(This is the second of two posts on this subject; the first dealt with why you should consider using culture as a key element in deciding whether to invest in a company, and how to gather the information about it.)
Toyota: A Cautionary Tale About Culture
If you keep a good eye on news stories affecting your investments, you will sometimes find stunning evidence of how their culture has affected performance, both on the positive and negative side. Take Toyota, for example: in August 2009 the news about their quality problems, resulting in crashes, made headlines for a stunningly long time and both their Lexus and Toyota brands were affected. It all began in my home town of San Diego, when a tragic accident happened involving an off duty police officer and his family, where he could not stop the car from accelerating. He and three others in the car died. Unfortunately this was only the beginning: in January 2010 Toyota was forced to announce it was suspending the sale of eight of its best-selling vehicles, a move that cost the company and its dealers a minimum of $54 million a day in lost sales revenue. In the end, Toyota paid a huge fine for covering up quality issues:
“In March 2014, Toyota agreed to pay a fine of US$1.2 billion for concealing information and misleading the public about the safety issues behind the recalls on Toyota and Lexus vehicles affected by unintended acceleration.”
Having been a Toyota fan since owning an incredibly reliable car of theirs some time ago, I was curious how a company with such a good reputation for quality could fall so fast…until I read a shocking article about the culture at their HQ in Japan in the Los Angeles Times. Here is a quote:
“For the Toyota Man, the demands involve following rigid military-style rules that teach workers to sacrifice individuality for the good of the group. The guidelines dictate nearly every facet of employees’ day — how they turn corners while walking on company property, where they eat their lunch and even how they conduct themselves at home.”
Can you imagine a US company which dictates how you walk down the corridor, exactly how you hold your arms while turning corners? This is what they did. Now extend this to the overall culture of the company and imagine how this level of control would affect you if you worked there. Would you feel free to bring up…quality issues? Any issues? Does this sound like a culture in which problems can be openly discussed? A place you would actually like to work? Not in my view. Now we cannot say for sure that this culture created the quality problems but one thing is certain: treating workers like this is no culture in which I would invest. Where is the freedom for creative and enthusiastic participation in the company’s operations, when even the simple activity of walking is carefully regulated? Not only that but this scrutiny extended to what employees did outside the workplace, like at home. Based on this, I would steer clear of that as an investment until I was sure their culture had shifted…which may have started. Just in the last few days Toyota has reported bringing in foreigners, including Americans, to the very top management ranks in Japan. About time. Guess what will happen if Americans are asked to walk a certain way down the corridors of HQ….!!
BMW’s Successful Culture:
In contrast to Toyota, but in the very same business, BMW is an example of how to do things right, culture-wise. The Munich-based company is a world leader in luxury automobile and also in motorcycles. I had the good fortune in 2011 to interview its next CEO, the brilliant Harald Krüger, when he headed Personnel. I had asked for this interview because I was writing a book on work culture and I had read something about the company: that it deliberately keeps a lid on top management pay in order to protect its relationship with its workers (an activity it calls “personnel politics”). How about that? Which US auto company head ever said something like that? I can save you time with a Google search: the answer is none. Why is this important? Because, as I said in the last post, culture is everything when it comes to companies executing their strategies successfully; therefore, anything which undermines culture, like over the top CEO pay for less than stellar performance, is a bad, bad thing. BMW’s whole top management team (7 people) together made only 18 million Euros in 2010. A single US CEO would scoff at 18 million Euros (about $19.08 million as of today), especially to head a company the size of BMW.
Guess what the return on investment was for BMW’s decision to pay careful attention to their “personnel politics”? Their next CEO told me BMW rocketed out of the Crash of 2008-9 not just because of Asian demand but also because the workers had been treated so well during it, that they jumped on board willingly for the rapid rebound.
Culture is a powerful driver of performance. It can make or break a company and has done so many times. Investors who don’t so their utmost during due diligence to look at this aspect of what might affect their investments, are missing out….big time.
David’s book (co-authored with Professor Sir Cary Cooper) on the Crash of 2008, the effect work culture had on this, and how we can learn from this to do much better, is titled The High Engagement Work Culture: Balancing ME and WE and is available worldwide from Macmillan. It includes an exclusive interview about work culture with BMW’s next CEO, Harald Krüger. Visit David’s website for all things engagement, culture and emotional intelligence at work: www.davidbowlesphd.com
Additional disclosure: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities. Before buying or selling any stock you should do your own research and reach your own conclusion or consult a financial advisor. Investing includes risks, including loss of principal.