A fragmented corporate culture is the villain of the piece; The business structure is such that employees have little interdepartmental contact

June 12, 2014 5:44 pm

A fragmented corporate culture is the villain of the piece

By Gillian TettAuthor alerts

The business structure is such that employees have little interdepartmental contact

Everybody loves to boo and hiss a corporate villain; especially amid scandal. Five years ago the hunt was on for baddies in banking. Then when BP caused a terrible oil spill in the Gulf of Mexico, there was more hand-wringing – and a search for villains.

Now, the chase is on again, this time at General Motors. Last week Anton Valukas, a former federal prosecutor, released a 315-page report on the carmaker’s scandalous failure to withdraw faulty ignition switches from several of its models, even though some employees knew about the technical problems for a decade.

Before the report emerged, some observers expected that Mr Valukas would reveal dastardly villains. After all, it was claimed, it was hard to imagine that corporate mistakes on this scale could have occurred for so long – and caused many needless deaths – without deliberate malfeasance.

Mr Valukas, however, blamed events not on an evil plot, but on the “silos” created by GM’s profoundly fragmented structure. The group’s culture and organisational matrix was so dysfunctional, he said, that employees failed to pass crucial information to each other or take responsibility for flaws. “GM personnel’s inability to address the ignition switch problem for over 11 years is a history of failures,” observed Mr Valukas.

That will be of little comfort to the families of the deceased; it is also unlikely to appease politicians calling for GM to be punished. But if Mr Valukas is correct – and nobody has yet proved otherwise – his report makes disturbing reading for the corporate world beyond Detroit.

GM is certainly not the only large company cursed by silos. Numerous institutions are marked by internal fragmentation, leading to tribalism and tunnel vision. A look at recent corporate scandals reveals repeated examples.

Take BP. When investigators dug into the 2010 Gulf of Mexico oil spill, they discovered that technical experts involved in day-to-day operations had known about the problems besetting deep-sea drilling for years. Yet no one acted. The specialist rig engineers had little direct contact with the “safety specialists”, who were supposed to control risks; they sat in different organisational silos, in much the same way that GM lawyers (who monitored accidents) were from the engineers (who built the cars).

General Motors was so dysfunctional that there was a ‘failure to understand, quite simply, how the car was built’

Or look at finance. When massive losses erupted at companies such as AIG, Merrill Lynch, Citigroup and UBS , many blamed greed or deliberate deception. That was sometimes true. However, another crucial problem was that financial groups were so fragmented that it was almost impossible for managers, regulators and employees to connect the dots – and see risks.

A 2010 report by UBS into the $19bn it lost during the financial crisis offers fascinating parallels with GM. At the Swiss banking giant, the silos were so entrenched that nobody knew the full scale of its exposure to subprime securities; at GM, the organisation was so fragmented that, Mr Valukas notes, there was a “failure to understand, quite simply, how the car was built”. At both organisations, risks were missed for years because they were misclassified at an early stage.

Thankfully there is some good(ish) news. At GM, senior managers have finally recognised the problem. “We need to make sure that we break down those organisation silos,” Mary Barra, chief executive, told staff last week. Elsewhere there are also plenty of ideas about how to break down barriers – some of which are even being implemented.

Unilever recently launched a social media platform to enable employees to swap ideas and sound alarm bells. Facebook is working to prevent its specialist engineering teams from becoming introverted by forcing staff to interact with colleagues elsewhere. Syngenta, an agribusiness giant, is trying to encourage more lateral thinking by moving from a system of dividing business units into silos created by its scientists – “seeds”, “pesticides”, fungicides” and so on – into one where teams are also organised around consumer labels, such as “wheat” or “corn”.

Yet, the truth remains that really breaking down silos is very hard; particularly at companies as large and rich in deeply entrenched traditions as GM. Ms Barra faces a very tough challenge – one that is much harder than “just” finding a few villains.


About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

%d bloggers like this: