The Effect of Internal Corporate Governance of the Firm's Performance and Firm Value in Five GCC Countries

*Zahra AL Nasser*

## **Abstract**

A critical glance at the literature review of GCC countries, firm performance and firm value shows that the literature does not adequately consider the uniqueness of an institutional setting such as the presence of royal family members and government officials' members on the board. Additionally, noticeable features are not accounted for in the previous literature, such as a large involvement of relatives and the presence of a female on the board of directors. It is important to understand whether these variables matter or not in this region as this then influences the firm's performance and firm value. Thus, this study focuses on the effect of internal CG of the firm's performance and firm value in five GCC countries. The final sample consists of 220 firms (1,096 firm-year observations) for the fiscal year 2009 to 2013. The main finding is that there is a positive significant relationship is seen between expertise factors and firm performance. The expertise factor encompasses royal family members on the board as well as hiring one of the Big 4-auditing firms. This result is in line with a theoretical claim (agency theory), the research question expectation and empirical evidence.

**Keywords:** royal family, board of directors, corporate governance, firm performance

## **1. Introduction**

There is agreement among scholars with regard to the limitation of CG research or studies in emerging markets. According to Nenova [1], CG in the developing countries is suffering from the effects of a number of issues including transferring the value from minority to controlling shareholders, a poor legal system, the problem of auditing practice and non-transparency disclosure. A critical glance at the literature review of GCC countries, firm performance and firm value shows that the literature does not adequately consider the uniqueness of an institutional setting such as the presence of royal family members and government officials' members on the board. Additionally, noticeable features are not accounted for in the previous literature, such as a large involvement of relatives and the presence of a female on the board of directors. It is important to understand whether these variables matter or not in this region as this then influences the firm's performance and firm value. In addition, this question considers some features of an audit committee and their effect on a firm's performance and firm value. An audit committee is an important committee within the board committee. An audit committee is not just for supporting management by giving advice for

major business decisions but also for monitoring and overseeing the management to protect shareholders' interests and to provide an independent view of corporate executives and their affairs [2]. It has been argued that an audit committee is more beneficial due to its skills and resources, which in turn affects their ability to enhance EQ, firm performance and firm value [3]. With respect to females and relatives, it is interesting to note that the region is considered a collectivistic under Hofstadte's cultural dimensions. Due to the culture and social norms, there is a fear of involving females on the board [4]. However, lately, females further engagement in the economy has grown [5]. In addition, as family ownership prevails in the region, there is a substantial involvement of relatives, which cannot be ignored [4]. Finally, the rationale of using both firm performance and firm value in the paper is that firm performance measurements (ROA and ROE) reflect performance based on historical information. This reflects previous firms' operation, and the efficiency of the firm using equity funds to generate profits [6, 7] where the firm value measurements (Tobin's Q) show performance based on firm value by market evolution of the assets [8], which in turn reflects current action [9]. In other words, firm value measurements indicate the perception of the market with respect to the firm's performance [10]. It also refers to growth and investment opportunities [11]. Firm value measurement also accounts for risk and is less likely to be manipulated as accounting measures [12]. Thus, it helps investors to estimate the growth and risk potential and shows the size of the firm. Management and investors have different interests and ways to evaluate CG; therefore, management attempt to use firm performance measurement (ROA and ROE) as the measurement to show how the wealth affects CG mechanisms. On the other hand, investors seem to prefer to value the firm structure of CG based on firm value measurement (Tobin's Q) [13].

## **2. GCC countries background**

A brief background of GCC countries is needed to have some understanding of the institutional setting. The Gulf Cooperation Council (GCC) countries, was founded in 1981 and consists of six Arab states namely Bahrain, Kuwait, Oman, Qatar, Saudi Arabia (SA), and the United Arab Emirates (UAE), all of which are Gulf Monarchies. GCC countries are located in the Middle East. Specifically, Arabian Peninsula and their total population are 50.1 million people [14]. They also share similar Arabian culture and traditions, the faith of Islam, social structures, wealth, political development (Monarchy), and demography [15]. The primary purpose of the establishment of GCC was to enhance the cooperation and integration as well as to strengthen their economy and development through their participation in different fields such as the economy, financial affairs, education, cultural activities, social, medical, agricultural development, research development and joint projects. Between them, they can issue similar policies and regulation to achieve unity [16]. It is also worth mentioning that each country has an independent government and their own independent currencies.

GCC countries are developing countries in Asia but enjoy prosperity due to natural resources and the rapid development of their capital market [17]. Some features make GCC countries interesting when examining the effect of CG on EQ, firm performance and firm value. Recently, the GCC countries share in the world's GDP has doubled to 2.2 percent, which refer to the development of a dynamic economy [18]. This also increases the significance and importance of GCC countries in the global economy [19]. Additionally, they have followed some global norms and standards to work with international organisations. This engagement with the world raises the status of the region, which brings more benefit and increases regarding trade and investment. This marks the region as "one of the most prosperous in the world" [19]. *The Effect of Internal Corporate Governance of the Firm's Performance and Firm Value in Five... DOI: http://dx.doi.org/10.5772/intechopen.99909*

## **3. Theoretical framework**

## **3.1 Agency theory**

Agency theory focuses on the relationship between the principals (owners) and the agents (managers). Agency theory's justification for its existence is to establish appropriate and adequate incentives in order to eliminate opportunistic behaviours by the company's management and to ensure that they pursue and maximise not only the company's wealth and interests but, also, work on behalf of the company's shareholders [20]. From agency theory's perspective, a reduced agency problem leads to maximising the company's value and the returns on investments to its shareholders. Furthermore, agency theory suggests ways of reducing agency costs in order to increase the company's EQ. These are: namely, monitoring costs; bonding costs; and residual losses which stem from the company's internal CG structure [21, 22]. Monitoring costs are borne by the principals and are the basis of the company's monitoring mechanisms, such as internal CG mechanisms, which are used to monitor management behaviour. Bonding costs relate to the financial or non-financial mechanisms which are used to ensure the agents make an effort to maximise the principals' wealth. Residual losses happen despite the involvement of monitoring cost and bonding cost because either these can fail or be insufficiently effective to align the principals' (owners) interests with those of the agents (management). Consequently, the owners can reduce the incentives to look after themselves by using some tools such as monitoring managers' behaviours and by introducing a contract which provides an incentive to align their interests with those of the company's management [21, 23].

## **4. Literature review**

#### **4.1 Independence factor, firm performance, and firm value**

The independent factor includes independent directors on the board of directors and audit committee. Arguably, a high percentage of independent directors on the board of directors and audit committee influence firm performance positively due to their effective monitoring [24]. However, others argue that independent directors in emerging countries are not applicable as it is "symbolic" but they are more likely to follow the management [15, 25, 26]. Nevertheless, the study follows the notion of CG code in the international practice and GCC countries and the majority of findings [27, 28] and hypothesises that:

*H01: There is a positive association between independence factor, firm performance and firm value.*

### **4.2 Family factor, firm performance and firm value**

Family factor encompasses family ownership and relatives on the board. Based on a prior discussion on relatives and family ownership, the research argues that these two variables are prevalent in the emerging markets [29] to protect family wealth and power [30], which in turn, lead to better performance [31–33]. Thus, they would play an effective role in the company, which results in better financial performance. Accordingly, the research hypothesises that:

*H02: There is a positive association between family factor, firm performance and firm value.*

#### **4.3 Board factor, firm performance and firm value**

Board factor contains board size, board meetings, audit committee size and audit committee meetings. Referring back to discussed literature of board size, meetings, audit committee size and meetings; even though there are few negative findings in the literature, the majority of prior studies argue that a large board and audit committee and the high frequency of board and audit committee meetings leads to better firm performance and firm value. Accordingly, despite different findings, the study follows the majority of prior studies' findings, the recommendation of CG code and claims that the board factor leads to high firm performance and hypothesises that:

*H03: There is a positive association between board factor, firm performance and firm value.*

#### **4.4 Government factor, firm performance and firm value**

Government factor encompasses government ownership and government officials on the board. Based on the prior discussion on these two variables, the research argues that the involvement of these two groups is common in the emerging markets [29] to retain their power on the firms. Thus, they may not play an effective role in the company, which results in poor performance. Accordingly, the study follows the majority of the studies [34–37] and hypothesises that:

*H04: There is a negative association between government factor, firm performance and firm value.*

#### **4.5 Effectiveness factor, firm performance and firm value**

The researcher had difficulty giving a name to this factor initially. However, other researchers such as Larcker et al., [38] mention the difficulties in assigning a name to some factors. This factor captures institutional ownership and audit committee expertise and the study calls them effectiveness because both are expected to *The Effect of Internal Corporate Governance of the Firm's Performance and Firm Value in Five... DOI: http://dx.doi.org/10.5772/intechopen.99909*

have effective monitoring. Based on a literature review of institutional ownership and an audit committee, despite some negative findings, the majority of the studies' findings concludes that institutional ownership [39] and audit committee expertise [40, 41] lead to better firm performance and firm value. Therefore, the research follows these studies and hypothesises that:

*H05: There is a positive association between effectiveness factor, firm performance and firm value.*

#### **4.6 Expertise factor, firm performance and firm value**

Expertise factor includes royal family members on the board and Big4 audit firms. Based on the discussion of royal family members and Big4 firms literature, the study argues that by giving the royal family members legitimacy, privileges and status, their involvement has benefits for the firms and their shareholders which result in better firm financial performance [42–47]. Additionally, despite the mixed results in the literature of Big4 firms, the majority of the studies [48–52] conclude that Big4 firms increase firm performance and firm value. Accordingly, the research hypothesises that:

*H06: There is a positive association between legitimacy factor, firm performance and firm value.*

#### **4.7 Board composition factor, firm performance and firm value**

Board composition factor captures females on the board and CEO duality. Halawi & Davidson [4] document a low female involvement on boards, around 1.5% in the GCC. Accordingly, the research argues that since there are few female directors on the board and because of the culture in emerging markets, it is likely they have a lack of qualifications, skills and business expertise needed for directorship, which might negatively influence firm performance and firm value [5, 53–56]. With regard to CEO duality, the code of GCC countries and best practice requires separation between the two roles. In addition, this study follows the majority of literature, which finds a negative association between CEO duality and firm performance [28, 57, 58]. Therefore, the study hypothesises that:

*H07: There is a negative association between board composition factor, firm performance and firm value.*

## **5. Methodology**

#### **5.1 Measurement of firm's performance and firm value**

Regarding the evolution of firm performance and firm value, there is no consensus within the literature [57]. Nevertheless, the majority of prior studies have relied on return on assets (ROA) and return on equity (ROE) which are an accountingbased measure and a measure of profitability [59, 60] and Tobin's Q which is market-based measure [13, 61–64]. ROA shows performance based on historical information, which reflects previous firms' operation, where ROE reflects the efficiency of the firm using equity funds to generate profits [6, 7]. Moreover, Tobin's Q shows performance based on firm value by the market evolution of the assets [8],

which in turn reflects current action [9]. It also refers to growth and investment opportunities [11]. Tobin's Q accounts for risk and is less likely for manipulation of accounting measures [12]. Management and investors have different interests and ways to evaluate CG; therefore, management attempt to use ROA and ROE as the measurement to show how the wealth affects CG mechanisms. On the other hand, investors seem to prefer to value the firm structure of CG based on Tobin's Q and measurement [13]. Therefore, a higher ratio represents a higher return in each of these measurements.

Some studies of CG have used ROA and ROE as a measurement method (as the proxy of financial performance) [57, 65–67]. Tobin's Q is the measure used to reflect how management effectively manages assets to generate value for its shareholders and reflects the perception of a firm's financial performance by market [57]. Chung & Pruitt [68] asserts that Tobin's Q has great theoretical and practical relevance. It has been widely used in CG literature as the proxy for firm performance [61, 62, 65]. Following previous paper the author control a couple of variables as influence the analysis. These variables growth Copeland & Dolgoff [69], leverage Haniffa & Hudaib [57], Jang & Park [70], firm size performance [71, 72] and big 4 Al-Hussaini & Al-Sultan, [73] and Wang & Huang [74]. The investigation of the effect of CG on firm performance and firm value based on the principal component analysis (PCA).

#### **5.2 Principal component analysis (PCA)**

It uses the three sets of internal CG mechanisms namely: ownership structure, the board of directors and audit committee. Due to a large number of variables and the nature of CG mechanisms (variables) especially the board of directors' composition, these variables correlated with each other. Not all 16 variables of CG can be included in one regression without facing the econometric problem, which leads to difficult interpretation and involvement of measurement error. The study does not use the CG index as suggested by Larcker et al., [38]. Larcker et al., [38] argues that using CG index leads to many econometric problems. Therefore, to alleviate the measurement error and avoid multicollinearity, the principal component analysis (PCA) has been used which is a data reduction method to extract the relevant factor which is used in regression methodology to analyse the data. This method reduces the data set to a better size while continuing to hold on to the original information. PCA is identifying a parsimonious set of CG variables that affect firm performance and firm value.

#### **6. Regression**

Firm performance and firm value are a dependent variable to the explanatory variables, which include individual internal CG factors and control variables. **Table 1** summarises the CG factor and control variables investigated in this question, which include the definition of each variable and shows how they were measured.

*Y = α + β1 F1 (INDEPENDENCit) + β2 F2 (FAMILY it) + β3 F3 (BOARDit) + β4 F4 (GOVERNMENT it) + β5 F5 (EFFECTIVENESS it) + β6 F6 (EXPERTISE it) + β<sup>7</sup> F7 (BOARD COMPOSITION it) + β8 LN\_GROWTH it + β9 LN\_LEVERAGEit + + β10 LN\_SIZEit + εit.*

*The Effect of Internal Corporate Governance of the Firm's Performance and Firm Value in Five... DOI: http://dx.doi.org/10.5772/intechopen.99909*


**Table 1.**

*Variables definition of model: CG, firm performance and firm value.*

Coefficients predict that β1 will have positive value where β2 will have negative value. Expected to is that β3 has a positive influence on firm performance where β4 has a negative association with firm performance. Predictions are that β5 and β6 will have a positive value where β7 will take a negative value. Regarding control variables, predictions are that β8 will also have a positive influence on firm performance while β9 will have negative value. Finally, β10 will have a positive value.

## **7. Results and analysis**

#### **7.1 Descriptive statistics and correlation matrix**

**Table 2** presents descriptive statistics for the main model variables1 . These preliminary findings show the relationship between firm performance, firm value, ownership structure and CG. The ownership structure shows that 14 percent of shares are family owned (FOC), whereas governments own 13.8 percent of shares (STATC). Approximately 21.4 percent of shares are retained by institutional investors (INSTITC), and this indicates a high percentage of institutional ownership in the region. On average, the board of directors is composed of eight members (BSIZE). In addition, there is a small representation of females (FEMALE) on the board of approximately 0.2 percent. Not surprisingly, (RELATIVES) relatives represent 11.6 percent of the boards in the region. Among these members, 59 percent are independent directors (IND). The table also reveals that CEO duality (CEOD) is approximately 7.4 percent of sampled firms. The average number of board meetings (BMEET) in the financial year is six. There are very few royal family members (Royal) and government officials (Gov) represented on these boards. This is an average 3 percent and 1.3 percent respectively.

With regard to audit committee characteristics, the average size of the committee is three members (AUDITSIZE); of which 62.8 percent are independent (AUDITIND). This committee meets approximately five times per annum (AUDITMEET). On average, 28 percent of the audit committees have at least one member who possesses financial or accounting expertise (AUDITEX). More than half of the companies hire one of the Big4 external auditors (BIG4).

Regarding control variables, on average, the firm size (SIZE) is \$12.69 million. The mean of Leverage (LEVERAGE) is about 38 percent. The mean of the growth (GRWOTH) is 2.9 percent.

The cross-correlation matrix for the variables is reported in **Table 3**<sup>2</sup> . The results show that institutional ownership is indirectly related to firm value. Family ownership shows a positive association with firm performance. Board size is positively correlated to firm performance. Contrary to the expectation, there is a negative correlation between independence of board of directors, independence of audit committee members and firm performance and firm value, which is also significant. The CEO duality has indirect association with firm performance. The presence of royal family members and government officials has a direct correlation with firm performance. Interestingly, the number of board meetings is significantly negative with firm performance. All other correlations are relatively low indicating no problem of multicollinearity. In addition, all VIF (Variance Inflation Factor) are below a reading of 10. This may indicate that there is no problem of multicollinearity among the variables. Therefore, this also indicates the validity of data [75–77].

<sup>1</sup> The descriptive statistics for the main variables (dependent variables, independent variables and control variables) is before using principle component analysis (PCA) to have meaningful understanding of the data.

<sup>2</sup> The correlation matrix for the main variables (dependent variables, independent variables and control variables) is before using principle component analysis (PCA) to have meaningful understanding of the data.


*The Effect of Internal Corporate Governance of the Firm's Performance and Firm Value in Five... DOI: http://dx.doi.org/10.5772/intechopen.99909*

#### *N = 1,096.*

*Notes: TOBIN'S Q is market value measure. ROA, is return on assets and ROE is return on equity. FAMC is the percentage of family ownership. STATC is the percentage of state ownership. INSTITC is the percentage of institutional ownership. BSIZE is board size. FEMALE is the ratio of female to the total board directors. RELATIVE is the ratio of relative to the total board of directors. IND is the ratio of independent director to the total board of directors. CEOD a dummy variable that takes the value of one if the CEO also serve as Chairman of the board and Zero otherwise. BMEET is the number board of meetings per year. ROYAL is the ratio of royal family member to the total board of directors. GOV is the ratio of government official to the total directors. AUDITSIZE is the number of directors on the audit committee. AUDITIND is the ratio of independent director in audit committee. AUDITMEET is the number of audit committee meeting per year. AUDITEX is the ratio of member with financial or accounting expertise to the total director. BIG4 is a dummy variable that takes the value of one if the company is audited by one of the BIG4 and zero otherwise. LEVEVERGE is total liabilities divided by total assets. LN\_SIZE is the natural logarithm of the total assets. GROWTH is change in net sales divided by total assets.*

#### **Table 2.**

*Descriptive statistics-CG and firm performance and firm value-GCC countries.*

#### **7.2 Regression analysis**

The regression analysis for the variables is reported in **Table 4**. A positive significant relationship is seen between expertise factors and firm performance (LN\_ROA; LN\_ROE: coefficient = 0.006; 0.007 p-value <5% and 10%,, respectively). The expertise factor encompasses royal family members on the board as well as hiring one of the Big 4-auditing firms. This result is in line with a theoretical claim (agency theory), the research question expectation and empirical evidence. According to Algamdi [78], the presence of ruling family members on a


#### *Accounting and Finance Innovations*


*The Effect of Internal Corporate Governance of the Firm's Performance and Firm Value in Five... DOI: http://dx.doi.org/10.5772/intechopen.99909*

**Table 3.**

 *Correlation Martrix-CG and firm performance and firm value-GCC countries.*


*Notes: \*,\*\* and \*\*\* denote significant at10%, 5% and 1% levels respectively.*

*LN\_TOBIN'S Q is the natural logarithm of market value measure. LN\_ROA, is the natural logarithm of return on assets and LN\_ROE is the natural logarithm of return on equity. INDEPENDENCE FACTOR includes independent of the board of directors and independent of the audit committee. FAMILY FACTOR includes family ownership and relatives. BOARD FACTOR includes of board size, board meeting, audit committee size and audit committee meeting. GOVERNMENT FACTOR includes government ownership and government officials on the board. EFFECTIVENESS FACTOR includes audit committee expertise and institutional ownership. EXPERTISE FACTOR includes royal family members on the board and Big 4 audit committee. BOARD COMPOSITION FACTOR includes CEO duality and female directors on the board. LN\_GROWTH is the natural logarithm of change in net sales divided by total assets. LN\_LEVEVERGE is the natural logarithm of total liabilities divided by total assets. LN\_SIZE is the natural logarithm of the total assets.*

#### **Table 4.**

*GMM regression-CG, firm performance and firm value- model 1-GCC countries.*

#### *The Effect of Internal Corporate Governance of the Firm's Performance and Firm Value in Five... DOI: http://dx.doi.org/10.5772/intechopen.99909*

board increases firm performance as they may expand the company's competitive environment and therefore, benefit the companies through networking and their privileges, leading to better performance. This supports the majority of politically connected firms literature [42–47].

In relation to the Big-4, prior studies show a positive relationship between Big-4 and firm performance. This is particularly the case in weak investor protection environments where firms which hire one of the Big-4 audit firms have a better performance record [79–82]. This is because Big-4 audit firms are concerned with their brand and reputation [83–85]. Another explanation is that royals may use their influence or power to secure the expertise of Big 4 audit firms.

With respect to other factors, namely independence factor, family factor, board factor, government factor, effectiveness factor, board composition factor and control variables (growth, leverage, and firm size), My study fail to find any significance between these variables, firm performance and firm value under GMM regression.

My study first conducted OLS regression and panel data regression. Under the pool OLS regression of model 1, independence factor shows a negative and significant relationship with firm performance while the board factor indicates a negative and significant association with firm value. These results are contrary to the study expectations and also with agency theory. Government factor shows a positive relationship with firm performance and firm value. Expertise factor shows a positive association with firm performance. With regard to control variable, growth and leverage appear to have a significant association with firm performance and firm value. Most of these significant factors disappear with the study's control for endogeneity problem.

#### **7.3 Robustness test**

To check the robustness of the results, the study conducts several additional tests. First, the study runs regression models using a different measurement of firm performance (Adj ROA) and firm value (Adj Tobin's Q ). The study runs the main model again using some additional variables such as period, corruption and minority shareholders. These results remain unchanged with these variables but period, corruption and minority shareholders are not statistically significant with firm performance and firm value using the GMM regression approach.

#### **8. Discussion**

The study utilises the model that is based on PAC Some point can be highlighted: The main observations are that the results in the model are inconclusive and there needs to be further study in this area. The results reveal that royal family members on the board and Big-4 have a positive influence on firm performance and firm value. A possible explanation is that under PCA the variance of one variable influences another variable. Thus, this observation indicates that the results from PCA may not give a clear picture. However, if the expectation of the study does not support the finding under the model, the study may tell a more interesting story. According to model, CG factor has a similar impact on long term and short term firm performance. In addition, royal family influence Big4 audit firms to use their expertise to enhance firm performance and firm value.

The independence factor does not have a significant relationship with firm performance and firm value, thus, policymakers should strengthen the role of independent directors through the improvement and restriction of requirements and procedures of nominating independent directors on the board. Independent

directors are some of the most important directors on the board as they can be more accountable than an executive [86, 87] due to their independent judgement of board decisions [88, 89].

## **9. Conclusion**

This chapter present the results and evidence of the effect of CG on a firm's performance and firm value in GCC countries. A critical glance at the literature review of GCC countries, firm performance and firm value shows that the literature does not adequately consider the uniqueness of an institutional setting such as the presence of royal family members and government officials' members on the board. Additionally, noticeable features are not accounted for in the previous literature, such as a large involvement of relatives and the presence of a female on the board of directors. It is important to understand whether these variables matter or not in this region as this then influences the firm's performance and firm value. Thus, this study focuses on the effect of internal CG of the firm's performance and firm value in five GCC countries. The final sample consists of 220 firms (1,096 firmyear observations) for the fiscal year 2009 to 2013. The main observations are that the results of both models are inconclusive and warranting further investigation. However, if the study looks at the support of findings under these two models, the study may still tell an interesting story. Thus, some corporate governance variables have a different effect on firm performance and firm value. Finally, the study offers some recommendations to policymakers with regard to independent directors from the analysis from the model.

## **Author details**

Zahra AL Nasser Dar AL Uloom University, Riyadh, Saudi Arabia

\*Address all correspondence to: zahra.n@dau.edu.sa

© 2021 The Author(s). Licensee IntechOpen. This chapter is distributed under the terms of the Creative Commons Attribution License (http://creativecommons.org/licenses/ by/3.0), which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited.

*The Effect of Internal Corporate Governance of the Firm's Performance and Firm Value in Five... DOI: http://dx.doi.org/10.5772/intechopen.99909*

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## **Chapter 13**

## Organizational Culture: A Systems Approach

*Herbert Nold and Lukas Michel*

## **Abstract**

The influence of organizational culture on performance is increasingly being recognized as a major force driving success in the 21st Century. Many models for organizational culture are widely employed by consultants worldwide. A fundamental weakness in most existing culture models is that they view culture as a stand-alone element within the organization. Accordingly, the tools used to provide insight to executives focus on the culture to the exclusion of other dynamic, interrelated, forces within the organization. We believe that this stand-alone view of culture contributes to the high failure rate of efforts to change the culture. This chapter introduces the Performance Triangle Model as a holistic approach to view organizational culture as part of an intricate, dynamic, interrelated triad of culture, leadership, and systems. We will describe the Performance Triangle and many underlying dimensions that comprise the triad and chart the emergence and development of the model. The later parts of the chapter will discuss practical applications that have been proven using a statistically validated diagnostic instrument that enable executives to recognize what is going in in their organizations then take effective, quick, targeted action. The PTM approach helps executive design agile organizations fit for the 21st Century.

**Keywords:** organizational culture, performance triangle, organizational agility

#### **1. Introduction**

Recognition of the powerful influence of culture on organizational performance has been steadily growing for several decades. Numerous books and research papers have been published using a variety of models and methods attempting to assess various dimensions and strength of those dimensions within the organization. There appears to be wide agreement with Schein's definition of organizational culture as a set of beliefs, values, and shared assumptions "invented, discovered, or developed by a given group as it learns to cope with its problems of external adaptation and internal integration—that has worked well enough to be considered… the correct way to perceive, think, and feel in relation to those problems." ([1], p.9). Hofstede suggested that organizational culture consists of core values that are often unconscious and rarely discussable [2]. Both of these descriptions appear throughout the literature on organizational cultures and combined provide a readily recognizable and useful description of organizational culture. Many researchers and authors have demonstrated the power of culture on organizational performance using both qualitative and quantitative methods.

The widely used, "Culture eats strategy for breakfast" has been bantered around in various forms in management writing and thinking for many years with multiple versions attributed to Peter Drucker, Jack Welch, and others, yet despite the widely accepted recognition that culture is a powerful force in determining success or failure of organizational initiatives, executives seemingly fail to take affirmative action in dealing with cultural inhibitors. Nold and Hagelthorn [3] found that in the context of cross-national mergers and acquisitions, 90% of executives acknowledge that culture was a key factor in the success or failure of the venture. Yet, less than 10% took specific actions to address cultural disconnections either in the due diligence or implementation phases of the project. Executives explored financial and operational issues and established wide ranging goals for operations, financial performance, quality, and market penetration yet rarely focused on the culture with the result that nearly 80% of cross-national mergers and acquisitions fail. We continue to ask "why" do executives acknowledge the importance of culture yet apparently bury their heads in the sand when it comes to acting.

We believe that there are many reasons for this apparently illogical behavior. Tom Peters in *In Search for Excellence* [4] and *A Passion for Excellence* [5] provided renewed focus on the old saying that, "What gets measured gets done". Business schools worldwide have perfected curriculum that emphasizes data driven decision making indoctrinating students on methods to measure performance in order to get things done. Just take a good look at the AACSB criteria that emphasizes quantitative research and accreditation criteria that focuses on research, research, more research. Course curricula at both the undergraduate and graduate level focus on data driven decision making which indoctrinates students with the unconscious and rarely discussable belief that executives must base decisions on hard data. Combine that academic conditioning with the overwhelming demand by stakeholders for quantitative proof of performance to earn bonuses, promotions, or recognition and executives shy away from intangibles that are difficult to measure and even more difficult to understand. Human nature is to avoid what you do not understand or feel comfortable with so executives avoid the issue in the absence of a tool to quantify the intangible.

The annual "employee survey" is a common event in many companies which we believe implies that people need fixing rather than the management systems or leadership. The annual "employee survey" is done to try to control mamagers and give executives cover for missing communications and unclear strategies that are always at top of the list of problem areas identified by employees. Rather than an annual exercise of questionable value, diagnostics should be an infrequent feedback tool for organizational development. We propose a methodology to help quantify many key intangibles of organizational culture along with other heretofore invisible dimensions of that drive performance and the ability of organizations to be agile, to rapidly adapt, and change in the VUCA (**V**olatile, **U**ncertain, **C**omplex, and **A**mbiguous) world that characterizes the 21st Century business environment.

#### **2. Organizational culture as part of a dynamic system**

Most of the popular instruments used to assess organizational culture use models that view organizational culture as a standalone dimension. Many proposed models such as the Competing Values Framework (CVF) popularized by Kim Cameron and Robert Quinn, the Denison Model, and Schein's layered framework are joined by a host of other models [6–8]. Popular instruments

#### *Organizational Culture: A Systems Approach DOI: http://dx.doi.org/10.5772/intechopen.97466*

such as the Organizational Culture Inventory (OCI), Organizational Culture Assessment Instrument (OCAI), the Culture Gap Survey (CGS), Organizational Beliefs Questionnaire (OBQ ), the Corporate Culture Survey (CCS), Denison's Organizational Culture Survey, and the Great Place To Work Institute methodology attempt to provide insight into many beliefs and values held by a group of people but largely ignore how the culture interacts with other key elements of the organization [8, 9]. We suggest that viewing culture as a standalone organizational attribute is a major contributing factor to the low success rate of change initiatives that has been estimated at between 20–30% [10].

Since Descartes, the "scientific method" was built on the basic assumption that a system could be broken down into its individual components for analysis then the system could be understood by adding up all of the various sub-components in a linear fashion [11]. The "scientific method" essentially assumes that systems are closed systems in that the components of the system and the system in total exists in isolation and is unaffected by outside forces. Ludwig von Bertalanffy described organizations as dynamic systems where all parts are inextricably connected with each part is dependent on and influenced by the other parts and the external environment, similar to a living organism [12]. Rather than a system being the sum of the parts, the functions of a system are characterized by the complex interactions among all of its components and external forces [13] General systems theory assumes that components of the system and the system itself is open to environmental forces that shape and influence both the components and the system in its entirety. Alfred Kuhn [14] observed that within social systems, like an organization, communication or flow of information and knowledge among the various components of the system and the system as a whole provides the energy for the system. Decisions made by all members that influence or are influenced by the system represent outcomes which can be readily observed. According to Kuhn, "Culture is communicated, learned patterns…and the society [organization] in a collective of people having a common body and process of culture." ([14], p. 154). According to Kuhn, subcultures can only be interpreted when viewed relative to all of the other subcomponents of the system and culture must be viewed as a pattern of behaviors within the system. Therefore, the study of the social interactions that power the system consists of interpreting "communicated, learned patterns common to a relatively large groups [of people]" [p. 157].

With regard to organizational systems, Walonick suggested that healthy organizational systems must change through time in order to remain healthy and productive [11]. However, since organizational systems are open, they are sensitive to changes in the general environment as well as to internal changes. The ability of all parts of the organizational system to anticipate, sense, and adapt to environmental change is a key factor for success. Decisions powered by the flow of information and knowledge throughout the system become observable outcomes by which to evaluate the health of the system (organization). General systems theory forces scholars, executives, and consultants to expand the scope of their investigations to consider how the flow of information and resulting decisions affect all of the subcomponents of the system, the system as a whole, and the general environment [11].

We believe that organizations must be viewed holistically and that effective change initiatives require conscious actions and reactions to all parts of a dynamic system. We believe that in order to improve on the 70–80% failure rate, it is necessary to assess "unconscious and rarely discussable" dimensions of leadership, systems, and culture that permeate all elements of an organization. It is necessary for executives to gain insight into many heretofore unseen dimensions of these key components of every organization in order to form targeted actions

to deal with these invisible issues. The question then becomes twofold, what are the critical "unconscious and rarely discussable" dimensions and can they be measured"? After nearly two decades of observation and research, we suggest that the answer is **YES**!

## **3. The Performance Triangle Model**

Our work on The Performance Triangle Model (PTM) for organizational design in a turbulent world emerged from nearly twenty years of observation and research with over 200 organizations worldwide [15, 16]. The PTM shown in **Figure 1** describes a dynamic system of culture, leadership, and systems that is powered by people who work in an environment that nurtures healthy relationships, collaboration, and a strong sense of purpose. Culture is a major component of the dynamic system and cannot be effectively changed without recognizing and addressing key elements of the ENTIRE system [14, 11]. Chris Argyris and Donald Schón popularized the concept of "actionable knowledge" as knowledge that is required to support or shape a decision and take action [17]. While teaching university courses we constantly emphasize the need for action and decisive decision making. Knowledge without resulting action is worthless to an organization, so we have developed and validated a diagnostic instrument to assess the strength of multiple dimensions that drive the PTM system [18]. Over the decades, we have observed countless organizations where unseen beliefs and shared assumptions infect large segments of an organization that interfere with knowledge sharing and decision making process like a virus in the human body. These interferences are almost always unknown to senior executives and derail or sabotage the most well-conceived strategic plan or

**Figure 1.** *The Performance Triangle Model.*

#### *Organizational Culture: A Systems Approach DOI: http://dx.doi.org/10.5772/intechopen.97466*

action. In most cases, executives would be wise to address the interferences and eliminate the viruses BEFORE spending valuable energy and resources on change initiatives with a low probability of success. We contend that armed with insight into many "unconscious and rarely discussable" beliefs, values, and shared assumptions embedded within the employee population, executives will be able to take targeted and effective actions to design organizations that will be successful in a VUCA 21st Century environment and dramatically increase the probability of a successful change initiative.

## **4. Qualitative and quantitative foundations of the Performance Triangle Model**

The concept and resulting diagnostic tools for the Performance Triangle emerged and gained definition over nearly 20 years from observations and data gathered from case studies involving over 200 organizations in different industries throughout the world plus results from survey data gathered from a sample of 50 organizations between 2006 and 2011. A unique opportunity in 2014 with a large sample allowed us to subject the diagnostic instrument to independent statistical analysis. Analysis of qualitative and quantitative information from these multiple sources revealed recurring themes and relationships between specific dimensions of organizations that evolved into the Performance Triangle Model and established statistical validity and reliability of our diagnostic instrument.

### **4.1 Qualitative origins**

After carefully analyzing responses from senior business leaders from case studies over 10 years representing over 100 firms, several trends, recurring themes, and stated concerns began to stand out as significant. Three primary groupings of themes were identified as being essential for success in a dynamic and fluid 21st Century business environment: leadership, systems, and culture.

Several themes revolving around leadership emerged. The need for intense, focused, and rapid leadership and managerial interactions in response to an increasingly fast-paced and complex business environment became apparent. This observation coincided with the fact that an increasing number of employees were hired for their knowledge and not for their physical contributions to work. The trend toward knowledge workers and knowledge economy has been documented by many researchers and authors for decades [19–21]. Feedback from senior executives and leaders suggested that this changing demographic called for a different leadership style requiring more involvement and engagement with people at all levels both internal and external to their organizations. Creating and maintaining a healthy environment that enables knowledge workers to maximize their unique and valuable abilities required focus of attention and constant energy from leaders and managers throughout the organization.

Several common themes emerged revolving around command and control systems in response to growing organizational complexity and pressure from increasing governmental regulation. Business leaders frequently indicated that traditional command and control systems with traditional tools and methods that were introduced in the industrial 20th Century were becoming increasingly less effective. Complex 21st Century organizational structures required different ways to maintain adequate data and behavioral control while simultaneously empowering operational managers enough authority and flexibility to make effective on-thespot decisions.

Time also emerged as a recurring theme related to systems in the sense that time is a scarce resource that is non-recoverable once gone. Maximizing efficient use of a leader's or manager's time as well as reducing the time needed to get relevant information into the right decision makers hands when and where it is needed were growing concerns. Feedback from executives consistently indicated concern that decisions were being made based on data and information that was inaccurate or not relevant to the question or that relevant information was received AFTER a decision was made that might have resulted in a different decision if available in a timely manner. Either situation resulted in a flawed or less than optimal management decisions. Time related themes associated with speed, quality, and efficiency of information and knowledge flow enabled by systems were frequent and emphatic.

The third major theme that emerged over this 10-year period was a growing awareness of the hidden potential of intangible, human, factors that shape human behaviors and responses. With increasing frequency business leaders identified the need for shared beliefs, values, and assumptions in the collective minds of organizational members which forms and defines the organization's culture. Growing numbers of leaders identified intangible "unconscious and rarely discussable" dimensions of the culture as a key factor for improving performance, innovation, and unlocking new sources of profitability. Themes involving organizational culture as the unseen force connecting systems and leadership emerged such that organizational culture clearly was a critical factor for success. Successful executives must have insight, a keen understanding, and an appreciation for the power that organizational culture exerts.

Combining and visualizing these three central themes resulted in the emergence of a dynamic triangular system consisting of leadership, systems, and organizational culture which is powered by the unique talents and skills of people. Energy for this people-centric system is transmitted throughout the system by people with a shared sense of purpose with healthy relationships that enable effective collaboration. Superior performance in the VUCA 21st Century demands that organizations harness the vast energy of people with shared values, beliefs, and assumptions within the organization to be successful. Perceptions and opinions are one thing, but business leaders asked what value a theory or model brings to the organization and asked if recommendations emerging from the PTM were based on fact or opinion. In order to answer this important question, it became necessary to subject the emergent themes to statistical analysis using a survey instrument to capture data to test for correlation significance and fit with the PTM.

#### **4.2 Quantitative analysis: phase one**

#### *4.2.1 The sample*

Between 2006 and 2011, responses from PTM surveys from a sample of 50 organizations were compiled identifying relationships among recurring themes that shaped the PTM. The general research question was "Are there relationships between leadership, systems, culture and success"? The hypothesis for each intersection of leadership, culture, systems, and success was that there would be a significant relationship. The survey consisted of 120 questions designed to provide insight into numerous aspects of leadership, systems, culture, and success that were consistently identified as key elements in many case studies. Senior level leaders and managers in these 50 organizations responded to questions asking them to assess the perceived strength of the element within their own organizations using a 9-point Likert-type scale. The sample encompassed a wide array of industries, firm sizes, countries, and ownership forms as identified in **Figure 2**.

*Organizational Culture: A Systems Approach DOI: http://dx.doi.org/10.5772/intechopen.97466*


#### **Figure 2.**

*Sample Demographics.*

#### **Figure 3.** *Factors and Themes.*

### *4.2.2 The themes*

Each theme of the survey (leadership, systems, culture, success) was broken down into five elemental factors that were identified as significant in the qualitative phase of the PTM development. Questions were developed for each factor based on observations in the case studies and designed to assess the degree of influence of specific factors within the organization as perceived by the respondent. **Figure 3** shows the factors within each theme and the thematic question explored by the factor.

The objective of the study was to assess the perceived relative strength of these elements in the organization as a whole. The survey was employed as a diagnostic tool for practical evaluation of the subject organizations and the results shared with the sponsoring executive in each organization. We found that individuals quickly and easily understood data on a 100-point scale or as a percentage. Since the results represent an assessment of the degree or strength of the perception, we found that an association with temperature or percentage to be useful and practical to facilitate understanding with business executives. Therefore, it became necessary for presentation purposes to normalize responses to each factor on a scale of 1 to 100 in order to allow executives to quickly and easily comprehend the intensity of the themes within the organization. Values on the Likert-type scale 1, 2, 3, 4, 5, 6, 7, 8, 9 translated into 0, 12.5, 25, 37.5, 50, 62.5, 75, 87.5, and 100 on the 100-point scale, similar to the Celsius temperature scale. Regardless of the scale, relationships and correlations remain unchanged.

### *4.2.3 Phase one survey results and interpretation*

Analysis of data from responses by senior level managers in 50 organizations with an average of 18 participants in each company suggested the existence of meaningful relationships between the central themes of culture, leadership, systems, and success. Using MINITAB statistical software for statistical analysis, results indicated that the correlations between these relationships are significant providing positive support for the hypotheses and the general research question. **Table 1** shows descriptive statistics for individual themes, correlations, and the regression analysis of relationships between themes.

**Table 1** indicates that regression analysis performed on the responses from the sample of 50 firms shows a significant correlation among the themes of the


#### **Table 1.**

*Descriptive Statistics, Correlations, and Linear Regression of Relationships (N = 50).*

Performance Triangle Model. The strongest positive correlation in the sample is between systems and leadership giving an early indication that these attributes of the PTM can drive effective decision-making.

## **4.3 Quantitative analysis: phase 2**

Qualitative and quantitative study in phase one led to the development and refinement of a diagnostic instrument designed to yield additional insight into many unseen elements of dynamic management systems, structures, and processes, including culture. Making a precise and relevant evaluation of the dynamic management structure of an organization is inherently difficult because of the vagueness, multidimensional nature, and complexity of the phenomenon [22–24]. Verdú and Gómez-Gras observed that tools developed to evaluate multidimensional organizational systems have rarely been supported by empirical testing [25]. Part of the reason for the lack of empirical testing is that relevant factor analysis requires data from a large sample, typically over 500 participants, during the same time period. All of the cases used to develop the PTM model and diagnostic instrument had less than 500 participants, except one. Application of the diagnostic instrument with a large organization in 2014 provided a unique opportunity for independent statistical testing conducted by faculty with a PhD in statistics at a major university in Germany.

## *4.3.1 The sample*

The sample consisted of all employees working for a mid-size city government in the southeastern United States. A series of highly publicized scandals in the city resulted in the recommendation by a select committee of citizens for a survey of the culture and morale of the all city employees. The PTM diagnostic tool was selected after comparison to multiple "morale survey's" because the model and diagnostic instrument provided greater depth and insight into the organization as a system and contributors to "morale" as well as the high degree of perception for change. 1,162 employees participated out of a total employee population of 2,400 (48.4% participation rate). Participants were asked to identify the department in which they work and whether they were a top executive (department or assistant department head), supervisor (anyone below department head with supervisory responsibility), and employees (anyone with no supervisory responsibility). **Figure 4** shows the distribution of all participants horizontally by management level and vertically by department. Departments with less than ten employees were grouped into "Other" to protect the confidentiality of individual respondents.

## *4.3.2 Design of the diagnostic instrument and data gathering*

The diagnostic instrument consisted of 55 statements worded to provide insight into the strength of perception by employees pertaining to specific elements and dimensions of the PTM. Participants were asked to rate perceptions on a 9-point Likert type scale ranging from very strongly disagree (1) to very strongly agree (9). Questions were worded such that senior executives were asked to evaluate the strength of the dimension within the departments in their area of responsibility. All other participants were asked to evaluate perceptions within their work group or department. This approach provided visibility into potential disconnects between what executive and employees perceive on the same construct.

Due to the size and diversity of the sample, responses were collected in multiple ways. Responses were captured electronically, transmitted through the internet, and stored on a secured server for analysis and interpretation. With full cooperation


#### **Figure 4.**

*Distribution of Sample Participants.*

of the information technology department, links to the diagnostic instrument were transmitted to executives via email while all other participants were allowed access to the instrument on computers at their workstations. Kiosks were set up and made available to all employees who did not have a permanent workstation. All participants were given time while on the job to participate and several videos were created and transmitted to all participants explaining the reason for the project, how the process works, and to provide assurance of confidentiality. Employees had ten days in May 2014 to participate. At the conclusion of the data gathering window, raw data was transmitted to the independent research team in Germany for analysis.

#### *4.3.3 Test methodology*

Similar to Charbonnier-voirin [26] exploratory factor analysis was performed to assess the validity of the individual dimensions of the system in the PTM with Cronbach's alpha to determine internal reliability of the primary constructs. The factor structure and psychometric qualities of the model were successfully analyzed using SPSS 23.0. Principle Component Analysis (PCA) with varimax rotation with Kaiser normalization was employed in order to test the dimensionality of the construct. PCA is often used in the development phase of a questionnaire [27]. The purpose of PCA is to retain enough items to characterize the phenomenon. Similar to Roussel [28] items with factor loadings below 0.5 were eliminated from the PCA analysis.

For the PCA the seven primary constructs of the PTM were clustered into three groupings. Effective leadership is strongly influenced by systems that provide timely and relevant information to key decision makers. Conversely, leadership styles strongly influence the design and implementation of systems. Therefore, leadership and systems are grouped into cluster 1. Culture, representing unseen values, beliefs, and shared assumptions is a very strong influence on the behavior of people, leaders, and systems is cluster 2. The entire system is powered by people through relationships, collaboration, purpose and focus therefore multiple peoplecentric constructs are aggregated into cluster 3.

#### *4.3.4 Results*

As seen in **Table 2**, results of exploratory factor analysis on the specific dimensions of the PTM are all greater than 0.5 with 13 of 20 (65%) factor loadings above 0.70. Factor loadings for dimensions of leadership are particularly high with 4 of 5 above 0.80. The results suggest that the statements used to evaluate the dimensions


#### *Organizational Culture: A Systems Approach DOI: http://dx.doi.org/10.5772/intechopen.97466*


**Table 2.** *Construct reliability, descriptive statistics, factor analysis and PCA.*

#### *Accounting and Finance Innovations*

#### *Organizational Culture: A Systems Approach DOI: http://dx.doi.org/10.5772/intechopen.97466*

comprising the PTM have high levels of validity. Those that evaluate dimensions of leadership are particularly strong. Since all of the dimensional items have factor loadings greater than 0.5, all were included in the subsequent PCA analysis.

Cronbach's alpha for the major constructs of culture, leadership and people were all above 0.80 demonstrating good internal validity. Cronbach's alpha for systems and the connectors of the model (purpose, collaboration, relationships) indicate questionable internal validity. Low alphas for systems and the connectors may partially be due to the few numbers of items in the instrument. Cronbach's alpha for all three clusters is above .81 suggesting strong internal validity.

Results from the PCA analysis shown in **Table 1** shows a clear factor structure supporting the major constructs of the model. After six iterations three distinct factors emerged for each of the three clusters. The results reveal that 19 of the 20 the dimensions have factors greater than 0.5 suggesting that the diagnostic is a good fit with the model.

Because of the tight interrelationship of leadership with systems, the dimensions comprising leadership and systems in the model were grouped into cluster 1. All of the factors are above 0.5 in cluster 1 however leadership and systems are commonly separated in the literature. Further work is advisable to analyze each attribute separately. One possible approach might be to simplify some of items to provide a greater distinction between leadership and systems. Interestingly, three dimensions associated with people in cluster 3 (purpose, awareness, choice) also have factor weightings above 0.5 indicating a possible strong association with leadership and systems.

Cluster 2 is made up of dimensions of culture in the model. All of the factor weightings are greater than 0.5 suggesting that the model is consistent with the literature dedicated to culture. Three (agenda, aspirations, and norms) having factors greater than 0.8 suggesting a particularly strong association or influencing component of organizational culture. Interestingly, two items (tools and purpose) outside of the culture cluster have factor weighting greater than 0.5 suggesting possible relationships with culture.

Cluster 3 aggregates the group of dimensions corresponding to intra- and inner-people-centric dimensions of the model. The only item below 0.5 is awareness, however, 0.495 is only .005 away from the 0.5 threshold therefore awareness is also included and considered relevant. The results are consistent with the literature dedicated to human performance. Interestingly, the people dimension of purpose yields factor weightings above 0.5 in all three clusters suggesting that people in organizations who share a common purpose can have a significant influence in all aspects of the organization and are instrumental in an agile organization.

The overall results offer strong evidence that the components of Performance Triangle Model for organizational systems; culture, leadership, systems, and people when aligned contribute to building agile and successful organizations and that the diagnostic instrument has a good level of validity and reliability [18]. Further, the PTM diagnostic instrument has adequate reliability and validity on which to base recommendations and give executives valuable insight into many intangible "unconscious and rarely discussable" dimensions of the culture that were identified in the qualitative phase of development [18].

#### **5. Practical implications**

After nearly 20 years of research and study by a team of practitioners and academics in Europe and the USA, we are confident that there are many lessons learned and practical implications. Organizational culture is a key factor for success in the VUCA 21st Century business world. Evaluating the underlying "unconscious and rarely discussable" elements or the influence of culture on the performance of an organization must be done holistically by considering how the culture interacts with leadership and systems. Further, since the culture is contained in the shared values, beliefs, and assumptions of the people, power for the organizational system comes from people and linked through shared purpose, relationships, and collaboration. Executives and leaders at all levels must first ask the "right" questions in order to gain insight into those pesky "unconscious and rarely discussable" beliefs, values, and shared assumptions.

#### **5.1 How do we measure success?**

In the 20th Century, success was traditionally measured using tangible assets and for-profit companies still measure success by stock price, earnings per share, return on assets, etc. While such financial measures are important, we prefer to define success by attributes of successful organizations that we have observed. By defining success by attributes rather than financial performance or tangible assets, we can include not-for-profit organizations, NGO's, governmental agencies, and private companies in addition to the for-profit companies. We have observed that top tier companies have strong foundations in responsiveness, alignment, capabilities, motivation, and cleverness. The PTM diagnostic assessment tool helps assess the perceived intensity of these dimensions within the employee population in answering the following questions.

*Responsiveness* – Is the organization flexible and able to react to changes in the environment?

*Alignment* – Is the direction of the organization clear? Does the structure fit the strategy? Is it shared broadly and are employees aligned to support the strategies?

*Capabilities* – Does the organization have the competencies and skills needed to deliver on promises?

*Motivation* – Are employees throughout the organization inspired to perform above and beyond expectations?

*Cleverness* – Are employees empowered to be creative and use their creativity to meet expectations or demands from clients or customers within boundaries that do not stifle creativity?

We feel that if the answer to these questions is yes, then the organization will likely be successful. Essentially, if people are equipped with proper capabilities, are aligned and motivated to excel, and empowered to use their innate creativity to react to changes; the organization will be successful. Unfortunately, if (for example) well intentioned rules and regulations stifle creativity or if actions in one department interfere with the ability of another department to align with corporate strategy, senior executives will rarely be aware of the condition. Few employees will walk into the CEO's office and say "you are killing me with unnecessary rules" in any organization.

#### **5.2 Culture: the glue that binds the organization**

We agree with the assertion that culture has two major components (visible and invisible), underlying beliefs, values, and shared assumptions that shape the collective thoughts that can be observed through decisions, behaviors, and actions of the people in the organization. Culture has a stabilizing effect on the organization and helps people make things meaningful and predictable. Each organization has a unique culture that evolves over years and is reinforced as people absorb, repeat,

#### *Organizational Culture: A Systems Approach DOI: http://dx.doi.org/10.5772/intechopen.97466*

and pass along what works. There may be an infinite number of dimensions that make up the culture of an organization, but we have identified five attributes that seem to be nearly universal and thrive, unseen, in the minds and actions of employees at all levels of the organization. These five attributes help form a shared context within the organization.

*Understanding* – Do people in the organization see the same things? Do people understand WHAT it takes to win?

*Intent* – Do the people in the organization think the same way? Do people share a common idea, view, and direction of the organization? Do people know HOW to play the game to win?

*Agenda* – Do people do the same things and play a well-coordinated game? Are people moving in the same direction with common goals and objectives and priorities?

*Aspirations* – Do people aim at the same things? Do people share a common vision and values of the organization to find purpose and drive performance?

*Norms* – Do people act in the same way? Do people know what gets them ahead, share appropriate boundaries, and do what they say they are going to do?

We have seen many organizations where the answer to one or more or all of these attributes is a resounding NO. In our classes and client workshops, we frequently ask students or clients if they have observed situations where managers or executives clearly have agendas that are more self-serving that supportive of organizational goals and invariably many hands immediately go up. We had a client several years ago where we found that managers and executives believed that rules and boundaries were well known and appropriate. Yet, the overwhelming response from people throughout the organization was that people had conflicting agendas and aspirations and that bending rules to advance their career was an acceptable norm. Our suggestion to the senior leadership of this organization was to spend a year getting everyone on the same page and following the same rules before starting big change initiatives. Today, this governmental organization is functioning demonstrably better and serving the needs of the community much more effectively.

#### **5.3 Leadership: shaping vision and inspiring the organization**

It is commonly accepted that the culture of an organization is shaped from the top of the management hierarchy down. We generally accept this belief however we have observed many organizations where there is a huge disconnect between what top executives THINK is going on and what the rank-and-file employees ACTUALLY believe. It does not matter whether this apparent disconnect is real or imagined, the perception makes it real. Leaders and managers at all levels must recognize that their actions and behaviors are being observed and interpreted by employees through the lenses of their own beliefs and values. Unknowingly, many leaders fail to connect with employees and inadvertently communicate conflicting values and beliefs throughout the organization. Employees will rarely approach the CEO and tell them that "you said (this)…. But we actually did (that)… which is it and what is going on?" The result in many cases is that employees are left to develop their own interpretation that, in many cases, are inconsistent with organizational goals. Leadership is a complex and indefinable quality, but we have identified five "unconscious and rarely discussable" leadership attributes that contribute to weakening the culture and performance of the organization.

*Sense making* – Are managers and employees aware of what is going on? Do we have the capability to quickly turn data into information and make informed decisions?

*Strategy conversation* – Are the strategies and tactics in the game broadly known and trusted throughout the organization? Does the strategy provide direction and help establish trust and encourage critical thinking among employees throughout the organization?

*Performance conversion* – Do managers effectively and routinely communicate whether the organization and individuals are on track toward meeting organizational goals? Do managers go beyond traditional performance measurement to translate strategy into objectives and establish a shared agenda?

*Contribution dialogue* – Do managers help staff make sense of what is going on and find a sense of purpose? Do managers maintain an ongoing conversation with direct reports to reach mutual agreement and focus attention on how employees can make a contribution?

*Risk dialogue* – Do leaders and managers maintain ongoing conversations with others to define boundaries and establish trust? Do leaders conduct conversations to help people focus on entrepreneurial degree of freedom and on risk limits as boundaries?

In our observations with clients and research we have found that many leaders and managers avoid having personal, face-to-face, discussions of this nature unless forced to do so, typically in the highly structured and stressful annual performance review. Employees will almost never go to the boss and tell them "I have no idea what we are trying to accomplish" or "I don't know if I should do … (this)… or (that)" until after the fact, when it is too late. Managers typically assume that followers KNOW it. Yet, more time than not, they DO NOT KNOW it. Without continuous dialogue in all of these areas a significant gap between leaders and followers develops that can by highly destructive. We had a client with a new CEO. The client was attempting to respond to declining market share and a host of other internal and external changes. The client was spending large sums of money on consultants who were implementing six-sigma, or lean, or leadership training programs and getting almost nowhere. After conducting a diagnosis of the top managers in the organization it became apparent that there were significant unseen barriers to any kind of change initiative. High level managers had the perception that if they took a risk and the risk did not yield the expected benefits, they would be reprimanded or worse. The new CEO had no idea that this was a shared assumption. This realization explained why the change initiatives, all of which involve risk taking, were unsuccessful. We recommended that the CEO take an extended period to have constructive dialogues with his senior managers to change these underlying beliefs BEFORE starting extensive change projects.

#### **5.4 Systems: rules, routines, and tools that shape decisions**

Systems are both influenced by and influence the culture and leadership practices that shape the decision-making process. When we talk about systems, we are not just talking about the computerized IT systems but the rules and routines that shape the input and output from the computerized tools. Everyone reading this chapter is familiar with the phrases "garbage in… garbage out" and "what gets measured, gets done" but we contend that such thinking is just scratching the surface of the complex dimension that we call "systems". What managers and employees do with the output from IT systems and how that output shapes decisions and behaviors seems to be rarely considered. Similarly, we have witnessed many examples of systems that were developed in prior decades being used to drive decisions today despite the fact that world and the business environment is dramatically different. We have seen many instances where managers created systems to generate relevant data needed to solve some problem or give the organization an edge… 20 years ago.

#### *Organizational Culture: A Systems Approach DOI: http://dx.doi.org/10.5772/intechopen.97466*

The problem was solved, partially with the aid of the data, and the company gained an edge over competitors. Sadly, today, those same managers are making decisions using the same data that is no longer relevant because the problem was solved decades ago, and the competitive dynamics have changed significantly. What was relevant and meaningful 20 years ago may not be today, leading to fateful decisions. It therefore becomes imperative for leaders to constantly critically evaluate whether the rules, routines, and tools being used to drive decisions are relevant and shape desired behaviors. We have identified five questions, the answers to which provide insight into "unconscious and rarely discussable" beliefs, values, and shared assumptions that either inhibit or enable the effectiveness of systems.

*Information* – Do we get relevant information to the right people at the right time to make informed and effective decisions? Does the information provide adequate sensors so that people know what is going on and does the information facilitate immediate action?

*Strategy* – What game are we playing, is it the right game, and are we all playing the same game? Does the strategy help focus capabilities and provide a sense of purpose for employees throughout the organization?

*Implementation* – Are expected outcomes clearly defined and consistently applied? Is there rich conversation on expectations that facilitates collaboration throughout the organization?

Beliefs – Do leaders inspire and engage employees throughout the organization to do more than the norm, or minimum expectation? Do leaders practice behaviors that demonstrate a clear vision and values of how things are to be done?

*Boundaries* – Are the limits or degree of freedom clearly established and known throughout the organization? Do the boundaries provide adequate focus while allowing people to take advantage of opportunities?

Developing and constantly adapting effective rules, routines, and tools that shape effective decision making requires constant inquiry and dialogue with day-today decision makers from top to bottom of the organization. Peter Drucker said that "The greatest danger in times of turbulence is not the turbulence; it is to act with yesterday's logic." We have seen countless organizations attempting to adapt to a changing business environment using systems and logic that worked fine…. 20 years ago, …. but is woefully outdated in the 21st Century world. We worked with one company that insisted on using the same metrics and routines that were successful for the first 20 years after the company was founded… in 1964. All of the senior executives had the same profile; first job out of college, mentored by one of the founders, rose through the ranks with their mentor's tutelage, never questioned the metrics or the decision-making process, and believed in their own superiority because of their history. The result is that the decision-making process is not measured in days, or month, but years and the decisions are being made using information that was no longer relevant but since the executives know no other system. The company continues on a downward spiral with no idea on how to go about changing the downward trajectory of the company. People brought in from the outside who introduce new ideas were inevitably ostracized and driven out of the company. New ideas that question the strategy, beliefs, or boundaries were viewed as heresy to be stamped out. Given the intertwined relationship between systems, leadership, culture and the people who power the system it is imperative for executives to constantly ask questions then make adjustments throughout the organization.

#### **5.5 People: the power for the system**

People are complex and difficult to handle yet the underlying beliefs, values, and shared assumptions of people determine the success or failure of all organizations.

Virtually every organization on the planet has some public statement along the lines of "people are our greatest asset". Human resources departments in organizations worldwide conduct initiatives intended to shape desired behaviors and improve performance throughout the organization. We subscribe to the theory that culture exists in the minds and personalities of people at multiple levels that can be divided into two general groups: climate and culture. The climate part of organizational culture includes the visible artifacts, behavior patterns, and norms that can be readily observed and can be relatively easily influenced by management through rewards or punitive actions. The culture part is invisible and difficult to assess because it exists in the values, beliefs, and basic assumptions that can only be assessed indirectly. We can observe artifacts and behaviors and draw a conclusion about the underlying beliefs and values, but it is difficult to know for sure what those beliefs and values really are. People can modify behaviors to mask their underlying true beliefs and values. We all know this.

We contend that it is relatively easy to shape behaviors but very difficult to change underlying beliefs and values of people which provides the power to the system that drives success. So, is it possible to identify some of the most critical beliefs, values, and shared assumptions that shape behaviors? If so, can the strength of these dimensions be assessed directly. We suggest that the answer is, yes and yes. The PTM identifies four dimensions of the culture that we believe are key to harnessing the power of people to drive the system and ultimately success of the organization.

*Awareness* – Are people aware of what is happening around them? Can people sense minute changes in the work environment internally or externally to the organization?

*Choice* – Are people empowered to use their creativity and make choices to effectively respond to customers, clients, or other people inside and outside of the organization? Do people have the freedom of action within appropriate boundaries?

*Trust* – Do people view management as credible, fair, and respectful of the needs, concerns, and conditions of employees? Do people have the self-efficacy and confidence to trust in their own decisions and actions?

*Focus of attention* – Has management created an environment that allows people to focus their skills, abilities, and talents to perform their jobs effectively? Does management create interferences that prevent people from being able to focus their attention of being effective and productive?

Those of us who were involved in sports know how someone or a team can get into a "zone" when everything they do works. A weaker team or player can defeat a stronger team or player when they get hot, and the game becomes easy when every shot goes in or every play works. The game becomes really fun, at least for the team in the "zone". In the workplace, management should strive to create an environment where people get into a state of "flow" where they enjoy what they do, and it seems easy [29]. Yet, Peter Drucker and others have observed that, "So much of what we call management consists of making it difficult for people to work". We have observed countless instances where management inadvertently introduced interferences that prevent awareness, choice, trust, and focus thereby preventing people from getting into a state of "flow". Typically, these interferences are unintended consequences from attempts to control the organization or behaviors of people. Also, typically, people throughout the organization almost never question the "boss" or go to the "boss" and tell him that what he is doing is hurting the people or the organization.

We ran into one of the most extreme, and humorous, example of this in 2016 (the date is important). During a workshop with the executives of a company in Germany our assessment of the people dimensions indicated that there were many

#### *Organizational Culture: A Systems Approach DOI: http://dx.doi.org/10.5772/intechopen.97466*

interferences that prevented people from being able to focus their attention on doing their jobs. This was a surprise to the CEO who asked his management team for an example whereupon several executives almost immediately named "the Friday gasoline report". The ensuing conversation went something like this:

#### *CEO: WHAT Friday gasoline report?*

*Executives: The report that every driver in the fleet of vehicles submits Friday morning with how much gasoline they used during the week and how much gasoline is in the tanks for the next week. The report is collected and compiled by supervisors, then managers, then ultimately submitted to your administrative assistant every Friday.*

*CEO to his administrative assistant: What do you do with the gasoline report? Administrative assistant: I file it in in the storage room down the hall. CEO: WHAT storage room down the hall?*

The administrative assistant then led the CEO and the executive team to the storage room what was filled, floor to ceiling, with filing cabinets full of Friday gasoline reports dating back to 1942. Gas rationing during World War II made such a report very important and the Friday gasoline report was apparently added to job descriptions and was never questioned over the decades as people came and went. For 74 years, people generated the report that was just filed away and never used for anything. The example of the Friday gasoline report not only illustrates how interferences get into organizations causing employees to lose focus, but it shows how important the interrelationships between people, systems, culture, and leadership really are. For example, regular open and honest dialogue on the relevance of information or contribution dialogue could have identified such an interference decades before 2016. Since 2016, the Friday gasoline report is no longer done, and the storage room has been cleaned out and repurposed. The point of this true story is that until executives become aware of "unconscious and rarely discussable" beliefs, values, and shared assumptions or in this case a routine it is virtually impossible for people to get into a state of flow and become the valuable assets that so many company's champion.

#### **5.6 Purpose, relationships, and collaboration: transferring people power throughout the system**

People provide the power for the PTM system of culture, leadership, and systems and that power is transmitted and flows throughout the organization when people have a common purpose, healthy relationships, and collaborate effectively. As with a two-wheel bicycle, a person provides the power to make the wheels turn but the system needs a chain to connect the power source (the person) with the wheels; a mechanism that is largely "unconscious and rarely discussable" connects people with the rest of the PTM system. We have identified three such dimensions with the following characteristics.

*Purpose* – Do people have a strong common and shared sense of higher purpose? Does the purpose that motivates people inspire people to go above and beyond the minimum expectations?

*Relationships* – Do people have healthy relationships that build trust and agreement among employees and external stakeholders alike? Do the relationships among employees and stakeholders facilitate knowledge sharing and growth?

*Collaboration* – Do employees and stakeholders share unique knowledge and work together toward common goals to achieve success in their everyday activities? Do people demonstrate trust, creativity, and patience when working together as unexpected events occur?

As with the other dimensions that make up the PTM, what people say they do may not necessarily be true representations of their underlying values, beliefs, and assumptions. Virtually every organization on the planet has published mission and purpose statements with high sounding language that sounds noble and worthy. Argyris and Schön [17, 30] explained the difference between espoused theories (what we say we do) and theories in use (what we actually do) and the difference is all too common. Many times executives or employees are not aware of the apparent disconnect. Unfortunately, we have seen, and I suspect many readers of this chapter have seen, executives and rank and file employees give lip service to the noble statements then take actions that are diametrically opposed to the stated mission or purpose. Employees will rarely confront executives to make them aware of the apparent disconnect. Employees simply conclude that the executive is either a liar or stupid. Either way employees are left to develop their own sense of purpose that many times is NOT what the organization wants.

Similar dynamics emerge with relationships that become toxic, inappropriate, or abusive and senior executives are unaware until a scandal emerges, and HR gets involved … or worse… the media. Collaboration breaks down and becomes ineffective for an infinite number of reasons like ego, knowledge hoarding, and narcissism and executives wonder "why can't we get things done"? We have observed these and many other interferences that infect an organization like a virus that prevents the power of people from being harnessed. Most of the time executives know or sense that "something isn't right" but they have no idea what or where to begin to make improvements.

#### **5.7 Can anything be done … and if so… what?**

We contend that something can and should be done if organizations expect to be successful in the VUCA 21st Century. Readers should have noticed that the definitions for the dimensions of success, culture, leadership, systems, people, and the system drivers are phrased as questions rather than statements. This is done for a reason. The reason is that each largely "unconscious and rarely discussable" dimension has many interpretations that change as the context changes. We want readers and participants in the diagnostic to reflect on how they would answer the question in the context of their specific organization and try to assess the intensity or strength of the perceptions. Armed with observations and data gathered from 220 organizations in 2017, we can identify patterns that differentiate top tier organizations from bottom tier organizations. We gathered data using our statistically validated and reliable diagnostic instrument designed to assess the intensity of participants perceptions of the various dimensions within their organizations then converted the data to a 100-point scale which provides a useful visualization of the temperature (intensity) of the dimension.

**Figure 5** offers insight into differences between top and bottom tier companies. What we see are significant separation in scores with the lowest top tier score (focus, 67) is greater than the highest score for bottom tier companies (systems, 58). Additionally, top tier companies have created environment or cultures where people have freedom of choice and collaborate effectively while bottom tier companies are weakest in these areas.

**Figure 5** also shows that bottom tier companies have cultures that emphasize systems and leadership while top tier companies show leadership and systems toward to bottom. This pattern suggests that bottom tier companies tend to have cultures that emphasize command and control while top tier companies have cultures that take advantage of the power of people. We contend that success in the

#### *Organizational Culture: A Systems Approach DOI: http://dx.doi.org/10.5772/intechopen.97466*


#### **Figure 5.**

*Comparison of top and bottom tier companies.*

21st Century depends on creating a culture and environment where people share their tacit knowledge and collaborate in ways that give organizations a competitive advantage. Also, notice that focus is toward the bottom of both top and bottom tier organizations which leads us to believe that Peter Drucker was right when he observed that "So much of what we call management consists of making it difficult for people to work". Even top companies over manage people and inadvertently introduce interferences that prevent people from attaining a state of flow.

Now that we are aware of these patterns of "unconscious and rarely discussable" dimensions that drive the PTM system, can anything be done to change the perceptions and improve the organization's chance for success? We believe that taking a diagnostic approach to changing the culture and underlying beliefs and shared assumptions that drive success is the key.

Members of our team have been senior executives in the past and spent large sums of money and effort on various initiatives purportedly targeted at changing the environment, or performance, or leadership effectiveness, etc. The result has been, as it is in most organizations, a continuous stream of initiatives that yield limited results, if any. Most organizations employ the "flavor of the month" strategy. Nobody would return to a doctor who started prescribing drugs before listening to your heart, taking your blood pressure, etc. to diagnose the physical problem you are having. Yet, in business, executives do exactly that by trying this, then that, then something else hoping that something will yield results. Typically, the only winners in this strategy are the highly compensated consultants. We suggest that taking a diagnostic approach based on using clinically (or in this statistically) proven assessment instruments will allow the executives to target root causes of unseen and previously unknown interferences that prevent people from maximizing their potential. Instead of patching the problems of the organization with band aids, executives can gain insight into many "unconscious and rarely discussable" beliefs and assumption then initiate actions to address the root problem instead of just stopping the bleeding. In many cases, executives would be more successful in the long run by taking time, maybe a year, to establish trust or engage in deep dialogue with people to seek alignment and common purpose BEFORE launching into some dramatic change initiative. However, little progress can be made until the executives first become aware of hidden interferences and gain insight into the invisible dynamics that are interfering with success. Once executives become aware of what is going on, they can take a comprehensive approach targeting the systems, leadership, AND culture. With investors and stakeholders demanding annual and quarterly results, time is not on the side of the executives. Executives cannot,

and should not, blindly try this or that and hope for the best. This strategy would not work on the athletic field but sadly it is the approach that most executives take mostly because there are few alternatives…. Until now.

### **6. Conclusion: what have we learned?**

So, you have suffered through numerous pages of academic research and psychobabble, but have you learned anything that makes you think or question the status quo? We hope the answer is, yes. We hope we made a compelling case for evaluating organizational culture as part of an inextricable interconnected system that drives organizational success. There are many approaches that focus on one or the other key element for organizational success. Six-sigma, lean, Great Places to Work, and leadership training among many others are popular approaches. We contend that they typically fall short because they do not address the organization as a whole. The statistics support this assertion because the vast majority of change initiatives fail to deliver results that meet expectations. We believe that part of the reason is that an organization is a complex and dynamic system so that executives must consider more than just productivity or leadership or culture to bring about permanent change. After nearly two decades of study and observation, we have developed a model that, we believe, touches on the key elements needed for success in the modern world. The Performance Triangle Model is a visual representation of a dynamic system with key focal points in systems, leadership, and culture that is powered by people who have a shared sense of purpose, who have healthy relationships, and who collaborate effectively. Unfortunately, in many organizations "unconscious and rarely discussable" beliefs, values, and shared assumption interfere with the ability of people to attain a state of "flow" that prevents people and the organization from reaching its full potential.

Theories and models are great but … SO WHAT! What is the value if the theory or model cannot be used to help executives actually make significant change? As former executives, we have focused our efforts on developing a methodology and tools to help executives bring about permanent change in their organizations. We reject the "flavor of the month" approach and propose a diagnostic approach to changing the culture and the organization as a whole. In a VUCA world where both internal and external environments change at a blinding pace, executives do not have the luxury of experimenting and hoping for the best. Organizational success in the 21st Century depends on the ability of organizations to adapt and change …. QUICKLY! We are all familiar with the 5 Why technique to get to the root cause of problems. The key is in asking the "right" questions then taking targeted action after gaining insight into these unseen or unspoken perceptions that abound in the organization.

**Figure 6** displays the results from the 18 executives in the sample discussed in Section 4.3 used to validate the diagnostic instrument formatted as a leadership scorecard. Introspective dialogue to answer the questions and understand the underlying causes can help executives be more agile, responsive, effective, and most important… timely … as they adapt the organization to ever evolving business environments. What unseen forces are interfering with the interactions between systems, leaders, and the culture that prevent the organization from being as successful as possible? This is the most basic question that executives need to ask and gain insight into to maximize success in a VUCA world.

The results in groups one and two (green) show that the leadership team has a firm understanding if what it takes to be successful. However, grouping four (yellow) suggests that systems and leadership are hindering their ability to be


#### **Figure 6.**

*The Leadership Scorecard - 15 Questions to Frame Dialogue.*

successful. Also, armed with insight gained from several hundred organizations, we can see patterns that tell a story. In this case, the green 76 for boundaries says that these leaders believe they have appropriate rules and procedures that are well understood. However, the red scores in grouping three (red) for agenda, aspirations, and norms indicates that they have differing personal goals and objectives and that it is acceptable to "bend the rules" to advance a career. This "unconscious and rarely discussable" dimension of the culture clearly introduces interferences preventing optimal success. Executives need an assessment tool that quantifies previously "unconscious and rarely discussable" dimensions within their organizations. Then they need to have honest and sometimes uncomfortable dialogue followed by actions to fix the underlying or root causes of interferences preventing organizational success. We believe that a diagnostic approach using a statistically valid and reliable assessment instrument of key elements of organizational success can provide necessary insight to executives to target the root cause of interferences and make permanent changes.

## **Author details**

Herbert Nold1 \* and Lukas Michel<sup>2</sup>

1 Polk State College, Winter Haven/Lakeland, Florida, USA

2 Agility Insights AG, Zug, Switzerland

\*Address all correspondence to: hnold@yahoo.com

© 2021 The Author(s). Licensee IntechOpen. This chapter is distributed under the terms of the Creative Commons Attribution License (http://creativecommons.org/licenses/ by/3.0), which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited.

## **References**

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*Organizational Culture: A Systems Approach DOI: http://dx.doi.org/10.5772/intechopen.97466*

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Section 9
