Texas Business Dispute Blog

Wednesday, November 4, 2015

Building A Positive Company Culture 101: A Critical Asset Not on the Balance Sheet (Part 2)

By Ladd Hirsch (Dallas)

I came to appreciate the importance of a positive business culture when I first started practicing law as an associate attorney more than 30 years ago – well before the advent of smart phones, tablet computers and even the internet.

An organization’s culture is not set by decree; it is established through the (often subtle) actions of its leaders.  At my firm, the name partner and co-founder built our culture through the way that he treated people.  He insisted that everyone at the firm call him by his first name and he would stop you in the hall (always with a smile) if you called him by his last name.  Despite his busy schedule, he made the time throughout the year to call everyone – from senior partners to receptionists and mail room clerks – to wish them a happy birthday on their special day.  He lived out our culture by being approachable and showing that success would be based on merit, not rank. His remarkable openness, warmth and personal attention set the tone for the firm, which resonated both internally and externally.

Company culture is even more important today, when information about companies and their practices is readily available online and in real time. Seemingly every transgression that takes place is witnessed by a camera, whether it’s a FedEx employee carelessly tossing a package over a fence or an employer screaming at an employee.  Technology and social media have made any lapse in judgment a viral sensation with devastating adverse consequences.

There are a number of factors that help to build a successful company culture, but some of the most important for business owners and company leaders to consider are: transparency, due process, existence of “off-ramps” for co-owners and dividing the pie fairly.

Transparency – Keeping Your Team Informed

The way that business owners communicate their vision and the degree to which they disclose their progress in meeting their goals reflect the level of transparency in the company.

Majority owners need to share their vision with minority owners and other stakeholders (especially employees) in a way that permits the company goals become shared.  Without buy-in to a shared vision, the company cannot move forward in harmony toward its goals.  Further, if no unified approach exists, when there are setbacks, which are inevitable, employees will not cope with the bad news while holding onto the larger vision for the business.  The goal of the owner’s communication, therefore, is to put forth a vision that fosters teamwork and cooperation.

The path to creating a shared vision follows some basic steps. First, all companies need a mission statement that is mutually developed by the majority owners and senior leaders.  Second, the company needs to hold regular (at least annual) director and owner meetings that will provide detailed progress reports of company performance.  This is also an opportunity to discuss ways the company can improve by comparing the results achieved to the goals that were set.  Third, the company’s leaders should issue regular reports regarding important events and developments such as new hires, product developments, financial results, and other significant milestones.

Finally, when problems do arise in the business, leaders need to meet each challenge head on by communicating promptly to investors, employees and, as needed, the company’s clients to acknowledge the problems and discuss how the company plans to resolve them.  A good leader must be willing to admit mistakes and take steps to fix them.

Due Process – Achieving Buy-In to Business Plans

Businesses are not democracies.  That being said, the best run companies do not operate as dictatorships.  Strong leaders welcome constructive feedback from investors, employees and other stakeholders (including clients), all of whom have a right to participate in the business at some level.  Seeking input engenders loyalty, because people who offer advice and constructive criticism believe they have a stake in the business.  Once this pattern is established, employees are more likely to embrace decisions made by company owners and leaders.

An open door policy (or even a no door policy) means that the owners do not govern by decree, but by a consensus evolved from regular meetings that minority investors are invited to attend.  At meetings, managerial decisions should be discussed and considered.  The voices of minority owners may not ultimately prevail, but their views need to be heard.  Finally, but also importantly, employees should be encouraged to share their ideas, and their innovations should be championed.  Minority investors, employees and other stakeholders need to be provided the opportunity to contribute to and adopt the business plan.

Exit Strategies – Succession Planning

Majority owners need to consider that minority investors may want to leave the business at some point.  By engaging in advance planning, the departure of minority owners will not result in debilitating conflicts and disruption.  As we have written in previous Posts, the parties need to discuss, adopt and implement an exit plan for minority owners, not a squeeze out plan.  This exit plan will also provide for majority owners to exercise reasonable redemption rights when the minority owners’ interests no longer align with the majority owners’ vision.  

The bottom line is that majority owners should not permit any equity in the company to be granted to minority owners without retaining the right for the company – through the majority owners – to exercise redemption rights if future conflicts arise.  This exit strategy is a forthright and proactive way to avoid potential serious disagreements and legal disputes down the road.

Profit Allocation – Fairness in Sharing the Pie

One of the greatest challenges in creating a positive culture both for current and future investors and employees is a willingness to share the wealth.  Successful companies typically institute some form of profit-sharing to retain and reward their employees.  Beyond offering an attractive base salary for services, performance-based bonuses in cash and/or share options should be made considered.  There are also phantom stock plans and stock appreciation rights that effectively provide bonuses to employees without granting equity ownership. 

All profit-sharing plans should be transparent and fair.  While fairness is a subjective goal, if senior employees with the company are involved in creating the plan, that will help to achieve what is viewed as a fair result.  Top performers, especially those who provide great value to the business, need to know their efforts in growing the business will be rewarded.  While the goal of achieving fairness can be elusive, a company culture that comes to be known for greed at the top will lead to internal strife and the absence of any company loyalty.

Conclusion

In the final analysis, companies with a positive culture are more likely to be successful.  Creating a desirable work environment contributes to lower turnover and helps to attract talented employees who will contribute to the company’s growth and continued success.  Finding, keeping and motivating the best people, perhaps more than any other factor, enables a business to thrive, whether through regular innovation or by providing an extraordinary customer experience, and an innovative, client-focused business is primed to achieve notable financial returns.


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