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August 27, 2013

Leading Change

How do employees learn an organization’s culture? In his new book, Professor Ray Fisman draws from organizational economics to reveal how leaders drive culture change.

Interview by Simone Silverbush

As a leader, how do you talk about your organization’s culture? When you need to reinforce certain values or reset your organization’s direction, what’s your plan?

For many leaders, articulating — and shaping — their organization’s culture is a nebulous, daunting endeavor. It’s also a key quality of effective leadership — if not, as Ray Fisman and Tim Sullivan suggest in their new book, The Org: The Underlying Logic of the Office (Twelve, 2013), “the very definition of leadership.”

In the book, Fisman, the Lambert Family Professor of Social Enterprise and co-director of the School’s Social Enterprise Program, and Sullivan, an executive editor at Harvard Business Books, use organizational economics to parse how and why orgs do what they do. It’s an eye-opening and forthright survey of the tradeoffs — and dysfunctions — faced by firms big and small, with case studies from organizations ranging from the Methodist Church to the FBI. “By better understanding the nature of the org,” the authors write, “you should be able to bridge, and perhaps even shrink, the disheartening gap between expectations and reality.”

Columbia Business: Organizational culture can be difficult to pin down. How do you define it?

Ray Fisman: Economists emphasize the notion of culture as an “equilibrium,” where people have similar expectations about how one behaves. If you think about culture as the unwritten rules of an organization — part coordination and part conscience — that help define collective behavior, then economic analysis can be very useful in analyzing and diagnosing radically different ways of doing things.

You write about how anecdotes and legends — a kind of institutional folklore — have more to do with defining an organization’s culture than mission statements or manuals. How can leaders harness this “squishy” element to effect change?

My coauthor and I are not really in the business of offering advice; we are diagnosticians rather than gurus. But at least part of a leader’s job is repeating stories that delineate the expectations and ethos of an organization. These are things that are hard to put in a written contract but crucial to making an organization function. It’s curious to note that some of the most effective stories and corporate legends likely aren't even true. But they’ve served nonetheless to reinforce the culture, telling employees what to do when faced with unexpected or odd situations. A story that’s often told about the early days of FedEx, for example, which may or may not be true, holds that founder Fred Smith flew to Vegas to try to make payroll by placing bets at the blackjack table. True or not, it’s a legend that — FedEx management hopes — can help to convey the company’s culture of risk-taking. By repeating stories like that, a leader can remind the org of what their values are, which, together with some clever design and good incentives, can keep everyone carefully aligned.

You suggest that the ability to articulate and promote stories that express an organization’s values is a critical skill for leaders. Besides storytelling, what are other key leadership skills when it comes to driving organizational change?

The work we’ve looked at on organizational change at the FBI in the wake of the 9/11 attacks and other attempts at organizational reform — like what BP has gone through over the past decades — illustrates the serious pitfalls involved in changing an org. Entirely well-meaning reforms often have unintended consequences and can lead to unmitigated disaster. BP, in particular, cut administrative staff and shifted towards performance-based incentives for everything from cost cutting to safety performance. But this came at the expense of vigilance on disaster prevention, to catastrophic effect (for example, the 2005 fire and explosion at BP's Texas City refinery or the 2010 explosion on its Deepwater Horizon rig). Unfortunately, while economics is very good at describing an equilibrium, it’s not so good at saying how to shift one.

So the best advice we can offer is: beware. I think one thing that comes across very nicely in a lab experiment we present in the book is that people always underestimate the difficulties of merging or changing cultures. There’s a lot of wisdom in knowing when changing direction is in fact possible.

How do leaders, even those who have been in the culture for a while, and especially those who come into it from the outside, learn the culture of their organization?

People really have a very hard time explaining their own org’s culture. So one thing you can do is ask: What could I do that others in the org would find totally shocking?

Who is a recent leader that comes to mind as a model of someone who has changed their organization’s culture for the better?

Tony Hsieh is a genius. He has built an exceptionally congenial — and productive — culture at Zappos (which has been endlessly documented) through some combination of understated charisma and brilliant selection of employees who are a good fit for the culture he wanted to create. I am also a strong believer in Bob Sutton’s “no asshole rule.” And I have great respect for Barclay’'s CEO Robert Diamond for trying to apply a version of it (the “no jerk rule”) at his company. Not only articulating but demonstrating to your employees that certain behaviors are unacceptable can be a key to lasting culture change.

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