True “Best Practices” Must Come From Within the Company’s Culture

The successive thud of scandal after scandal over the past year – Enron, Tyco, Adelphia, and others – has left investors and senior managers alike feeling that the only prudent course is to take cover until the bombardment is over. Now, with the passage of the Sarbanes-Oxley Act, and with much tighter regulation of companies, boards and auditors in the offing, it may be time to lift our heads above the parapet to survey the changed landscape.

Readers of the business press, looking at the run of articles from the “high net” culture of, say, 1998, are stunned in retrospect at the ardor with which previously held and tested economic and business theories were simply discarded in favor of wishful thinking disguised as “new economy” verity. When economic historians write about this period, they will struggle to explain how so much of what we thought we knew – about good business practice, about the monetary value of things, about what motivates business people – was not only mistaken, but completely wrong.

It should not surprise us, then, that a major casualty of the scandals has been the deference, amounting to worshipful awe, with which senior management figures were regarded during the nearly twenty-year period from 1982 – 2001. That some – or many – of these giants may have committed serious lapses of judgment, to say the least, is only the beginning of the story. For those managers who did not aspire to godlike status, but simply tried to run their companies well – and are now confronted with much tougher regulation as a result of the sins of their peers – the question has to be: what to do now?

Throughout the 1980s and 1990s, all CEOs knew – or thought they knew – that one indicator of good corporate management was the willingness to bring in a benchmarking consultant or a bunch of six-sigma black belts to be sure that the company was following “best practices” in various aspects of its operations. This approach led to a “seal of approval” culture that enabled management to tell the board and shareholders that “best practices” were indeed being followed by the firm and that, by implication, everything was being done to maximize shareholder value.

But when the supposedly leading companies – those held up as models in the benchmarking exercises – have been pilloried as near-criminal enterprises, what should senior managers do? In a world where the standard-setters have been revealed as incompetent, venal or corrupt, how should they determine what standards to follow?

One solution might be to remove the opportunity for discretion (and, potentially, for abuse). Sarbanes-Oxley attempts to legislate best practices by imposing one-size-fits-all regulatory requirements on US-listed companies. Beyond the requirements of the law, however, we need to look again at how “best practices” is defined – for each firm. In the past, it was sufficient to say that you looked to the example of the industry leaders. In the future – that is to say, from now on – a good working definition of best practice will be behavior that is consistent with what you knew you should have been doing all along. The struggle between a rule-based system and a principles-based system isn’t over: Sarbanes-Oxley is full of rules, but the best companies will be those that honor principles.

For this reason, the future of consultants who sell best practice “solutions” to companies does not look bright. Unlike benchmarking, true best practices can’t be sold as a product or grafted on from outside. Best practices must be owned, and they can only truly be owned if they emerge from a firm’s own culture. If the corporate culture doesn’t adopt it, the most articulate best practices “package” will be discarded once the consultant has walked out the door with his or her fee.

In any company with an authentic culture, there are individuals who aspire to a best practice standard that is rooted in the culture – the highest expression of “the way we do things here.” The job of senior management is to identify these leaders, to raise them and their values up within the corporate culture, and to provide incentives by which their standards may be disseminated throughout the firm.

For example, in the current very negative business environment, investment banks are trapped in a game of “chicken” with each other. Each is waiting to see who will blink first and reduce staff in order to bring costs into line with reduced revenues. But the long-term costs to the firm’s culture and franchise of sacrificing its professionals are profound. If mass layoffs are to be avoided, a key component of survival for a securities firm in a low-revenue environment must be to understand what it takes to enable deals to be done at a lower cost. It is, therefore, more important than ever for senior professionals to be able to transfer their skills to more junior staff. The question is how this transfer process can best be accomplished. What, in other words, is the ‘best practice’ to which a firm should aspire with regard to supervision of junior staff so that they can execute deals more independently, at lower cost, without sacrificing professional quality or integrity?

This process is not a simple one. The identification of leaders within a firm necessarily involves judgment of a high order, since the noisiest or most dominant people may not be the ones to set up as role models. Furthermore, even individuals who embody best practice may not be able to teach their skills and values to others. A sensitive and comprehensive process of facilitation, combined with sponsorship at the highest levels and a compensation structure which rewards “best practice” behavior, is essential.

The result of this process should be a corporate culture that views best practice as an authentic part of its mission, rather than as something grafted on from the outside. Most importantly, such a best practices culture is also a process that is owned by the firm as a whole, from its newly hired trainees through to its senior management, and that is by its nature self-strengthening and self-renewing.

Contrary to the popular image, then, the passage of Sarbanes-Oxley does not mean that corporate management is now prohibited from using its own judgment. Rather, the need for good judgment is more crucial than ever before. In the new environment, judgment – being able to articulate how you “know what you know” and to act on it – will mark the truly successful companies that own their own values and culture and are constantly applying an authentic “best practices” standard to them rather than simply toeing the legislated line.

William F. Jarvis is Managing Director of Greenwich Strategic Advisors.
william.jarvis@greenwich-strategic.com; and will lead a course in Due Diligence
January 16-17, 2003
New York

See the course agenda, description, and special offer!