8 minute read 10 Dec 2018
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Six ways CEOs transform culture to drive change

By

John de Yonge

Ernst & Young LLP EYQ Global Markets Insights Director

Analyst and thought leader focused on disruption, sustainability and megatrends. Proponent of innovation for meeting global resource challenges. Skier. Fly-fisher. Tae kwon do black belt.

8 minute read 10 Dec 2018

Our CEO imperative report reveals how CEOs are trying to transform their organization’s culture – and the gaps between planning and doing.

The business truism that “culture trumps strategy” gains new relevance and urgency in today’s rapid transformations. Where strategy articulates what an organization wants to achieve and how it intends to achieve it, culture manifests itself in what its people actually do. The gap between the two can be wide. And the inertia of the incumbent culture often sinks lofty corporate ambitions.

As the pace of change accelerates and disruption upends the status quo, solving the culture problem becomes imperative. Corporate strategy must both respond to immediate disruptions and initiate disruption to drive the next phase of growth. And while innovation and digital transformation enable this dual strategy objective of seizing the upside of disruption, culture must deliver.

For this reason, creating a more agile and innovative culture is a near-universal objective — and challenge — for the participants in EYQ’s CEO imperative study. “We are working toward a more open and more adventurous culture in relation to taking a risk,” says one of the participants. “We were very profit-and-loss, what-are-we-making-now focused, and have come to understand that culture could be about creating innovation. This creates a more dynamic workforce that helps to make us more bullet-proof long term,” recounts another CEO.

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Six culture transformation imperatives

From the more than 65 hours of CEO interviews conducted in our study, a set of six culture transformation imperatives emerge. These are the areas where the CEOs are investing significant resources — including their personal involvement — to drive lasting behavioral change in their organizations.

1. Instill urgency to overcome the inertia of success

Success frequently complicates and hinders the objective of culture change. A long track record of past success — such as the ones established by the Global 5000 companies in our study — can engender complacency because it seemingly validates the current culture, even as disruption demands new attributes for future success.

“You can never fall back into the comfort zone and think that you will continue to be successful, as the things that made you successful in the past are not necessarily the things that are going to make you successful going forward,” observes one CEO.

Escaping this inertia requires the CEO to instill the urgency of disruption throughout the organization. “People think they have two to three years to prepare for this, but disruption is here and now,” a CEO respondent warned.

A large majority of CEOs in all regions say that their companies set the expectation that innovation is part of every employee’s job. A significantly higher percentage of CEOs in the Americas (89%) and Asia Pacific (81%) assert this than their EMEA (68%) counterparts.
 

2. Bring the outside in to change ways of thinking

Changing how an organization perceives the threat of disruption and seizes on innovation opportunities can’t be achieved in isolation. Leaders and teams must get out of their comfort zones and interact with outside innovators to recognize their company’s culture gaps and identify the new attributes that need to be cultivated inside the organization.   

The CEOs in our study describe a variety of initiatives—from high-impact interactions to long-term relationships—to promote a culture change by bringing the outside in. Some CEOs put their executive teams through innovation workshops. Others lead tours of Silicon Valley and arrange meetings with venture capitalists. Many maintain structured relationships with university incubators and external innovation hubs. “It is an ongoing effort to re-educate our executives and our leaders across the board, in terms of how they think,” says one of our study participants.

3. Learn positive lessons from failure

Changing the organizational perspective on failure from that of something to be feared because it results in professional demerit, to the natural outcome of experimentation fosters agile product development, facilitates diverse thinking and encourages new idea generation.

Although companies have been encouraged to “celebrate failure” for some time, giving employees permission to take calculated risks, experiment, fail and learn from it remains a corporate cultural challenge. “It’s a culture issue that we are struggling with,” confirms a study participant, adding “unless one embraces failure, it's difficult to innovate.”

The CEOs in our study point to several steps that have helped move the culture toward are more productive view on failure:

  • Communicate consistently throughout the organization in a way that recognizes that failure is an inevitable part of risk taking. Communications should not only celebrate successes, but also discuss why an idea or effort didn’t work and explore the lessons learned from them.
  • Create a separate governance process for moonshot ideas, such as an innovation board that takes responsibility for assessing risky projects, so that responsibility doesn’t rest with just one person. It is essential that this process “acknowledge that there are inherently unresolvable uncertainties in new businesses,” notes one CEO.
  • Fail more quickly — with less cost and impact — by creating separate units for innovative new businesses with dedicated leadership that can operate nimbly and entrepreneurially. Also stage gate innovation through a methodology that constantly evaluates an idea from inception to commercialization.
4. Remix talent to drive change

Changing the organization’s talent mix provides another important lever for effecting culture change. Our CEO participants report changing recruitment criteria to favor innovativeness, openness to change and entrepreneurialism. They also seek to attract talent who have experienced disruption in other industries and come without the sector’s ingrained biases and assumptions.

According to one CEO, “People who come from sectors that have already experienced this change and have no industry sector history are an extremely valuable asset. We believe it brings a culture into existence where topics and things are more quickly questioned and scrutinized.”

More difficult, and often necessary, is making changes to the executive team who no longer represent the company’s culture. “We changed some of our executive team that were more locked in the old model and who had tendencies to not be able to give authority or allow personal ownership to flourish,” recounts one the CEO participants.

5. Measure and incentivize to change behaviors

Culture change founders without accompanying changes to personal performance metrics and incentives. Clearly defining the behaviors that lead to rewards and promotion aligns the organization to the desired culture.

For example, one executive credits a variable pay program based on a monthly scorecard for yielding “a dramatic change in our culture and our business strategy and a higher awareness of how important it is to think two or three steps ahead of where we are today.” Another CEO points to a C-suite recognition and a high incentive for important innovations as key to bringing the company to embrace an innovation culture.

6. Move from “doing” to “being”

Culture change aims to remake the organizational DNA so that innovation, risk-taking and agility become organic organizational attributes rather than remain top-down initiatives. “Everything boils down ultimately to culture, and the ability of people to move ahead and think of new solutions without everyday reminders from the top,” says one of the study’s CEOs.

“We are hoping that the outcome will be that people will embrace change, and actually look for change, rather than sitting there and waiting for change to impact on what they do,” another CEO observes.

Some of the questions CEOs may want to ask themselves as they  move from “doing” to “being” include:

  • Does your culture hinder or accelerate the transformations you need to seize the upside of disruption?
  • What culture lessons can you take away from other sectors that have already experienced disruption?
  • How do your talent criteria, metrics and incentives drive your culture objectives?
  • Are you doing culture projects rather than making the fundamental changes?

Summary

CEOs have a role to play in changing a corporate culture, but success ultimately comes from actions, not words.

About this article

By

John de Yonge

Ernst & Young LLP EYQ Global Markets Insights Director

Analyst and thought leader focused on disruption, sustainability and megatrends. Proponent of innovation for meeting global resource challenges. Skier. Fly-fisher. Tae kwon do black belt.