If from lawlessness or fickleness, from folly or self-indulgence, [we] refuse to govern [our]selves, then assuredly in the end [we] will have to be governed from the outside.
Culture lies in the synapses between individual units of a system, whether that be neurons in the brain, individuals in a group, or units in a conglomerate. Now that we understand something about the general types of culture at work in most business endeavors today, and the various dimensions that define and influence how these cultures function, what do we do with that knowledge? How does it help us make Waves, go on TRIPs, and continue to thrive in the new conditions of twenty-first-century business?
Blind obedience, informed acquiescence, and values-based self-governance are not just types of culture; they also describe an approach to governing—how organizations create the rules, structures, policies, and procedures that shape the way people behave and perform. As we discussed, blind obedience and informed acquiescence cultures place most governance outside the individual, in the hands of a boss or a set of rules. They seek to control things the same way the guardrails in a bowling alley are used to keep kids' balls from rolling into the gutter; roll the ball and the guardrails keep it on the lane and moving in the right direction. Transparency and connectedness, however, make cultures based on one form of external control or another less ideal for our new world. It is no longer enough to just get the ball to the pins; because everyone is watching, we must now bowl strikes. Few would deny that in a horizontal, hyperconnected, and hypertransparent world, to bowl strikes we need a working environment that connects people and groups more intensely, is powered by communication and information flow, and enfranchises individuals at all levels of the company to act quickly and autonomously when presented with new opportunities by the fast-moving marketplace.
But as the rapid changes in technology since the mid-1990s created a new type of hyperconnected worker, little has changed in the underlying structures of how we organize and govern ourselves to truly take advantage of our new reality. The guardrails are still in place. To thrive in the new conditions of twenty-first-century capitalism, groups must learn to place the structures of governance in each individual's hands. At the heart of this process lies a fundamentally different relationship between governance—the way we seek to control things—and culture—the way things really happen. Instead of achieving culture through governance, companies must learn to govern through culture, to put the guardrails of governance within the culture itself.
To govern through culture is to govern through hows, through the internal structures that influence every action and relationship in an organization. This represents a profound shift in focus from blind obedience and informed acquiescence, the two governing systems with which we are most familiar. It moves governance higher up the food chain, if you will, while also distributing it throughout the diverse parts of the variegated whole. Rather than governing with a matrix of rules and authorities laid over the organization, governing through culture is about governing from within the corpus. When governing through culture, rules don't work well, values do; motivation does not bind people together, beliefs will; external controls are less effective, and self-governance is more efficient. A culture of how, one that uniquely transforms new conditions into new opportunities, as we have already learned, has a name: values-based self-governance.
We have three compelling reasons to embrace the idea of governing through culture: We can, we must, and we should do so.
The evolution in transparency and communication, the breakdown of the fortress, and everything else we have discussed about the new conditions in the twenty-first century enable us to see and affect culture on every level. We can identify, quantify, and systematize the dimensions of culture as never before, allowing us a unique opportunity to unleash its power and efficiency.
When I was asked to testify before the U.S. Federal Sentencing Commission when the committee was considering revisions to the Federal Sentencing Guidelines, I made a passionate argument about the centrality of culture to business governance.[211] The committee heard from many other experts as well, and they incorporated these ideas into their new recommendations to judges dealing with corporate malfeasance.[212] The newest guidelines direct judges determining a company's culpability for wrongdoing to evaluate an organization's commitment to "promote an organizational culture that encourages ethical conduct and a commitment to compliance with the law."[213] The U.S. Department of Justice, interpreting the committee's findings, made it even more clear, saying, "A corporation is directed by its management and management is responsible for a corporate culture in which criminal conduct is either discouraged or tacitly encouraged."[214] [italics added]
"Our work on the commission was nothing less than a battle for the hearts and minds of the people who work at companies," Judge Ruben Castillo told me when we visited with each other in his chambers in Chicago.[215] Castillo is vice chair of the commission and has served as a U.S. district judge for the Northern District of Illinois since 1994. "The guidelines became more than just a way to reduce [incidents calling for] fines and punishment; they aspire to induce higher values and bring the business community to higher levels of conduct." As we move forward into an ever more transparent world, culture—the character of an organization—is now everyone's responsibility.
Culture can't be copied. The collective experience of any group of people forms a unique narrative, a story that lives and breathes in the halls, offices, and factories of that enterprise. The way people connect, spark against one another to create new ideas or refine old ones, solve problems, and overcome adversity builds the synapses that make an organization thrive or die, and no two groups conglomerate these experiences alike. Each is as unique as any family; the number of children can be the same but the ties that bind them will always be unique. Because of this singularity, culture, as an expression of the collective hows of a group or enterprise, gives us our greatest opportunity for differentiation. Many of the people I spoke to agreed. "Culture is a competitive advantage that's very, very hard to imitate," Charles Hampden-Turner told me. "If you have a particular culture, another company can come along and seize your patent and try to imitate your product, but your culture has the huge advantage of both being real to the people who understand it and of being almost impossible to emulate. It doesn't 'scale up,' as people like to say, because it is a process rather than a product."[216]
Just like we all know that one family can't copy another, one company can't copy another's culture. I put this precise question to Massimo Ferragamo, chairman of Ferragamo USA, Inc., a subsidiary of Salvatore Ferragamo Italia, which controls sales and distribution of Ferragamo high-fashion products in North America. "Families cannot copy one another and companies cannot copy each other," he told me.[217] Massimo is the youngest of six children of Salvatore and Wanda Ferragamo.[218] It was Salvatore Ferragamo who started the family shoemaking business at age 15 in Italy. Massimo followed in his father's footsteps and began working in the family company at age 12, putting shoes into boxes. Today, he, his mother, his siblings, their children, and a slew of other relatives preside over a luxury fashion empire with more than 200 retail locations around the world. As they embark on the journey to take the company public, Massimo has had ample opportunity to think about what will make the family business endure in the new millennium. And for him, it boils down to culture. "It is the culture that is not copiable. It is values and deep things that are very hard to duplicate. Those values are established by someone naturally in the life of the company, often without them even knowing it, and then gets carried through the threads of people who embrace those values and culture. I would venture to say this: Our U.S. company and our Japanese company and our Italian company, in three different parts of the world, stand a much greater chance of having a similar culture that two unrelated companies that occupy the same building in Florence."
Organizations can win through culture, by getting their hows right and setting off Waves of creativity and purpose throughout their workforce. Winning today requires surpassing expectation because great companies don't just fulfill contracts; they exceed them. They outbehave the competition. "It means giving an experience that no one else can do," Ferragamo told me, "and it is very, very challenging. It means excellence to the nth degree."
I asked Massimo for an example of how he thinks he can outbehave his competition. "I was talking to a lovely lady who works in our company," he said. "She was on holiday and passed by one of our stores that was extremely busy. She doesn't work in our retail stores, but she went in and said, 'Let me give you a hand.' It was 10:30 in the morning and she didn't leave until 5:30 that evening, and this was her vacation. During the day, a customer came in and said to her, 'I have my Christmas shopping to do and I do not know what to do, and I am in a hurry.' She said, 'Look, do you have a list?' He gave it to her. To make a long story short, he sat down with a drink and she just brought over things. He left with a six- or seven-thousand-dollar purchase, and I am sure she made his day. The challenge for me is how do I duplicate that commitment, not as a happenstance, but as a standard? How do I create a culture where we can play a great game and keep on scoring so that everyone can still be that excited by the game? That is how you outbehave competition."
In an informed acquiescence culture, you could do everything that the carrots and sticks require, play by the rules, and still never delight or surprise anyone. Self-governance is about giving people the freedom to act individually and creatively, to uncork their ability to surprise people and create delight. In a world where your hows matter most, governing through culture puts the opportunity to exceed expectations in the hands of those who can make the difference.
When most people first think of self-governance in the abstract, it seems all well and good. But when they think about it concretely, fear creeps in. How can an organization function, they ask, when workers are free to do what they want?
But what is freedom? Some people think that freedom is an absence of constraint. "If I could just do exactly what I want," they think, "I could really get something done." Danish philosopher Soren Kierkegaard had a different thought: "Anxiety is the dizziness of freedom," he said.[219]
Researchers at the University of Erfurt in Germany set up an investment game to discover exactly what freedom means to people—in dollars and cents. They recruited 84 players and gave them 20 tokens each. To make it interesting, and to ensure a real profit motive, they told the players they could redeem their tokens for real money at the end of the game. In each of a number of rounds, players could choose whether to invest some or none of their tokens in a fund. The fund had a guaranteed return, and after every round, the profit would be distributed to the entire group equally, including those free riders who chose not to invest.[220] The game was totally transparent; everyone could see what everyone else did. Those were the ground rules.
Next (and here is where it gets interesting), they established two different types of groups: those that permitted members to penalize other members and those that did not—in other words, groups that had a self-governing system and those in which participants were totally free to do as they liked. Players had to choose a group with which to invest, and after each round they could change groups if they wanted to.
Perhaps not surprisingly (given most people's misperception of freedom as an absence of restraint), about 65 percent of the players initially chose a group that had no regulatory procedures. By the fifth round, however, things began to change; about half of them switched to self-governed groups. A smaller number migrated in the opposite direction. By round 20, nearly everyone had moved to self-governed communities. The "free" groups were empty. The greatest profits were to be had in groups with self-regulating cultures. Given a choice, it seems, groups without regulatory mechanisms attract exploitative people who tend to undermine cooperation. Early on, those who wanted a free ride to collect profit without risk gravitated toward the unregulated groups. Then people caught on; the threat of penalty by the group tended to draw people not afraid to cooperate. In these groups, more people invested and everyone earned more profit.
It turns out that people in pursuit of something, when given the choice between cultures where they are free to do as they please and cultures that have self-regulating mechanisms, choose those with self-governing principles. "[We found] that when you have people with shared standards, and some that have the moral courage to sanction others, informally," said Bettina Rockenbach, the study's senior author, to the New York Times, "then this kind of society manages very successfully."[221]
Freedom does not mean anarchy. The freedom to self-govern actually binds people together around stated values and the desire to accomplish common goals. "A financial analyst once asked me if I was afraid of losing control of our organization," wrote Herb Kelleher, executive chairman and former CEO of Southwest Airlines, a company whose workers thrive on autonomy. "I told him I've never had control and I never wanted it. If you create an environment where the people truly participate, you don't need control. They know what needs to be done, and they do it. And the more that people will devote themselves to your cause on a voluntary basis, a willing basis, the fewer hierarchies and control mechanisms you need. We're not looking for blind obedience. We're looking for people who on their own initiative want to be doing what they're doing because they consider it to be a worthy objective. I have always believed that the best leader is the best server. And if you're a servant, by definition you're not controlling."[222]
The rationale for centralized, top-down decision making—control, direction, and compliance—melts away when individuals are tightly aligned with the company's values and goals, accountable for their actions, and self-regulated. Because values-based governance is positive governance—given to what is desirable rather than what is prohibited—it presents a proactive solution to achieving corporate aims. As opposed to the heavy enforcement apparatus of blind obedience cultures or the reactive, make-another-rule solution of informed acquiescence, values-based self-governance provides constitutional principles that can be applied again and again to situations as they arise. It addresses the wide range of possible human conduct more comprehensively and puts the values of the company out in front of behavior.
Joe Stallard is the vice president of human resources at Sewell Automotive Companies, which has become one of the largest family-owned car dealerships in the United States in large part because Sewell does culture. The 1,500 people who work at Sewell sell and service new and used vehicles, and their success depends on not only delivering a good product, but also building relationships with their customers. Since 1911, Sewell has thrived by delivering a customer experience that goes far beyond what most people expect from car dealerships. "We certainly have elements of self-governance in our culture," Joe told me when I asked him about the company culture, "and we have elements of informed acquiescence. I've always said it is very effective, if you need something done fast, to just coerce people to do it, but it's not going to be very long-standing. When you take the time for people to understand the whys and hows to get things done—and more importantly, to get them to believe in them—you are much more effective."[223]
There are very few rules at Sewell. "I think that a lot of rules implies no trust in many ways," Joe said. "You have to put rules or a stick in place—'If you do this, I'll do this to you'—if you don't trust people. We have three guiding spirits at Sewell, and I always say that if we get these three things right, we don't have to have a lot of rules." Those "guiding spirits" represent the core values that bind everyone at Sewell in common enterprise: Act Professionally in Everything You Do, Be Genuinely Caring, and Maintain the Highest Ethical Standard. "If everyone has some strong, guiding principles," Joe said, "it allows them to be creative, to be innovative, to be flexible, and to get out there and really do some things differently."
There are just three values, but for Sewell they cover a lot of ground. When you bring your car into a Sewell repair shop, a team of technicians trained to work bumper to bumper does all the work required on that vehicle. Each team elects a group leader who guides the work flow, but other than that the team is almost entirely self-governing. Frontline technicians make every decision necessary to fulfill those three values, up to and including spending company money to do so. "Let's say you brought in your Lexus. It is out of warranty, the window regulator went out, and you feel we should have caught it," Joe offered by way of example. "Most technicians would have to talk to a service manager, who would review the records and maybe talk to his supervisor before making a decision, or something like that. At our dealership, the person that you first dealt with can make the decision to fix it. Now, you might ask why we would do that; won't they just spend all your money? Actually they won't. In fact, they'll spend less than you hope."
Spend less? Frontline personnel, with no profit-and-loss (P&L) responsibility and no commission structure, when allowed to freely spend company money, spend less?
"Yes. Think about it. If you give most people the power to spend freely, what are their concerns now that it's their responsibility? 'I hope I don't do too much. I hope they don't look at my goodwill account and say it's huge.' So they will worry about it almost more than we would like them to. Sometimes new hires will come back and tell the assistant service manager that they noticed the taillights are out on a car and they are worried this customer could be upset. We ask them, 'If it was your mother, what would you want us to do? What do you think we should do?' They want the reassurance at first. Over time, as they gain trust, they make these decisions themselves. If you give them the checkbook, they're a lot more thrifty than if you took it away.
"Are we more vulnerable because we have fewer rules?" Joe continued. "Sure. But let me give an example. We give all of our sales associates a car, gas, and insurance. First day you start, if you work at a Lexus store, you're going to get a new Lexus to drive. Now are we vulnerable? Could we have somebody go out, get drunk, and total our car or kill somebody and leave our dealership open to tremendous amounts of liability? That could happen, but it never has. Most other dealers tell us, 'You're crazy. Why would you do that? How do you keep somebody from not doing that?' And we say, 'Well, we start with great people.' They honor that trust."
Everything about Sewell culture reinforces its three basic "spirits," and they celebrate them every chance they get. "We tell lots of stories here," Joe says, stating what has already become obvious to me in the course of our conversation. One of their favorites involves a technician who had recently been hired from one of their competitors. "The technician charged a customer for work that he hadn't done. One of the other technicians went over to him and said, 'Hey, what are you doing? You can't do that here.' And he said, 'Oh, at the last place I worked, that's the way we made a little extra money.' So the technician told him that we don't do that here, and he apologized and said, 'I just didn't know.' So the group watched him a little bit, and the next day they caught him doing it again. This time a few guys went over to him and said, 'Hey, we told you we don't do this here.' He replied, 'Okay, I'm sorry. I got it. It's a bad habit.' So now the group watched him a lot. The third day they caught him doing it again. This time, they spread-eagled him on the back of a car, told him to get his tools, get his truck, and get out. No supervisor, no manager; they just said, 'We're not going to let a guy like that mess up our business,' and they fired him."
Now that may seem a little rough to you if you work in a cubicle, but if you work in a service garage, the culture can tolerate a different set of behaviors. Joe admits that the fired technician could have raised a fuss, but he just went away. He realized that he just didn't belong.
To "Be Genuinely Caring" can be rough, but it also brings inspiration. When a team member suffering from an illness had to go on disability and discovered that his insurance didn't kick in until he was off the job a month, his fellow group members all donated a paid hour of their own time to support him. When Hurricane Katrina wiped out Sewell's one New Orleans dealership (located between the Superdome and the Civic Center), over 40 of the 114 associates working there lost their homes and possessions. Associates in Dallas/Fort Worth, despite not knowing any of the affected families personally, canceled that year's parties and awards, quickly raised $168,000, donated use of their summer homes and cabins, found apartments and housing, and helped those associates rebuild their lives. Although they didn't know them, they considered them a part of the Sewell family.
Self-governing cultures both inspire alignment and eject elements that don't fit in. That's one of the many reasons that Sewell, in an industry that typically sees 184 percent turnover each year, enjoys just 22 percent turnover. "We reinforce behaviors by celebrating them in stories," Joe said, "but we also reward for them. One of the big measurements in the automotive industry is the customer satisfaction index (CSI). We pay every person in the dealership—whether you mop the floors, answer the phones, or sell cars—on how well the store does in CSI, because we believe everyone has an impact on customer satisfaction. We break it down and post it in all the different work areas. Everyone knows, for instance, if the customer satisfaction index in the pre-owned car department is low, and we have people from accounting saying, 'How can we help you get that up?'"
Values-based self-governance is not an end in itself; it is a way to influence the creation of winning cultures for the twenty-first century. Through culture, companies have the opportunity to grow more varied and diverse while simultaneously remaining tightly aligned in a common purpose. There are no hard walls in cultures; they are progressive and evolutionary, growing and changing at all times. Sewell's culture, for example, is not purely self-governing; by Stallard's own admission it has elements of coercion and instances where rules provide the best way to get things done. But by building on the core of self-governing principles, Sewell is able to keep these external controls peripheral to the central effort of the group, keeping everyone inspired and propelled by the values that lie at the center of all they do. In those instances when senior leadership does have to throw up some guardrails, everyone at the company trusts that those external protections extend from the same set of core values as everything else they do.
Streamlining authority and putting information and decision making in the hands of those closest to the challenge make a team nimble and responsive, two qualities critical to thriving in a fast-moving market. More than front-loading decision making, however, self-governance holds the key to the next great leap in corporate efficiency: It closes the gap between the individual and the company.
Businesses do gap analysis of initiatives all the time to discover the difference between expected outcomes, standard outcomes, and the competition. So let's look at the costs of compliance with the rules and regulations of the U.S. government's latest attempt to regulate corporate behavior, the Sarbanes-Oxley rules. "Even before the most expensive Sarbanes-Oxley rules take effect," reports the Wall Street Journal, "companies say their audit costs are increasing by as much as 30 percent or more this year due to tougher audit and accounting standards.... Companies also are paying steep fees to fund a new accounting-oversight board—as much as $2 million apiece annually for some large businesses."[224] A study by Financial Executives International estimated the labor invested in new compliance procedures by small companies with revenues less than $25 million at almost 2,000 man-hours; at $5 billion in revenue the number was 41,000 man-hours.[225] What has all this new investment achieved? PricewaterhouseCoopers found that of the 85 percent of multinational corporations that have new compliance controls and procedures, only 4 percent report significant changes in behavior.[226] Business has spent madly to close the gap between rules and conduct, instituting new programs and training to raise the level of regulatory compliance. Yet despite these Herculean efforts, there has been little real reduction in regulatory enforcement action and prosecution.[227]
"We have great training, great systems, and great policies and controls," Douglas Lankler, chief compliance officer, senior vice president, and associate general counsel of the pharmaceutical company Pfizer told me when we met at Pfizer's New York headquarters, "and yet we still end up with compliance problems."[228] Lankler is the son of an assistant district attorney. He grew up listening to and idolizing the stories his father told him about putting bad guys in jail. They so impressed him that he went on to become an assistant U.S. attorney so he could do the same. Pfizer, one of the largest health companies in the world, has a best-practice, state-of-the-art commitment to compliance and achieving higher standards of conduct and corporate responsibility, and yet even Lankler recognizes the challenges posed by rules-based compliance. "People are giving a lot more attention in the year 2007 to compliance issues and understanding of their importance and the real exposures that exist than they did in 2001, and yet the hotline is still ringing at about the same pace that it was ringing in 2001. And it is not just that people feel more comfortable talking about it, we're still hearing about things you would think we would be able to move on from. And I think unequivocally that every company does the same; Pfizer is not unique in this."
It has been said that insanity is doing the same thing over and over again and expecting different results. This is the trap in which business finds itself with regard to compliance. How much falls through the gap between the ways people conduct themselves and the rules? How much time and confusion does the need for external regulation by a management-oriented bureaucracy create around every decision or initiative? Organizations spend 98 percent of their time and enforcement resources on the 2 percent of their employees responsible for compliance failures, and still have not substantially reduced those failures. Herein lies the essential flaw in informed acquiescence cultures: the gap between people and what's expected of them, people and the rules, and people and what their boss wants. Gaps are the inevitable end result of external governance. "It's like an arms race," said Lankler. "You can keep tightening the controls, but businesses will get more aggressive and try to figure out a way around them; then you tighten the controls more and hire more people to enforce them, and they get even more aggressive, and it never ends."
Self-governance closes the gap. It puts 100 percent of your resources into 98 percent of your organization, giving them the inspiration, trust, and opportunity to achieve at their highest level. Why will employees do the right thing? They will do the right thing because in self-governing cultures, not to do the right thing no longer betrays just the company; it betrays the individual's own values. Rules control and limit how we do what we do; only values-based self-governance can simultaneously control behavior and inspire us to do more. When companies and workers align on values, workers then act on their own beliefs. Nothing is more powerful than that. Betraying oneself brings distraction, those pesky little voices in your head that cause friction and diminish your productivity and effectiveness. (We'll discuss the non-compliance percent in a few pages.) Values-based self-governance creates a culture of consonance.
Imagine how much can be gained by eliminating dissonance at the very core of corporate governance and creating a culture of consonance. The time, energy, and expense formerly dedicated to closing the gap between the individual and the corporation disappears. "To me," said Lankler, "what I want to be saying to our sales force is, 'I'm not interested in rules and policies and procedures and restrictions anymore. I'm not interested in bounds, what you can do, what you can't do. You people get it, you are big boys and girls, you have integrity, you understand that we expect you to do the right thing. We don't have to have these artificial restrictions; we can trust you.' If we can get the culture right so this is what we reward every day at Pfizer and this is what we look most highly upon, we can operate with even more freedom and be even more aggressive. That, to me, is the holy grail."
When you introduce more self-governance into a culture, you diminish the need for rules and procedures and policies. You also diminish the need for carrots and sticks to motivate compliance (another efficiency; carrots and sticks are expensive). In their place, you get alignment to values, more inspiration, and less time and effort lost down the rabbit hole gap between people and rules. Self-governance is the most efficient way to get everyone on the same page, aligned to organizational values and goals, and doing the right thing to achieve them. Compliance is about surviving; self-governance is about thriving.
Michael Monts is vice president, business practices, at United Technologies Corporation (UTC) and a thoughtful and respected leader within the defense industry. UTC was an early leader in trying to create a values-based governance culture, and Michael helped the company see the limits of compliance-based solutions to corporate behavior. He brought this point home to me forcefully. "Creating a compliance program—the external structure, rules, and what have you—will definitely improve your overall compliance results, but ultimately you reach a plateau. Values-based programs take things to the next level. First, they help people get away from loophole hunting. More importantly, if you look at it from the vantage point of leadership, values-based approaches inspire people to accomplish great things. It's not fear that moves people; it's the aspiration toward accomplishing something wonderful. When you combine your vision, values, mission, and leadership, you can capture the imaginations of your employees and harness their power in a collaborative effort. It's what you want, and it's exactly what they want. At bottom, it's not just a cost-benefit equation. They want to feel like they are a part of something that is big."[229]
Values-based self-governance begins, of course, with values, a clearly articulated set of principles that define the nature and purpose of an organization in human terms. At GE/Durham, they use the phrase "Guiding Principles," and it titles a document they consider their constitution.[230] In it, they articulate values of diversity and respect, a commitment to a learning and teaching culture, a dedication to keeping promises, responsibility for the environment, and an attitude toward resolving conflict in a way that corrects and not punishes unacceptable behavior. At Sewell Automotive, they have their "guiding spirits": Act Professionally in Everything You Do, Be Genuinely Caring, and Maintain the Highest Ethical Standard. These values form the basis for its entire culture. Every structure, process, and decision in both these groups flows from their commitment to a set of hows.
Sewell and GE/Durham are relatively small enterprises, so a natural question to ask is: "How can this work for a big corporation?" Luckily, we have examples around us both old and new. Johnson & Johnson has long been a leader in integrating values into its corporate culture. Robert Wood Johnson, the son of the founder, who later became known as General Johnson after his service as a brigadier general in World War II, took over direction of the company in 1932 and 10 years later wrote a one-page document that came to be known as the Credo. It codified the company's socially responsible approach to conducting business.[231] The Credo states that the company's first responsibility is to the people who use its products and services; the second responsibility is to its employees; the third is to the community and environment; and the fourth is to the stockholders. This revolutionary document upended the traditionally held view that a company's first responsibility is to its shareholders. General Johnson and his successors in managing the business have believed that if the Credo's first three responsibilities are met, the stockholders should be well served.
Since the day it was written, the Credo has become a living, breathing part of everything J&J does, not because it sits framed on the wall of every office, but because it sits enshrined in the day-to-day discussions of everyone at the company. "We don't talk about the Credo for five minutes in every meeting," Roger Fine of J&J told me. "We have no such rule. The way I first heard about the Credo when I joined the company in 1974 is more typical. I was in a meeting with about 8 or 10 executives and all of the sudden somebody said, 'That's a Credo issue.' That's a classic line at J&J, and it acts like a trump card. When somebody says, 'That's a Credo issue,' the conversation stops, whatever the business subject is, and the entire conversation turns to 'Okay, let's talk about the Credo issue. What is the issue? What are the pros and cons? What's the dilemma?' if there is an initial dilemma. Then we try to resolve it."[232]
When Roger first told me this, it sounded like the Credo was a burden, an extra tax on the system that needed to be periodically paid. I pointed out to him that business moves quickly, and no one wants to be encumbered by the albatross of having to stop a meeting to discuss this extra thing. "I travel around the world each year speaking to dozens of groups about the Credo," he explained to me. "When I do, I usually talk about four or five misconceptions people have about it, and I save this one for last. This is the craziest fallacy of them all. We want to be real hard competitors, and we want to compete, and that's what everybody at J&J should do. But they need to do it informed and inspired by the Credo. The last sentence of the Credo, you see, is the most important sentence of the Credo. It says, 'When we operate according to these principles, the stockholders should realize a fair return.' What that means is that the Credo is not a brake on our success; it's the engine of our success. Everything in J&J's history proves the General right."
More recently, Xerox Corporation made "Living our values" one of its five central performance objectives, and chairman and CEO Anne Mulcahy credits it as part of the company's remarkable turnaround. "Corporate values helped save Xerox during the worst crisis in our history," Mulcahy said at the Annual Conference of Business for Corporate Social Responsibility in 2004. Xerox went far beyond a vague statement of purpose and infused its central values into every facet of the organization, with a high level of accountability and vigilance. "Far from words on a piece of paper," she said, "[our values] are accompanied by specific objectives and hard measures."[233]
Clearly articulated values keep everyone on the same course. Values place governance within each person rather than in persons or rule sets external to them, establishing the conditions for a very different type of culture to grow.
How does a culture become more self-governing? Methodist Hospital System in Houston tackled that challenge in a very systematic way. In 1998, the board came to the conclusion that the nonprofit hospital chain had become too much like a for-profit enterprise, managing to the bottom line, and had lost touch with its values-based roots. To rectify this drift, they embarked on a major effort to change the nature of how they do what they do. Rather than institute new rules, policies, and procedures or simply plaster the walls with inspirational posters, they chose to approach the challenge from the inside out, to govern through culture. Workforce Management magazine reported their compelling story in early 2005.[234]
They began their process where it counted the most, with the 8,600 employees who would live and breathe it every day. Through ongoing workshops, they developed three documents: a vision statement, a belief statement, and a new mission statement, all based on the idea of integrating spiritual values—broadly and inclusively defined—throughout the workplace. The core values they came up with made an appropriate acronym for a hospital, ICARE: integrity, compassion, accountability, respect, and excellence.
Values-based self-governing cultures, as we have discussed, require dedication to education and vigilance, so Methodist's next step was to develop a system that built an understanding of these new values in meaningful ways. They polled their employees extensively and developed a clear baseline matrix against which to measure their progress toward their goal of values integration. This matrix later became a powerful HR educational tool used throughout the organization.
Most important to increasing self-governance around these values was helping each group of employees translate ICARE into daily behaviors and decision making, in a sense marrying a how to every what. Putting values into action, after all, is the core effort of self-governing cultures. They asked each employee work group to interpret and apply each value to their specific discipline. What does compassion look like? How do we express respect every day? Every discipline came up with its own answers. Nurses internalized accountability with, "Don't ask why; ask why not. Follow though and correct mistakes," while the information technology (IT) department forwarded, "If I do not understand, I will ask questions." Pharmacy workers tackled integrity by vowing, "We will always do our best whether the boss is here or not," while no less than the CEOs of the five-hospital system dared themselves to "challenge each other with respect." This process helped to turn values into self-governable behaviors that could be embraced and applied by each worker on a daily basis.
Given how difficult it sometimes seems to quantify the results of attempting to govern through cultural change, some might be tempted to say that Methodist's initiative was a leap of faith. Even Tom Daugherty, who directed the initiative, admitted skepticism. "You can't always identify a clear line of sight between cultural change and operational performance," he said. But at Methodist, the results speak for themselves. Employee turnover dropped 38 percent, from 24 percent to 15 percent, in less than two years. Vacancy rates fell by half. Satisfaction levels for patients, doctors, and staff hit all-time highs. U.S. News & World Report named Methodist one of the top 100 hospitals in the country and, in 2007, Fortune magazine ranked them number nine on their list of the 100 Best Companies to Work For.[235]
Methodist is a fairly small company, as corporations go, and concentrated on serving a single locality. So I asked Douglas Lankler of Pfizer how he would go about pursuing his vision of "the holy grail" in a large, multinational organization. "I think it's easy," he immediately replied. "You ease it in. Let's say we have a cap on the amount of money that we will let a particular regional sales force give to a group of doctors for educational speaking events, say $100,000. The law doesn't require it, but we put that cap in place because we feared that without it there would be anarchy and people might just pour money at the doctors. That would put us in a situation where we're essentially paying for prescriptions, and we can't have that; we can only fund education-based speaking programs that are designed to get medical information out to doctors and patients who need that information. So you say to that region, 'We're going to move that cap to $200 grand, but at the same time we're going to help you see the right way to use these funds, and trust you to do so in accordance with our values.' You make them more self-governing. If they can do that, their sales are going to go up because more information is getting out to the communities, to the physicians and patients, and compliance is going to go up also because the sales reps know they are being trusted to do the right thing. Then we reward them when they do."
Leadership is key to this process. "We have a lot of leaders who have turned around difficult markets," Lankler said. "For example, the area president of Asia, a region that is wracked with corruption, took over a situation where, from 2000 to 2003, we were having 90-some-odd compliance issues per year, and got it down to one or two. He really drove the notion of values and integrity and his expectation that first and foremost you do it right. 'We can sell like there's no tomorrow and surpass our numbers,' he told his team, 'but if we're doing it in an improper way that's unethical or illegal, then we haven't achieved what we need to achieve.' He was able to back it with his own well-grounded and well-demonstrated integrity."
Increasing self-governance means moving values to the center of your efforts and making it clear—in how you reward, celebrate, communicate, and pursue—that those values form the guiding spirit of the enterprise. This is not just an effort for appointed leaders and managers. Everyone has the opportunity to do something about culture, to evolve it, make it better, and make it more responsive to the needs of today. Corporate culture, after all, is not monolithic. A board can have a culture, a team can have a culture, and a unit can have a culture. The culture of GE/Durham differs dramatically from cultures of other GE units, but the fact that it embraces and sustains the core values of its parent keeps it congruent with its sister parts.
How leaders beget how leaders, like our fictional caveman Ook begat lots of collaborative little baby Ooks. Self-governing cultures grow as people begin to see, model, and then adopt the hows that build strong synapses. To be more self-governing is to realize that culture is something that you do, not something that does to you. Everyone needs to engage in the cultural dimension of what they do. Like oarsmen on a boat, we can all pull together to make culture happen. You need a critical mass of leaders to start Waves, and in a self-governing culture, leadership begins with you.
There are many more reasons why getting more values-based self-governance into every culture makes sense.
Values-based self-governance minimizes the layers of hierarchy within an organization. At GE/Durham, decision making eschews middle management because there is none. There are no silos and there is little separation of functions; all governance functions reside within each individual. Almost nothing happens without a chance for everyone's input; thus almost every initiative is an expression of the group. At Sewell, each self-governed team takes responsibility for every aspect of a vehicle, which allows them to deliver a superior experience to their customers in a more efficient and responsive way.
Unlike the hoarding or need-to-know information flow of blind obedience and informed acquiescence cultures, values-based self-governance requires that information be readily available to all when they need it. Information unleashes ability. To unleash the power and creativity of a workforce of inspired leaders, you must create an environment that unleashes the information they need to succeed. Transparency between people at all levels in all transactions actually makes these cultures stronger and more effective, and the free flow of information makes cultures more self-governing by increasing trust.
To push the bounds of creativity and innovation, you need people to live out there every day. Rules-based cultures contain an inherent tension between outside-the-box thinking and inside-the-box compliance. Self-governing requires each individual to step up and lead, to take responsibility both for their own work and for the performance of others. They live outside the box because there is no box to contain them, only values to guide them. At GE/Durham, for example, each person works in, and is responsible for, their own team, but each also belongs to shopwide councils that address larger issues of the unit. Council membership rotates so everyone is exposed to and responsible for the complete range of functions in the factory. By making each employee both individually responsible and accountable to the group, self-governing cultures encourage a leadership orientation.
Blind obedience and informed acquiescence cultures tend to build their workforce skills through rote learning and through training programs, respectively. While these approaches to worker knowledge can be an efficient way to disseminate black-and-white, easily quantifiable information—like maximum pollution levels or safety performance metrics—they don't do enough to prepare people to wrestle with the infinite shades of gray they now face in the course of a working day. You cannot train someone to struggle in the Valley of C, but you can develop their ability to do so. You train a dog, but you develop leaders.
Thomas R. McCormick, director, global ethics and compliance for the Dow Chemical Company and one of the true thought leaders on the relationship between values and business performance, told me a story about how Dow is investing in the education of its team. "We are asking every supervisor in the company—there are about 2,000 of them—to have a face-to-face education session with their employees to take them through three or four scenarios (such as conflicts of interest), really tough, gray-area issues that would be relevant to that work group, whether it is a business or a function or a geographic location or whatever," he said. "The goal is to really have people talk through some of these areas where there aren't any good black-and-white answers, and collectively explore how they would handle the situation. It's educational, but it also sets a tone. They see their leader talking through it with them, and that reinforces what leadership expectations are. All of that is designed to help people manage the gray, which you can only do by making values-based decisions."[236]
The conditions of the networked world make pushing vast amounts of information to workers' fingertips cheap and easy, but it must come with a concomitant dedication to education. At GE/Durham, it means multiskilling. At Sewell, it means the rich stories, told again and again, and modeled in everyday behavior.
There are times when individuals can join an organization but not embrace its goals. In groups governed by informed acquiescence, these people can skate by or game the system to some degree, fly under the radar so to speak, and create drag on the system. They might even be part of the 2 percent that compliance efforts are currently focused on containing. In values-based self-governed groups, however, they can't fool the culture; the vigilance of the group identifies them and makes them feel uncomfortable. In a self-governing group, the person who does not truly align with the values of the group will not feel at home, and be ejected. The overcharging technician at Sewell learned that lesson the hard way. Thus, the 98 percent take care of the 2 percent, ejecting the non-aligned before they can create the kinds of compliance failures that can bring a company down.
Greater than simply preventing compliance failures, though, the universal vigilance of a self-governing group maintains alignment over time. If someone is not performing, it becomes incumbent on everyone else to raise the issue and then solve it as a group, with a focus on fixing the problem, not assigning blame. With everyone accountable to the team's success, slacking is not tolerated.
Global fast-food giant McDonald's organizes itself more like an ecosystem than an organization with strong central control. CEO Jim Skinner likens the culture to a three-legged stool supported by the franchises, the suppliers, and the vast employee pool. But it is a strong commitment to values that keeps all these various and dispersed stakeholders aligned with a common purpose, and the culture it breeds exerts a similar self-regulating influence on all levels of the organization. "People talk about 'tissue rejection,'" Skinner told me. "It occurs when people join us at too high a level from outside the organization without paying their dues, if you will, in order to understand our culture. It's not really a rejection by the business itself, but by our culture. People in a sense say, 'I don't care how bright you are or what capabilities you have; you have to be able to understand all of what we stand for.'"[237]
Cultures like these are self-enforcing, and this reduces the need for external management controls. Honest feedback becomes the name of the game, and this form of self-governance takes advantage of the collective intelligence of the group to regulate the culture as a whole.
Reputation, consistency, promise keeping—all the factors we've discussed necessary to achieve personal and corporate continuity in a transparent world—stem from the ability to make decisions based on principle, rather than what is immediately pragmatic. Values-based self-governing cultures are inspired by mission and steered by values. They enshrine long-term principles in place of short-term thinking, and challenge each decision maker to fulfill those principles in every act they perform. Decisions made on the basis of sound principles provide a steady rudder in stormy seas.
Like the trust, belief, and values it relies on, values-based self-governance speaks to the higher self. It governs in the name of principles and values, not rules, and only principles and values have the ability to inspire. Isn't it more inspiring to think that you are your own legislature? More inspiring to self-govern rather than acquiesce to someone in authority?
There is a touch of inspiration in all these concepts. Values-based self-governance relies on structures and rhetoric that speaks to people. It speaks the language of should rather than can. Inspiration comes from holding a set of beliefs, and we all want to believe in what we do. This is why values-based self-governance provides such an outstanding model for the future. It calls us forth to marry our highest goals and aspirations to how we do what we do each day.
If values become the engine of culture, self-governance provides the scaffolding that allows everyone throughout the hierarchy to embrace and put into operation those values daily in everything that they do. Different subunits, like the various specialties at Methodist Hospital System, can internalize those values in ways that are specific to their form and function; global businesses can extend horizontally across borders, open back-room operations to embrace and collaborate with new partners, and diversify in myriad ways while maintaining the integrity of their missions; and the myriad combinations of freelancers, consultants, full-timers, telecommuters, and other thinly bound people who make up the workforce of today can align more tightly around common values. Since values provide a stronger, more adaptable navigation system than do rules and procedures, values-based self-governance provides a system that allows an organization to grow, adapt, mutate, and evolve in the marketplace without losing sight of its core mission or straying too far from its chosen path.
Cultures stay healthy only if they pursue and stay true to their missions, a purpose beyond themselves, a noble mission. Culture means journey. Because cultures are alive—growing and changing as they adapt to challenge and celebrate success—they are in a constant state of becoming. To embrace the notion of doing culture, then, means to accept that you are on a journey, every day, to build stronger connections with those around you. Embracing the importance of self-governance—that how your group interrelates begins with you and how you do what you do—is the first step on that journey.
You don't need a memo from headquarters that says "We are now a self-governing company" to begin to change the culture around you. You can begin by getting your hows right, by extending and engendering more trust, by being more actively transparent, by aligning more closely with group values and acting from those values in everything you do, and by defining your journey—whether it be laying bricks or managing a team—as one with a mission greater than success. Pursuing a noble mission can take you—and your organization—on the journey from what to how, from rules to values, from defense to offense, from informed acquiescence to self-governance, from brand awareness to brand promise, and from a road to success to a journey of significance that should (in the J&J Credo sense), in turn, beget success.