Ghosts of a company’s past must be exorcised to stop rot setting in

Every organisation has ghosts. Not shrieking spooks exactly, but the sort of behavioural ectoplasm that clings to companies long after change has supposedly swept through. Spectres of past successes haunt the board and frighten investors, while staff in pursuit of new goals have to wade through psychomagnotheric slime to get there.

Ghost structures and habits are particularly persistent at established companies. Whoever takes over at UniCredit will find some skeletons: the Italian banking group, which just started a search for a new chief executive, goes back nearly six centuries and so, probably, do some of the ways it works.

But newer groups also need ghostbusters. Twitter, which continues to tinker with its hierarchy and misfiring, is a good example of a company still spooked by the spirit that first enlivened it.

Exorcists should always be on standby at start-ups, where behaviour that seemed fresh in the first phase of growth often reeks of recklessness by the second or third round of funding.

Two big problems stand in the way of ghostfinders-general. As leaders of the organisation, they were often the champions of the type of behaviour that now holds it back.

“We’re asking them to change the things that got them there in the first place,” says Jonathan Trevor of Oxford’s Saïd Business School.

The second, related problem is that outmoded habits are often the same ones that knitted the old organisation together. These informal frameworks are sometimes referred to as “truces” – uneasy coalitions between feuding factions, based on embedded routines. End the truce and you end the fragile peace.

"Habits become institutionalised: a set of routines, procedures and rules which define us and give us identity," Sir Anthony Salz wrote in his 2013 report into how Barclays' business practices went bad. "Everyone defends their identity."

You do not have to look far to detect phantoms. In the newspaper business, for all our headline devotion to digitalisation, we cling to the old jargon (sections, pages), defer to old titles, and show a near-pagan devotion to the old print day. There is no real reason why I should be at my desk as the first edition print deadline nears, but here I almost always am.

Pressing technological change makes it even more urgent to know how to end the haunting.

A pre-internet episode from Citigroup's history shows how. When John Reed, then chief executive of the banking group, sought to tackle a crisis in commercial property that took the company to the brink of collapse, he needed several goes to make the changes that saved it.

Despite the depth of the problem, mere exhortation did not work. He had to break the structure – by getting rid of the three executives who oversaw fiefdoms outside his control – and destroy ingrained bad habits.

To cut costs, for instance, he scrapped bonuses, but also forbade staff from using cover sheets on faxes (this was the early 1990s, remember) and told them to take taxis not limousines. He also started charging for canteen meals.

The signal was clear. As he put it in a private memo: “Much of this waste is habit. A style issue of ‘how we have grown to run the place’ . . . We need the courage to change our ways and embrace them.”

Mr Reed opened his private correspondence to Sarah Kaplan of Toronto's Rotman management school for a recent study. She says another important way to kill off zombie habits is to adjust internal incentives.The amount people are paid sends one signal. At Barclays, the Salz review found that "pay contributed significantly to a sense among a few [investment bankers] that they were somehow unaffected by the ordinary rules".

More important, though, is to change the stimuli that affect behaviour.

At Citi, Prof Kaplan writes, a new system of monthly meetings of the chief executive, the line managers and their teams “created acute incentives” to increase sales and cut costs.

As Prof Trevor has written, whether the strategy, purpose and structure of companies are aligned often makes the difference between a good organisation and a bad one.

Expunging phantasms is essential, but not enough. Leaders also need to make new truces, lest the dead hand of past behaviour strangles new ways of working. – Copyright The Financial Times Limited 2016