c o nv e r s a t i o n s o n l e a d e r s h i p

how exceptional
companies create a
high-performance
culture

A handful of companies deliver high profits

and grow above their industry average. These
high-performance companies got where
they are not by chance but by choice. Their
leaders consciously decided to create a high-
performance culture and put in place the
elements required to get there. It’s not easy, and
few companies are in that league. Here is how
they do it.
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By definition, most companies deliver average profit margins. A few, however, deliver operating profit
margins that are 50 percent-150 percent above the industry average. Even fewer also grow well above the
industry average — they take market share and maximize profits simultaneously. They enjoy superior
growth, increasing profitability, better utilizing capital and, therefore, escalating market capitalization.
What accounts for the difference between these high performers and the great mass of middling
companies? The exceptional companies maintain a high-performance culture that drives everything
they do.

Many companies claim to have a high-performance culture, but the reality is that very few do. As a result,
not many people actually have experienced such an environment. The difference between the culture of
even a very good company and a genuine high-performance culture can be a shock. A top executive of a
high-performance company says of the difference, “Previously, I ran a billion-dollar business for one of
the world’s most respected companies, but even that experience didn’t fully prepare me for the intensity
of a true high-performance culture. What I subsequently discovered is that a year in a good company is
like a month in my current company, where work is a full-contact sport, not touch football.”

The relentless nature of a high-performance culture makes people who do not understand it uneasy. Not
surprisingly, many executives and companies feel comfortable where they are — bound by past policies,
practices, conventional wisdom and settled expectations. In the machinery industry, for example, a 10
percent operating profit margin appears to constitute acceptable performance to many companies, yet
outliers deliver margins of more than 20 percent.

FIGURE 1
Examples of Performance Differentials: Machinery Segment A

EBIT margin (%)

25%

20%

15%

10%

5%

0%
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

-5%
C OM PA N Y A C OM PA N Y B CO MPANY C CO MPANY D

Source: Capital IQ, Annual Report;*2016 annual earnings not announced by Schindler
Source: Capital IQ, Annual Report;*2016 annual earnings not announced by Schindler

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It doesn’t have to be that way, as the top performer depicted in Figure 1 demonstrates. A board and
management can consciously choose to create a high-performance culture — regardless of the past,
the competition or the industry. That doesn’t mean that a high-performance culture can be ordered up
overnight or simply copied from a successful company. Painstakingly establishing such a culture can
take a decade — and requires a lot of courage, commitment and resources. This kind of culture cannot be
created in the abstract but only in the concrete, where it is manifested in how the organization’s values
are implemented, how management systems and incentive programs operate, and the way employees
behave in practice. Through our research and experience working with high-performance companies,
we have found that they consistently do the following:

• Adhere to a performance ethic that combines the ambition to do the unthinkable and the discipline
to deliver the nearly impossible

• Exercise a passion for renewal in the business, the organization and its people

• Liberate leaders to get on with the business of the company

FIGURE 2
Egon Zehnder Cube of Cultures

Preservation Optimization
Culture Culture

PERFORMANCE
ETHICS Oblivion Abdication
Culture Culture

High-
Delivery
performance
High Culture
Culture
LEADERSHIP
NOTION
Compliance Intellectual
Low Low Culture Culture

High
Control & Liberation
Command
PASSION
FOR RENEWAL

These are not abstract principles. They are practices and deeply engrained behaviors in the daily life
of the organization that have concrete consequences for the business. And they are practices that any
company can choose to adopt, but they must be accompanied by an in-depth, long-term commitment.

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The Ethic – and Ethics – of Performance

High-performance companies adhere to an ethic that is manifest along two critical dimensions:
ambition and execution. These companies set targets at levels generally seen as unachievable and
execute with relentless discipline others may see as neurotic. This performance ethic (singular) is
grounded in a widely shared set of ethics (plural) — deeply held values that drive what otherwise might
be mechanical, political, superficial or random approaches to target setting and execution.

Mu ham ma d A li

“Impossible is just a big word thrown around by small men who

find it easier to live in the world they’ve been given than to explore
the power they have to change it. Impossible is not a fact — it’s an
opinion. Impossible is not a declaration — it’s a dare. Impossible is
potential. Impossible is temporary. Impossible is nothing.”

Setting almost unthinkably high performance targets requires both courage and outsized aspiration.
Disciplined execution requires commitment, conscientiousness and a willingness to take personal
responsibility, as well as tools and processes to make sure results are not left to chance. And the
acceptance — without resignation or scapegoating — of inevitable shortfalls that occur when targets are
set out of reach requires trust.

In their processes, policies and operations, these high performers typically do the following:

Set transformational targets in revenue, costs and margin. For example, one leading company
that has outgrown its competitors in size and outperforms them year after year sets goals of reducing
product costs by 7 percent over a rolling two-year period while boosting product benefits by the same
amount. If that goal were achieved, then, in just a few years, the compounded savings and benefits
offered to its customers would reach astronomical levels. But even if the company is unable to maintain
that pace, the scale of the ambition encourages people to think big, to refuse to settle.

Pursue systematic and relentless execution. Ambitious targets must be accompanied by the
discipline to do what it takes to come as close as possible to reaching them. From operational strategy to
manufacturing capability and plant productivity, outperformers use continuous improvement to slash
cycle times and increase yield, capacity and reliability and achieve quantum leaps in quality, efficiency
and cost reduction. While most companies do this, intensity and rigor set high-performance companies
apart. They focus on process control — not quality control. Their focus on flawless processes that are
converted into execution muscle on the first iteration renders quality control and rework practically
unnecessary.

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Adopt only a few measurements, carefully balanced. High-performance companies look for growth
and cost leadership. For one high-performance company, the key metrics are top-line growth and
margin expansion and so are working capital improvement and return on newly invested capital. Why?
Because they are important indicators of operational excellence. Customer care is measured by the
timeliness and quality of delivery on commitments. Leadership effectiveness is measured by employee
retention and the internal fill rate for open positions. Another company empowers its leaders to balance
the short and the long term by rewarding managers after they have improved the previous year’s results
by 5 percent. Ten percent of any profit above that initial 5 percent is allocated to the management bonus
pool.

Undo the budgetary straitjacket. Many companies view budgets as commitments to be delivered no
matter what and, therefore, treat them as targets for incentive compensation. This widespread practice
produces a number of performance-limiting effects. First, tying incentives to the budget encourages
people to understate their projections for their businesses so they can easily attain their incentive
targets. Second, the coupling of incentives and budget discourages people from blowing past their
targets for fear the boss will set higher targets following a year of such unforeseen success. Consequently,
people try to avoid greatly exceeding their targets — targets that have been understated in the first
place. In these budget-focused cultures, the core managerial competence is sandbagging — making
decisions to deliver the budget at the expense of longer-term sustainability. And organizations that try
to avoid this dilemma by setting unreasonably high incentive targets tied to the budget are at risk of
demotivating their people.

Contrast that practice with the practice of a $10 billion company that is a high performer in its industry.
The company has abolished the straitjacket of annual budgeting as a non-value adding activity. It
concluded that spending a significant amount of energy on an internal process that delivers a number
that will not be right — unless it is managed to be right — in a year’s time is a waste of shareholder value.
The company now runs rolling quarterly and 12-month forecasting processes instead of budgets.

Another high performer, which has grown its market capitalization in excess of tenfold to more than $50
billion in just over 10 years, establishes budgets and targets, but it sets them so high that they generally
cannot be reached. However, no one is penalized for missing the targets. As an executive from the
company puts it, “Failure to deliver the impossible still produces a miracle.”

Still another high performer rewards for progress along a road map to outperformance. Depending on
the business unit, the route along that map may vary from cost transformation to market share to global
scale, but the typical measurements are growth, margin expansion and cash flow.

Such organizations free their people to deliver maximum performance without the concern for what
it means to their annual bonuses or their career. They do not follow a 12-month or even quarterly
cycle with the budget as a sacrosanct contract. Instead, the cycle could be a week or a day. To them,
performance is a way of daily life.

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High performance does not happen accidentally. Outperformers consciously aim high and just as
consciously tolerate failure as the cost of achieving comparative success against their competitors. Yet
they deploy countermeasures quickly if results fall short. They do not rely on markets and cycles to bail
them out. They know that consistently seeking to avoid failure inhibits initiative and discourages the
risk taking that is essential for breakthrough results. They also know that aiming high is futile in the
absence of disciplined execution, operational excellence and continuous improvement.

Pursuing a Passion for Renewal

A strong performance ethic will generate superior results, but ambitious targets and disciplined
execution, by themselves, do not produce the renewal, continual learning and innovation required to
stay ahead of changes in technology, competition and markets. In genuinely high-performance cultures,
a strong performance ethic is complemented by a passion for renewing the business in order to keep it
viable and vibrant. Organizations that have a passion for renewal exhibit these characteristics:

Organizational humility. Management has the collective humility to forthrightly admit what it does
not know, an attitude that is reinforced by insistence on fact-based (as opposed to belief-based) decision
making. Leaders are committed to organizational learning as an antidote to the complacency that
outperforming their peers could breed. In fact, they maintain a healthy insecurity about other industry
players. As one executive puts it, he and his colleagues are “constantly miserable” about where they stand
against the competition, even when far ahead. And to continue to outperform and outflank their rivals,
they are eager to learn new things from whatever source — people at every level of the organization,
competitors and other industries.

Commitment to innovation. Companies that remain satisfied with merely doing more and better of the
same thing are ripe for disruption — or takeover. By contrast, companies with a passion for renewal not
only pursue innovation in order to disrupt their industry, but they also are willing to disrupt themselves,
whether by cannibalizing their products and services or transforming their business models. While
such a commitment may lower profits in the short term, high performers regard superior products and
services as the only sustainable path for staying ahead of the competition. Innovation-driven growth
allows them to streamline the company and lead change before it leads them.

Desire to seek or create new niches. Many companies explain outperformance by competitors
as a result of the good niches the outperformers occupy. But outperformers do not come to occupy
those niches by accident. They move into, or create, new niches by instituting internal processes or by
acquiring companies where there are clear margin expansion and growth opportunities that can be
exploited through the acquirer’s performance ethic. And they exit from poor niches, leaving them for
competitors.

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Ability to add value through acquisitions. High-performance cultures are good at adding value
through acquisitions because the acquisition is infused with their own culture. One high-performance
company is so good at this that it does not need to justify its acquisitions to the capital markets. Further,
to deeply understand what has been bought, the company sends a member of its top leadership team —
and sometimes even the CEO —to manage an acquisition for the first 12 to 18 months.

The combination of humility, openness to learning, and the restless desire to create additional value
through innovation and acquisitions enables high performers to take measured risks. They neither
gamble the company on high-stakes rolls of the dice — as poor performers may do hoping to make a step
change — nor shy away from making a bold move when the facts favor it — as complacent or risk-averse
cultures do. Instead, they continually renew the business both incrementally and, when the opportunity
arises, dramatically. Because they are process driven, even the passion for renewal is a process.

Liberating Leadership
The command and control approach to performance management exerts pressure on management
to deliver on commitments — no less and, typically, no more. Further, the control process takes a
considerable amount of internal business review time and energy without necessarily adding to
organizational muscle. The more time that is spent on control and review, the less time that is left for
execution. By contrast, high-performance companies liberate their leaders and their organizations to get
on with the business. They minimize internal processes and normally operate clear P&Ls, often virtual
organizations, so people can focus on what really matters. There is clarity about responsibility, authority
and accountability. In their approach to leadership, they generally do the following:

Align talent management with the right cultural attributes. Because so few people have experienced
high-performance cultures, high-performance companies invest an unusual amount of senior
management time and energy in talent management. In hiring, they employ rigorous, uncompromising
assessment to determine whether a candidate will thrive on the intensity and relentlessness that goes
with the territory or wilt in an atmosphere that can be extremely uncomfortable for people who cannot
adapt to it. Once the right fit is ascertained, they take risks by giving real responsibility to executives.
But they mitigate risk through exceptionally strong training programs, even in the upper tiers of
management. In one high-performance company, for example, an executive appointed to head a $500
million business unit found himself shadowing other successful executives for months before being
allowed to take charge.

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High-performance companies make sure that executives are culturally ready for bigger assignments
— creating a robust pipeline of leaders who are self-motivated and self-guided. At the same time, these
leaders retain the humility that is essential for collaborating with colleagues and remaining open to
learning and renewal. In one prominent high-performance company, the executive team spends up
to six weeks teaching in the organization’s “leadership university.” Is that a wasteful misuse of these
top executives’ valuable time? “No,” says an executive in the company. “I put in that time today so that
tomorrow I don’t have to spend far more time managing, controlling and correcting people.” This is
process control applied to management bench strength.

High-performance companies also deal quickly with toxic employees, like ego-driven, would-be “stars,”
who undermine the culture. Non-performers, who simply cannot keep pace with their more dynamic
colleagues, are similarly dealt with. As the CEO of a prominent high-performance industrial company
says, “Accepting non-performance is not fair to those who do perform.” The sports world often employs
a similar approach to performance management. Sir Alex Ferguson, the longtime coach of Manchester
United, let go of even the biggest stars if they undermined the culture and the team’s performance.

Achieve large spans of control through cultural and operational symmetry. This is a litmus test
for a culture and its leaders. In the hierarchical organizations of days past, spans of control sometimes
were as narrow as four or five direct reports. In high-performance cultures, however, executives usually
have more than 10 direct reports and sometimes as many as 20. This is possible because self-guided,
collaborative leaders do not need to be pushed, only channeled in line with the organization’s specific
business objectives. These large spans of control flatten the organization and enable information to
circulate quickly and decisions to be made expeditiously. Empowerment is granted where it has the
most impact, and such empowerment often is reflected in small headquarters size.

Make fact-based decisions. Many leaders would say they are making fact-based decisions when, in
reality, their decisions are governed by organizational constraints on the business that are assumed to be
unchallengeable. Other leaders pride themselves on their gut feel or instinct when it comes to making
decisions. Intuition when informed by experience no doubt has its merits; but in high-performance
cultures, leaders rely on facts — regardless of what traditional beliefs of the organization they might call
into question or what their gut tells them.

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Practice root-cause analysis. When problems arise, leaders in high-performance cultures drill down to
the root cause of issues — transparently and in a spirit of objective inquiry based on years of experience
and deep industry expertise. They, above all, are problem solvers. They are not looking to fix blame
and, thereby, incentivize people to cover up problems. They are there to help, creating a trusting and
genuinely collaborative culture. As one executive puts it, “If you keep it, it is your problem. If you share it,
it is our problem.”

Favor leaders who balance strategic orientation with attention to detail. In high-performance
cultures, leaders are highly strategic, but they also are able to operate and add value at the root-cause
level. Even if they do not know the answer to an issue, they know who they can leverage to solve it. They
also are detail oriented. They know that without attention to detail, they would have to rely solely on
hope that strategies are being operationalized.

Exhibit energy and drive. High-performing executives are self-motivated and driven. Because they have
more fire inside, they need less fire underneath to drive them forward.

Collaborate freely. Because these executives primarily are motivated by achievement as opposed to
power, high-performance cultures are highly collaborative. Leaders and managers have the personal
humility to seek answers and assistance from colleagues at any level of the organization, and that help is
given willingly and accepted gratefully.

Combined with a strong performance ethic and a passion for renewal, this approach to leadership
produces not just better results but best-in-class outcomes. Companies that historically perform well
and then fall from grace often do so because they lack critical ingredients of high performance or let
important elements erode. Success breeds complacency, feelings of invulnerability and lack of humility.
Status seeking, risk aversion and bureaucracy overtake collaboration, innovation and self-direction.
Comfort, not aspiration, rules. When things go wrong, blame is plentiful and solutions are scarce.
Decline is imminent, and reversing the tide is a herculean task. As the stories of such companies suggest,
corporate culture, in many cases, hasn’t been consciously chosen — it simply has grown up over time and
can develop into any one of many types of cultures (see sidebar “A Field Guide to Cultures”).

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Choosing the Road to High Performance

Choosing to create a high-performance culture requires ambition, vision and courage, particularly for
companies that are performing acceptably. Why fix something that doesn’t appear to be broken? That
attitude may be an early warning sign of decline and an indication that it is time to choose the road to
high performance. Cultures, however, do not collectively decide to change themselves. The first step on
the road usually is taken by a visionary CEO who recognizes that the company could perform far better
and that the chief obstacle to improvement is the culture itself.

Change does not come overnight. Outperformers have developed their performance excellence
systematically and in a disciplined manner over extended periods of time. Few can do it without help.
And few can achieve it without investing in the organization. A one-person “process excellence office”
or “Lean office” does not suffice — nor can the choice of adopting a high-performance culture and the
associated tools be left to the discretion of individual executives.

FIGURE 3
Examples of Performance Differentials: Machinery Segment B
EBIT margin (%)

25%

20%

15%

10%

5%

0%
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
-5%

-10%

-15%
COMPANY A COMPANY B CO M P ANY C CO M P ANY D
COMPANY E COMPA NY F

Source: Capital IQ, Annual Reports;*2016 annual earnings not announced by Terex

Though the culture-building process can take years, the rewards begin to manifest themselves from
the outset. And they grow dramatically as the organization finds itself progressively better prepared to
deal with changes in the competitive and economic environment. For example, note in Figure 3 how the
top performer in an industrial sector not only consistently outpaced its rivals but also weathered the
financial crisis far better than competitors did.

The journey to high performance can be exhilarating for those who are fit for it and clarifying for those
who are not. But as the performance differential with rivals begins to widen, everyone in the organization
should see that taking the road to high performance is not only a choice, it is an imperative.

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A Field Guide to Cultures

High-performance Performance is in the DNA of the organization and is reflected in the

symmetry of values with processes. Little time is needed to control truly
empowered people who have accepted responsibility and hold themselves
accountable. Headquarters headcount is minimal. Span of control is wide,
with a flat organization and rapid, free flow of unfiltered information.
Business reviews are joint business improvement and learning sessions.

Delivery Performance management is about demanding more. Superiors often

are omnipotent executives who also may be bottlenecks in a hierarchical
organization. Business reviews are energy depleting and frequently
are oriented toward justifying results. In this centrally driven culture,
headquarters headcount is high and central functions strong.

Compliance The organization is led by a strong executive whose authority is not to be

challenged. The organization is harnessed to serve this commonly recognition-
driven leader and to implement that leader’s orders.

Intellectual The organization is an idea bank where analysis and the strategic planning
process are robust, but implementation is weak or ideas are not actionable.
Leaders are empowered but lack execution discipline and a uniform corporate
language. Managing is like herding kittens.

Preservation The hierarchical organization values the status quo, is worried about
disrupting it and is strongly rooted in its past, with a strong affiliation to
businesses and locations. Processes are effective because they have been honed
over the years in the headquarters-driven culture.

Optimization The organization is flat, with little hierarchy. It has efficient processes. But the
strong results orientation has optimized the organization to such a degree
that little room remains for renewal, with little tolerance for failure. Growth
is the key challenge of an optimization culture.

Abdication The culture exhibits excessive empowerment, with senior management no

longer controlling and driving performance or renewal. Mid-management is
in charge by default. Performance, at best, is accidental.

Oblivion Strategic myopia, coupled with absence of effective performance

management, destines the company to technological obsolescence and
eventual disappearance.

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Authors
Olli Laurén
Egon Zehnder, Chicago
olli.lauren@egonzehnder.com
+1 312 260 8844
Olli Laurén leads the Global Machinery and Engineering segment of Egon Zehnder’s
Industrial Practice with a focus on smart machinery and performance culture.

Morten Tveit
Egon Zehnder, Oslo
morten.tveit@egonzehnder.com
+47 97 12 50 90
Morten Tveit leads the Global Telecommunications segment of Egon Zehnder’s
Technology & Telecommunications Practice with a focus on succession management
and leadership development.

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Egon Zehnder is the world’s leading privately owned executive search Amsterdam Madrid
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