RN #004 Culture capital: How culture drives financial performance

Professional service firms and consultants have long struggled to present a simple way of saying that when clients invest in cultural transformation initiatives it leads to direct increased financial performance. The truth is there are cultural proxies one can use to determine how an increased organizational culture is a fundamental driver of financial performance.

Watch this: if you can measure dysfunctional team culture (cultural entropy) you can use that as a proxy to calculate return on investment.

A number of studies by renowned researchers have investigated the relationship between culture and the bottom line. Eric Flamholtz from the University of California undertook a detailed study of the two variables and came to a conclusion that there is a direct correlation between cultural agreement (a proxy for values or cultural alignment) and the company’s EBIT (Earnings Before Interest and Taxes). The diagram above illustrates Eric Flamholtz findings.

By definition, culture is “the way things are done here.” It is who you are, and what you do. It is the ‘being’ part of your humanity.  Culture is defined by the values, beliefs, and behaviors of the current leaders of an organization, and that intends defines the organizational culture; and the culture shapes policies, systems, processes, practices, results and financial performance of the organization.

Cultural capital by extension is a measure of the value of that behavior ( the way things are done here). If your cultural capital is weak, it becomes obvious that there is a dysfunctional team culture. As I write as much as there is no accurate universal measurement of cultural capital one can use a cultural entropy score (the degree of team dysfunction) as a proxy for measuring cultural capital. According to the Barrett Values Centre a high Cultural Entropy score is identical to low cultural capital, and low Cultural Entropy score equates to a high cultural capital.

It is therefore refreshing to note that at the end of Eric Flamholtz’s study he stated that:  “Organizational culture does have an impact on financial performance. It provides additional evidence of the significant role of corporate culture not only in overall organizational effectiveness but also in the so‐called “bottom line.”

We have now moved one more step closer to establishing a strong positive correlation between culture alignment and superior(sustainable) financial performance.

At Nimdier we work with Top Teams (Senior Management and Boards) to measure, and assess team culture to improve performance. We have developed the Adinkra Barrett Cultural Transformation Model to do just that.