When Culture Meets Financial Theory

How often have you seen this: A company makes a big public announcement regarding a new strategic initiative designed to bring wiz-bang methods and profitability to the way the company does business.  Investors are intrigued because what the company has announced seems eminently reasonable and conforms to what the analysts were taught in business school. (Of course, the consultants that the company is using all went to the same business schools, so there is a bit of circular reasoning at work here, but leave that for another day.)  Following the initial splash of the announcement, investors clamor for more details on the big new initiative.  What they are usually greeted with are phrases such as “It’s still early days”, “It’s too soon to see anything out of this” or “This is a big project that touches many areas of the company and it’s very difficult to measure”.  Eventually, the amount of information about the project coming out of the company slows to a trickle and then stops.  In the noise of the market, investors forget about the project and look at other things.  No one ever really finds out if the project had an acceptable return on investment.

What’s going on here?  It’s not as if the company is no longer working at trying to implement the new project.  It’s not as if they don’t have internal measures that gauge the progress of the project.  If the news were great, would the company stay silent on the issue?  Maybe, but probably not - they would be much more likely to be trumpeting the triumph of new technology.  I would suggest that what is happening is the corporate version of a shell game: the company would prefer that you direct your attention to something else so they don’t have to explain why their vaunted project is not living up to it’s initial promise.

Large, radical new corporate initiatives almost always represent a break with existing corporate cultures.  I have a favorite saying about this situation: “When culture meets financial theory, culture almost always wins”.  The corporate culture in many organizations is part of the corporate DNA and will fight off attempts to change it.  The result is generally that the big new project will wind up costing more than initially planned, take longer than estimated and do less than the original projections.  When companies start to see this, they begin to build up a barrier around the project by limiting further disclosures.  I’ve seen this any number of times.  For example, during the 1980s Walgreen embarked on a “Strategic Inventory Initiative” designed, among other things, to lessen the amount of inventory carried in the stores.  Millions were spent on computer systems to help achieve optimal inventory levels.  Unfortunately, the culture of the Walgreens store managers was that they wanted their stores to look as if they had lots of inventory.  Their culture was to never to be out of a product if they could help it.  As a consequence, inventory levels never went down.  More recently, Home Depot went through a big reorganization to centralize many functions that had previously been done at the store level, running smack into a culture that had been centered around the store managers.  The result was a lot of dislocation and same store sales that were anemic for a protracted period of time. 

I’m not here to say that corporate cultures are always right – they’re not.  Many times corporate initiatives to change ingrained methods of doing business are both necessary and difficult.  But as I look at the way such projects are disclosed to investors, and the short-lived way that investors pay attention to the projects, I think things could be better.  Herewith, a few modest suggestions: For companies – if a project is important enough to announce to the public, it is important enough to continue to report about it until it reaches maturity.  Recognize that the project will vary from its original projections and provide sufficient metrics to enable investors to judge the progress of the project.  The ability for investors to determine if an adequate return is being achieved on the company’s investment seems to me to be a reasonable goal.  For investors – make the company continue to disclose.  Have a long-term outlook when it comes to this type of project.  Try to figure out how the project fits into the overall fabric of the corporation, not just whether it sounds like something your business school professors would recommend.  

Perhaps if corporations and investors take a longer tern view of these projects both sides will benefit – after all, more disclosure about things the company thinks are important should be better for investors as well.