Corporate failures are common in growth markets, and despite the damage they can cause to shareholders, consumers and employees, they are not inherently negative. Corporate failures can serve as a mechanism for streamlining efficiencies and acting as a catalyst for innovation. However, when firms collapse due to poor governance, misconduct or cultural breakdowns, it can have devastating consequences for the people involved. These damaging outcomes often trace back to issues in company culture and the behaviour of senior management. It is therefore imperative firms understand how these factors can cause corporate failures and how to avoid these outcomes.
What Is the Role of Corporate Culture?
Corporate culture can be defined as the shared values, beliefs, attitudes and behaviours that characterise an organisation, inform corporate actions and guide the decision-making process. It can sometimes be hard to define exactly what the culture of a company is, but it is very easy to identify when it starts to turn negative and damaging. A strong, positive company culture can help employees feel empowered, encourage investment and support sustainable growth. A negative, toxic culture on the other hand can lead to a range of systemic issues which can ultimately result in corporate failure. At the heart of corporate culture is the tone from the top, which displays the example set by the board and senior leadership. If they act ethically and demonstrate integrity, then those values cascade throughout the organisation. If they act unethically or disingenuously, then the fabric of the company culture can quickly erode. Culture plays a direct and impactful role in governance and operational performance, by supporting clear information flow, enabling more robust risk management through open dialogue, and underpinning ethical decision-making at all levels.
What specific cultural and senior management behaviours drive poor company outcomes and therefore cause corporate failures?
Corporate failures can be caused by a number of different factors, both internal and external, but in many high-profile business failures, the root cause lies in leadership behaviours and toxic company culture. There are common patterns observed in these types of failures:
- Weak tone from the top
- Ineffective Leadership and short-termism
- Lack of accountability
- Absence of truth and trust
Weak Tone From the Top
When senior leadership consistently fails to demonstrate ethical conduct and integrity, they establish a detrimental and harmful tone from the top. This trickles down into a corporate culture where values are not adhered to or seen as superficial, and employees do not feel part of the overall company mission. Ambiguity and inconsistencies can weaken internal controls over time, leading to a toxic culture, enabling widespread misconduct and undermining governance.
Ineffective Leadership and Short-Termism
Companies that have a pervasive focus on short-termism are often demonstrating ineffective leadership, where immediate financial results are prioritised over long-term strategic corporate sustainability. Constantly focusing on short-term priorities can lead to critical underinvestment in areas such as innovation and employee development, as well as increasing the likelihood of regulatory risks being overlooked. This approach can also impact company culture as it enables an environment of cutting corners which disincentivises long-term planning for sustainable growth.
Lack of Accountability
A consistent lack of accountability at senior levels can result in a culture where mistakes are hidden and poor performance or unethical behaviour does not result in any meaningful consequences. This can erode discipline and compliance over time, resulting in critical issues for risk management and a direct challenge for the governance structures that are intended to ensure responsible conduct. Without any accountability, these issues will often persist and repeat themselves, eventually leading to corporate failure in many cases.
Absence of Truth and Trust
Open communication and transparent information flow are key components of a positive company culture, and an absence of truth and trust can lead to a culture of fear and hoarding of information. This can result in several critical issues such as the inability to respond to market threats, operational inefficiencies and leadership decisions based on misinformation. The absence of truth and trust throughout an organisation can ultimately steer the business towards foreseeable failures, some of which they may not be able to recover from. Collectively, these detrimental behaviours can dismantle the foundations of sound governance and prudent risk management, leaving organisations highly vulnerable to catastrophic and often entirely avoidable failures.
How Can Firms Foster Good Culture and Monitor the Behaviour of Senior Management?
The broader regulatory challenge in markets is to ensure an appropriate balance between risk and reward, and avoiding unnecessary corporate failures is a key part of this. While regulation provides a framework for compliance, the real driver for sustainable positive outcomes is the presence of strong culture and ethical behaviours within organisations. It is therefore the role of senior management to ensure that they are fostering an ethical culture that goes far beyond the basic level needed for compliance. Demonstrating and maintaining an ethical tone from the top and integrating this into the company’s governance structures and decision-making processes promotes accountability and encourages transparent communication. Effective leadership should encourage long-term strategic decisions instead of relying on short-termism to maximise immediate profits at the expense of sustainable growth. The behaviour of senior management should be monitored and evaluated to ensure that it is achieving the desired balance of risk and reward. The board, particularly Non-Executive Directors (NEDs), play a critical role in scrutinising the actions of leadership and this can be achieved in several ways:
- Performance evaluations for senior executives to assess adherence to ethical standards
- Creation and preservation of confidential whistleblowing channels
- Regular assessments to monitor cultural contributions
- Integration of monitoring efforts into the firm’s overarching risk management framework
Examples of Corporate Failures That Are Linked to Cultural Issues
In recent years, there have been several examples of high-profile corporate failures linked to cultural and behavioural issues:
- Carillion: the collapse of Carillion in 2018 was due to an aggressive overexpansion strategy which led to high debt levels and overextension, coupled with systemic issues of governance and operational mismanagement. A UK Parliamentary report called it a story of “recklessness, hubris and greed”.
- Boeing 737 Max: the 737 max crisis exposed serious governance issues and accountability failures at Boeing, leading to the widespread grounding of planes. Investigations revealed that internal controls were ignored and regulatory reporting levels were inadequate. There were no meaningful mechanisms in place to challenge poor decision making and the cultural breakdown allowed critical engineering decisions to be made unchecked.
- Wirecard: known as one of Europe’s biggest corporate frauds, the Wirecard scandal was enabled through a culture of secrecy and denial. Whistleblowers and journalists were silenced and dismissed, internal trust was eroded and replaced with fear and misinformation. Senior leadership consistently denied any wrongdoing for several years which exacerbated the damage and fostered widespread deception throughout the organisation.
Contact us today to learn more about how Novatus Global can support you in responding to cultural and leadership challenges within your business.
