Elon Musk faces long odds in his attempt to turn Twitter into a profitable company. Bringing in a new CEO from outside the company isn’t likely a winning solution. That’s the conclusion I reached upon reviewing management studies of past attempts by outside CEOs to turn companies around.
Most often, these CEOs failed. The single biggest source of their failures, those studies found, is the powerful influence played by a firm’s internal culture — its norms, values and customs.
Corporate culture’s role is often overlooked because it is so hard to define and measure. But that doesn’t mean it isn’t important. In fact, according to research published this month in the Annual Review of Financial Economics, authored by Gary Gorton and Alexander Zentefis of Yale University and Jillian Grennan of Duke University, “corporate culture has the potential to set the theoretical paradigm for all corporate finance research.”
“ Transforming a company’s culture requires changing how employees relate to each other. That’s hard work and takes a long time. ”
An outside CEO will almost certainly clash with a firm’s culture when trying to turn the company around. Given the culture’s powerful inertia, it usually prevails. Try as a CEO might, culture can’t be changed by firing people, since the culture lies in the interactions between employees rather than in any individuals themselves. Unless you fire everyone and hire a completely new army of employees, which itself would be disastrous, transforming a company’s culture requires changing how employees relate to each other. That’s hard work and takes a long time.
Read: Musk is running Twitter like a start-up. That could be a mistake.
Yet time typically is not on the side of the outside CEO brought in to turn a company around. Twitter, for example, is losing money and is billions of dollars in debt. Musk needs to move quickly, which gives Twitter’s internal culture that much more of a role in determining the future success of the company.
These and other reasons are why, as Gautam Mukunda, a professor in the Organizational Behavior Unit of Harvard Business School, once told me in an interview, “most of the CEOs who try to radically transform a company will fail.”
It’s important to recognize that culture often prevails even when it needs to be changed. The inertial force it exerts on a company is not a function of whether it is helpful or healthy. The outside CEO may have the most brilliant and profitable strategy for the company’s future, but that doesn’t mean he will have an easier time getting the company to pursue it. As Peter Drucker, the late management guru, put it: “Culture eats strategy for breakfast.”
Musk, who currently oversees Twitter, rocket company SpaceX and car maker Tesla TSLA, -2.01%, is coming face to face with what needs to happen to justify his spending $ 44 billion for an unprofitable social media company. Even bankruptcy for Twitter is on the table. That may be Musk’s way of recognizing that the odds of success are not good.
Mark Hulbert is a regular contributor to MarketWatch. His Hulbert Ratings tracks investment newsletters that pay a flat fee to be audited. He can be reached at mark@hulbertratings.com
More: Elon Musk floats possibility of his successor at Tesla, says he plans to eventually find new Twitter CEO
Plus: Twitter’s former chairman has a warning. Why Musk should listen.