Where Is Culture
on the Balance Sheet?
This summer TiER1 went through a pretty complex transaction to create an Employee Stocks Ownership Plan, or ESOP. The ESOP is a trust that now owns the stock of the corporation and will issue it incrementally to employees over time.
In the process of constructing the sale to the ESOP we had lengthy conversations about the value of the business with the trustee, lawyers, investment bankers, and valuation experts. We’re largely a professional services company and like other professional services companies there aren’t a whole lot of assets that show up on our balance sheet. We don’t own buildings or major capital equipment or inventory. Like many companies we believe our people are extraordinarily valuable because they in fact are the business. But beyond the individuals, when discussing what makes our company valuable, I continually found myself saying that the most valuable asset inside our company was our culture.
Perhaps contrary to what many financial experts believe, culture is not “fluffy.” Managed well, it can be a real asset that creates real, significant financial growth. How does culture create value for us? For starters, it helps us attract and retain incredibly talented professionals and—more importantly—good human beings who care about each other…and are encouraged to do so. We recently asked our employees in a survey: “What would you tell prospective recruits about why TiER1 is a good place to work?” 81% of the respondents used a reference to culture in their response. Of those that didn’t, another 12% used the word “people.” I think that’s a valuable asset.
But culture goes beyond just attracting and retaining good people. When we get team-oriented people working in an environment of trust, it allows for better collaboration. Active collaboration with diverse expertise leads to unique, innovative, business-focused solutions for our clients; solutions that would be very difficult for less collaborative, less trusting cultures to produce. So our culture helps us differentiate and deliver better solutions. Further, a culture that actively and openly cares about people—regardless of who they are—helps create deeper, longer-lasting relationships inside and outside the organizations, leading to employee and client retention. Transparency and information sharing helps align people towards the same goals. It helps ensure decision making is efficient and effective, reducing the cost of operations and allowing us to grow and adapt rapidly. Autonomy and support allow people to bring their best talents to make an impact and encourage people to bring forward their best ideas and to take risks, leading to greater innovation. And accountability—without punishment and fear—ensures that issues surface quickly and that autonomy and initiative will lead to high performing results.
Our culture is not easy. We are a high growth, professional services company. Both of these characteristics create stress. High growth can be stressful because things are continually changing with new people, processes, and structures. Professional services can be stressful because clients—appropriately—have very high expectations. We attempt to create a culture that reduces stress—it is relaxed, open, collaborative, and fun. We do it, not because we think work should be easy but because we know it is very difficult. Our culture serves as an asset making it easier to perform at a higher level in a challenging daily environment.
Our culture is also very “human,” and therefore, very imperfect. Every individual will see aspects that they value and others that they wish were different. That’s OK because our culture—like each of us—is continuing to grow and evolve. And like any asset, to maximize its value we have to continue to invest in it, to maintain it, and to develop it. Much like a manufacturing company has to continue to invest in equipment maintenance or R&D, we have to continually invest in the maintenance and development of our culture so that it continues to yield positive returns.
In thinking through this though, it is clear to me that culture can also be a liability for organizations. Organizations can have a culture that has negative impact where the organization is very literally “paying interest” on the culture that has been created (or, often, been unintentionally allowed to form). Each time there is inefficiency due to distrust, or lack of innovation due to fear, or limited engagement (which shows up by not getting the discretionary commitment that fully engaged employees give) the organization is effectively “paying interest” for cultural traits. And these payments are huge hidden costs. Bureaucracy, distrust, fear, lack of appreciation, lack of purpose—all are cultural elements that an organization will pay for every day, every week, every month. Because these costs are often buried in the cost of doing business, they are not explicit and thus are often not acknowledged or considered real. But they are not only real, they are debilitating to any organization trying to compete, change, and grow.
It can be corrected. The debt can be paid down and culture can become a productive asset. But to do so you have to make “principal payments” on the cultural debt that exists. This is done by making investments in the intentional design of culture and in aligning leaders’ beliefs and behaviors to create a culture that produces value and doesn’t create a tax on the organization. Our own experience is that it takes intention, time, and a consistent, unrelenting commitment to key principles. But it truly has been the driver of value creation within TiER1 for over 12 years. And there is a growing volume of research proving it’s one of the best investments an organization can make.
So to my new co-owners at TiER1, I give the same advice: Take care of the asset, nurture it, develop it, invest in it. It will produce remarkable returns.