Was Organizational Culture the Key Driver in the Collapse of a Major Company?

A large (~5£ billion) publicly traded construction company, Carillion, collapsed earlier this year after months of ignored financial warnings.

In fact, because of the size of the organization and how this all went down, the UK Parliament conducted an in-depth investigation into the collapse.

The report of the Parliament investigation is quite interesting. It starts out with this paragraph:

Carillion’s rise and spectacular fall was a story of recklessness, hubris and greed. Its business model was a relentless dash for cash, driven by acquisitions, rising debt, expansion into new markets and exploitation of suppliers. It presented accounts that misrepresented the reality of the business, and increased its dividend every year, come what may. Long term obligations, such as adequately funding its pension schemes, were treated with contempt. Even as the company very publicly began to unravel, the board was concerned with increasing and protecting generous executive bonuses. Carillion was unsustainable. The mystery is not that it collapsed, but that it lasted so long..

My jaw dropped to the floor. I was speechless.

But what about the organizational culture at Carillion?  Wouldn’t it have a role too?

Absolutely!

Many stories place blame for Carillion’s meltdown on the executives, the board, and even the company’s auditors.

While all of these undoubtedly had a role in Carillion’s ultimate demise, I would say that organizational culture was the largest driver. And the Parliament agrees:

“the problems that caused the collapse of Carillion were long in the making, as too was the rotten corporate culture that allowed them to occur.”

In fact, I would argue that organizational culture was a key driver in the collapse of firms during the financial crisis a decade ago.

As part of risk management, we typically focus on the “risk culture” of an organization. But in reality, there are multiple areas of culture: collaboration, innovation, compliance, ethics, communications, and others.

Harvard Business Review article on the Six Elements of a Great Corporate Culture discusses the areas that really determine what an organizational culture looks like. Those elements are:

  1. Vision
  2. Values
  3. Practices
  4. People
  5. Narrative
  6. Place

When it comes to the people, the frequent phrase is “tone from the top.” Well, how far up should you go? Executives? CEO?

I believe the “top” should be the board. Here’s why.

If the board is interested in the daily operations of the organization, they will:

  • Push on specific topics that could be risky, have strategic impact on the organization, create financial implications, or cause regulatory issues
  • Want answers and not be satisfied with fluffy answers from executives.
  • Have robust discussions on subject matters instead of a cursory 2-minute discussion and then vote approval.

And do not think that the credentials of the board members are the end-all. After all, the Carillion board looked great on paper, as analyzed by The Financial Times. That didn’t work out too well, did it?

But if your organization does not have the greatest organizational culture, don’t stress.

Changing organizational culture takes time. And a lot of patience, diligence, and consistency.

Without all of those, any effort will appear false or fake,which will mean that future efforts to change your organizational culture  will be even harder.

What are areas in your organizational culture that should be improved? 

I’m interested to hear your thoughts on the role organizational culture can play in the collapse of this magnitude. Feel free to leave a comment below or join the conversation on LinkedIn.

If you are focused on changing your organization’s culture, especially in the risk area, contact me to talk about your situation and how you can have a game plan for taking action.

 

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