When Something Is Rotten

The best defence against "infectious greed" is a healthy corporate culture

When WorldCom revealed in June that it had fiddled its accounts to the tune of $3.9 billion in the 15 months to the end of March, it was the tip of an iceberg. Employees have since alleged that the practice had been going on for much longer. Moreover, malpractice was not confined to the accounts department. WorldCom's sales staff were also fiddling the figures. In February three WorldCom salesmen at the company's Arlington, Virginia, office were suspended in a case involving millions of dollars of overpaid commissions. The company's Chicago and Baltimore offices were investigated at the same time.

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Former employees say that a practice known as "rolling revenue" was endemic in the sales hierarchy of WorldCom. The practice involved registering a single sale many times over, even if it meant paying salesmen several commissions in the process. At WorldCom, which filed for Chapter 11 bankruptcy this week (see article http://www.economist.com/displayStory.cfm?story_ID=1250514), increasing reported revenues came above all else.

It is a pattern repeated elsewhere. When James Bingham, an assistant treasurer at Xerox, first blew the whistle on the photocopier company's accounting tricks in 2000, he admitted that he had initially been an enthusiastic participant in a charade that led the group to overstate its profits by $1.4 billion between 1997 and 2001. "Sometimes I fed the beast," he said. "The beast was a Xerox culture that created an illusion of value."

Early this month Xerox admitted in a regulatory filing that, in an effort to push sales at its Indian unit, it had made "improper payments over a period of years" to government officials there. In 2000, when the bribery is said to have stopped, payments amounted to "approximately $600,000-700,000". Xerox is also investigating allegations that transactions by its South African affiliate were "improperly recorded" and that a South American division made "improper payments".

Last week Alan Greenspan, chairman of America's Federal Reserve, spoke of the "infectious greed" that had gripped much of American business, a greed that ultimately pushed companies such as Enron, Global Crossing and now WorldCom into bankruptcy. Greed is not the only infection that can grip a corporation. If, in the 1990s, Arthur Andersen (auditor of Enron, Global Crossing and WorldCom) had been less envious of the high-rolling consultants at its former twin, now called Accenture, and had not gone chasing blindly after their business, it might now have a future beyond the end of next month, when it is to cease operations.

Infections spread via an organisation's culture--meaning the set of rites and rituals, symbols and signals that give it its unique character. Culture is the "way things are done around here"--the HP Way, for example, the open-plan, walkabout management style laid down in the 1950s by Bill Hewlett and Dave Packard, a style that still imbues the company today. But culture is a concept that many business leaders find difficult to grasp. They consider it too soft to be managed--even though its importance is more appreciated now than it was when one executive some years ago asserted that "the only culture round here is in the yoghurts in the canteen." GOOD FOR MORE THAN THE YOGHURT

"A corporation's culture is what determines how people behave when they are not being watched," says Tom Tierney, a former managing partner of Bain, a consultancy, and author of "Aligning the Stars", a book about the culture of professional-service firms. Cultures are formed over time, by big events and small ones. The $110 billion merger of AOL and Time Warner has tried, so far disastrously, to weld a nifty e-culture to a sedate media business. The departure of Bob Pittman, the group's chief operating officer and an AOL man, marks a return to dominance by the old-media culture (see article http://www.economist.com/displayStory.cfm?story_ID=1250924).

At the best companies, the way managers interact helps to set the tone. The culture of Jack Welch's General Electric was forged to a large extent by what have been described as something "close to revivalist prayer meetings", gruelling question-and-answer sessions with managers at the company's training centre in upstate New York. Wal-Mart's culture of penny-pinching zealotry is reinforced by the company's weekly Saturday morning meetings for managers and their families--part evangelical revival, part corporate Oscars.

"Once you as CEO go over the line, then people think it's okay to go over the line themselves"

Cultures are influenced by the sort of people a company recruits. Enron had a policy of recruiting fast-track MBA "talent" into the culture of an electric utility. It didn't work, and the firm ended up promoting the pushy over the prudent. But the biggest single influence on a culture is the company's boss. Lawrence Weinbach, head of Unisys, an IT-services firm, told a recent meeting of leading American chief executives: "Once you as CEO go over the line, then people think it's okay to go over the line themselves." Employees set their behaviour by the pole star at the top. If they have been disoriented in recent years, it is partly because there has been an unprecedented turnover in bosses.

First came the boom in mergers (which inevitably throw one of the merging companies' bosses out of the top chair). Many of America's downfallen (Tyco, Global Crossing, WorldCom) were hastily bundled together amalgamations of companies that lost their distinctive ways and found nothing to replace them. Then came the dotcom bust, which forced many chief executives to fall on their swords. Now, says Challenger, Gray GBP Christmas, a headhunter, "we are seeing CEOs leaving under a cloud of suspected or substantiated wrongdoing."

All this is unhelpful to the growth of a healthy culture, "the key to which is consistency," says Dominic Dodd of Marakon, a consultancy that has advised some of the world's most consistently successful companies, including Boeing, Dow Chemical and Lloyds TSB. One recommended aid to consistency is "the broken record", the mantra repeated over and over again by the boss. Sir Richard Branson, the unconventional head of Britain's Virgin group, has a few such phrases; one is, "common sense counts for way more than pure intellect." A favourite saying at Cadbury Schweppes is "the tyranny of "or' and the beauty of "and'." Easily remembered, phrases like these set the tone for an entire organisation's behaviour. But, says Mr Dodd, bosses need to know when to change the record. Jack Welch, he believes, was a master at that.DRUG CULTURE

Mergers and a change of chief executive do not necessarily cause a culture to rot. Look at Aventis. Created in 1999 by the merger of two chemicals
companies--Germany's Hoechst and France's Rhône-Poulenc--it not only integrated two firms of different nationalities, each with over a century of its own traditions, but also transformed the industries they were in. Since 1999 Aventis has moved to being a pure pharmaceuticals firm. It set up a new head office in Strasbourg (historically tossed between French and German rulers) and it relocated its three inherited American HQs to one base in New Jersey.

At the core of its cultural change was an unusually close relationship between the company's two heads: Jürgen Dormann from Hoechst and Jean-René Fourtou from Rhône-Poulenc. Their rallying cry--"we want to create something new"--seems to have had the desired effect on the group's 75,000 employees: Aventis's earnings per share are growing by some 40% a year, and its sales by 12-15%.

It is no surprise that Mr Fourtou was picked to replace Jean-Marie Messier, the disgraced boss of Vivendi, a Franco-American cultural and commercial disaster. When your culture is putrid, recruiting a chief executive from outside is not a bad idea. Challenger, Gray GBP Christmas says the biggest challenge facing corporate America is "finding replacement CEOs who are above reproach yet still able to lead companies back from the depths."

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