
Booz & Company annual study, “Why self into a more cooperative and highly nual growth rates, compared with the
Culture Is Key” (Winter 2011), defined profitable business, based on renewed average of all companies participating
company culture as “the organization’s leadership in the field of software as a in the study.
self-sustaining pattern of behaving, feel- service. Once cash flow was stabilized, And where do such companies focus
ing, thinking, and believing. It trumps Gerstner focused on transforming the their attention? Belying the belief that
strategy and leadership.”1 culture to optimize the long-term value customer service died long ago in Ameri-
As an example, remember when of IBM. In Who Says Elephants Can’t ca, companies with perceived strong cul-
Steve Jobs returned to Apple Comput- Dance? Gerstner wrote that IBM’s cul- tures focus on three key success factors:
er? The “white knight” used his commit- ture reemphasized cooperation, fun, superior product performance, superior
ment to visionary products and design innovation, and results orientation to product quality, and aggressive custom-
perfection to motivate employees as drive IBM’s overall company value to ization of products to local markets and
Apple revolutionized ways of delivering new heights. geographies. In other words, happy and
and listening to music and communi- The Booz study found critical links satisfied customers (as a component of
cating and connecting with others. between culture and value. We used to corporate culture) drive value.
Consider as well Louis V. Gerst- think that R&D drove innovation and Companies whose management
ner, Jr.’s turnaround of IBM, which by company value, but the Booz study em- teams have aligned their cultures to
1993 was the corporate equivalent of phasizes that “there is no statistical rela- their company strategies also are em-
an ocean liner full of fiefdoms focused tionship between financial performance ployers of choice (and valued at a pre-
on building office machines. And that and innovation spending in terms of mium), because they have optimized
ocean liner essentially was rudderless either total R&D dollars or R&D as a product design, delivery, and customer
and adrift: IBM was running out of percentage of revenues.” Take Apple, service. Informed investors prefer to
cash, Gerstner later wrote in his book as noted above: it consistently under- buy companies that strongly align their
spends its peers on R&D, but its results cultures to innovation, which routinely
1 “Why Culture Is Key,” by Barry Jaruzelski, John outperform its peers.
Loehr, and Richard Holman, Booz & Company, Is-
delivers higher profitability while also
sue 65, Winter 2011, page 3. See www.booz.com/ Businesses that have aligned cul- serving as a long-term “growth engine.”
media/uploads/B oozCo-Global-Innovation- tures to innovation and strategy have In our business valuation and M&A
1000-2011-Culture-Key.pdf.
30 July/August 2012 the value examiner

2. A P R O F E S S I O N A L D E V E L O P M E N T J O U R N A L f o r t h e C O N S U LT I N G D I S C I P L I N E S
consulting practices, we have seen a management sufficient to ensure can stop a manufacturing line if he
direct connection between a company that the owner can step away from or she finds a defect in an auto on
culture of “engaged” employees and the business? the line: that’s empowerment.
value. When working with potential 3. A company with a history of well
buyers of company clients, such as pri- conceived and well executed busi- The message is clear: company
vate equity groups and strategic buyers, ness plans tends to realize lower culture drives value. Valuation, M&A,
we seek to identify cultural factors that business risk and better economic and exit strategy professionals must
drive value. results. Does the company annu- seek to understand company cultures,
Here are some questions that we typ- ally complete a strategic business whether the assignment relates to a
ically use to identify the existence and planning session that involves input company’s general purposes, or for
scope of a strong corporate culture and from all staff? transition-related positioning. VE
its impact on a company’s value: 4. Employee empowerment increases
product and service performance and Scott T. Wait, CPA, is a
1. Continual communication with customer satisfaction in turn. Making managing director at The
customers drives customer loyalty, every employee part of the “team” is McLean Group’s Reno,
innovation, revenues, profits, and critical. Some issues to consider: NV, office (e-mail swait@
thereby value (higher economic ben- mcleanllc.com). McLean
efits). Does the company regularly •• Does the company have an estab- Group is an investment
survey customers on the utility and lished program to hire the best bank that provides M&A,
quality of its products and services, candidates? business valuation, and
especially in relation to alternative •• Is there an effective plan for new strategic consulting
products and services and the cus- employee orientation? services to middle-market businesses.
tomer’s emerging needs? Does the •• Does the company maintain a
company have a history of taking ac- mentoring system to orient new
tion based on its customer surveys? employees with appropriately Mark A. Dayman, CPA,
2. A company that depends on a sin- matched, seasoned employees? ABV, CFF, ABAR, CVA,
gle owner for market, product, and •• Do all employees have clearly ex- is a managing director
operational success is headed for plained job responsibilities and re- at The McLean Group’s
trouble and has limited value. Man- wards? Are employees trained and Atlanta, GA, office
agement depth builds value (higher empowered to make decisions in- (e-mail mdayman@
economic benefits, lower specific volving their work processes? For mcleanllc.com).
company risk). Has the owner devel- example, at most auto manufac-
oped at least one layer of executive turers today, any single employee
the value examiner