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Profiling is wrong! Or is it? Defining a Company's Credit Culture

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A first question many people would ask about Credit Culture is what is it? The follow on questions might be can I catch it? And if I can is there a vaccination for it so I don’t? These questions aside, Credit Culture would seem to be one of those concepts that belong on a shelf with the other corporate sayings, trite maxims and bumper stickers but the fact that all organizations, if they are involved with selling any sort of product, have one makes it important to understand. A Credit Culture is woven into the fabric of the corporation and should be a direct reflection of the corporate culture. Educating the corporation and aligning and balancing the mechanical and philosophical aspects of these two concepts are some of the most important jobs for the credit professional. A working definition of “culture” is a good first step in defining what characteristics of corporate and credit culture exist within the organization and will help imply the linkages between the credit and corporate cultures.

The American Heritage Dictionary defines culture as”The predominating attitudes and behavior that characterize the functioning of a group or organization.” Other definitions refer to culture as the cumulative deposit of knowledge, experience and beliefs of a group or collection of people.

The word culture, from the Latin colo, -ere, with its root meaning "to cultivate", generally refers to patterns of human activity and the symbolic structures that give such activity significance. Different definitions of "culture" reflect different theoretical bases for understanding, or criteria for evaluating, human activity. Anthropologists most commonly use the term "culture" to refer to the universal human capacity to classify codify and communicate their experiences symbolically. This capacity is long been taken as a defining feature of the genus Homo. However, primatologists such as Jane Goodall have identified aspects of culture among our closest relatives in the animal kingdom.
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How do these formal definitions of “culture” translate into what could be described as a definition for Credit Culture? One possible way to describe or define the concept of Credit Culture is that it is the organization’s unique combination of policies, procedures, practices and experience combined with the corporation’s and manager’s attitudes toward credit within that organization that define the culture. This means that the questions of the “What’s”, “Who’s”, and “How’s” of granting and sustaining credit relationships would need to be answered to determine the type of credit culture an organization possesses. In order to begin the task of profiling the organization’s credit culture, it must be remembered that a company’s credit culture is normally implied by or linked to the overall corporate culture.

Determining the type of corporate culture, ultimately to determine the type of credit culture, can be done by identifying what drives the corporation. In short, on what does the corporation place importance? There are essentially four basic strategies which drive corporations in the accomplishment of their operating objectives. Determining where a corporation fits with regard to these strategies can be accomplished by answering the question, what is the company most interested in and/or for what does it strive? (1) Long term stable performance, (2) short term performance, (3) being the largest of their peer group or (4) they have no idea. Each of these strategies has a multitude of components and should be viewed more as a continuum as opposed to a set of classifications. In other words, not many corporations can be placed squarely in any of the four strategies because they may exhibit attributes of more than just one.

A corporation that has a strategy of long term stable performance is most likely one that has departments with a shared set of corporate values. They are interested in the long term profitability of the company with steady growth over the life of the organization. The company’s management is tied to working well with each other and taking a balanced synergistic approach to risk management. Companies with this type of strategy will have a credit culture that balances the risks versus the rewards. They will also have sound, well defined credit policies which are flexible enough to handle anomalies and are understood at all levels of the company.

The second strategy which identifies the corporation’s interest as being short term performance is one that is focused on making profits in the short run without regard to the long term health of the organization. This type of company may also be hyper focused on the company’s stock value. Normally this strategy implies a credit culture that either does not have established policies has policies that are not enforced or has policies that are frequently bypassed in the interest of the deal. The sales and sales management values dominate the organization with the credit group being portrayed as “Anti-Sales”. The strategy implies more risk being taken in the interest of profits and little to no interest in the long term impact of any high risk deals.

A corporation that just wants to be the largest in its peer group or just the largest regardless of the peer group is interested in acquisitions and gaining market share by buying it. The company may not take the time to identify the core corporate values on which the organization can base its growth or the values that would contribute to its long term financial health. Credit Culture in this type of organization may be an amalgamation of the credit philosophies of several of the acquired entities. In general, their approach to credit and risk management may be skewed toward making sure that the acquisition is accomplished and not to managing the ongoing business.

Ultimately, there will always be the organization that has absolutely no idea what type of corporate culture they have. They are the ones that do not have any defined policies and procedures or have ones that are outdated or enforced sporadically and prejudicially. These companies have no set direction.

Remembering that one of the goals of a credit professional is to educate the corporation and align and balance the mechanical and philosophical aspects of the corporate and credit cultures, reviewing an organization with regard to the strategy continuum is the first step. A good second step is to evaluate the organization’s unique combination of policies, procedures, practices and experience combined with the corporation’s and manager’s attitudes toward credit.

When reviewing the policies and procedures there are a number of questions which should be asked in determining their level of sophistication and relevance. These questions are:

1. Do both a credit policy (philosophical) and procedure (mechanical) exist?

2. If one and not the other, which one?

3. Are they formal written documents?

4. Are they well defined and sound?

5. Do the policies and procedures have robust measurement, management and monitoring components?

6. Are there limits?

7. At what level of management within the corporation were they approved? (First line managers – Board of Directors?)

8. Do the policies and procedures apply to the entire organization?

9. Are they implemented?

10. If so, who does the implementation?

11. To what degree of conformity are the policies and procedures implemented?

12. Are they “living” documents? (Ones that are reviewed annually for relevance and practicality)

The review of the policies and procedures through answering the questions establishes the credit cultural framework but a review of corporate attitudes toward the policies and procedures determines how much linkage exists between the corporate culture and the credit culture. Once again, a set of questions answered honestly will help with defining how much if any linkage exists.

1. How do the credit policies and procedures fit with the corporate strategy?

2. Are the credit policies referenced by the company’s risk management strategies?

3. Do the corporate sales and marketing procedures reference the credit policies and procedures?

4. On what activities does the company provide incentive?

5. Do the sales and/or trading staff “buy in” to the credit policies?

6. To what extent are the measurement, management and monitoring components adhered? (Does anyone really read the reports?)

7. If it is discovered that one of the limits has been violated, to what extent is there company action taken?

When the answers are viewed in relation to each other, a picture of how closely aligned the corporate and credit cultures are can be developed. In a perfect world where the organization is pursuing a strategy of long term corporate performance, everyone in the corporation knows the corporate policies and procedures and these are perfectly aligned with the credit policies and procedures. This state of affairs would imply a perfect balance of sales versus credit risk with all of the sales people knowing what types of deals they can and cannot do and full managerial support. However, since perfect worlds do not exist there will always be a need for the credit professional to educate, align and balance the credit and corporate cultures within the organization.

How best to accomplish the cultural balancing act will depend on the philosophical disparity between the two cultures and the extent to which the procedural aspects of the credit culture have been developed. It will also depend on the prevailing attitudes of management and their desire to change the organization. The credit professional would be the best judge of the managerial climate for change within the organization and would need to adjust their program appropriately.

If change is desired, the credit professional, by profiling the different cultures, is provided with a roadmap for designing and implementing a corporate change strategy tailored to fit the organization. The strategies could range from being simple corporate credit presentations and cross-functional working sessions to writing an entire program from nothing in order to align the existing policies and procedures.

Profiling the Credit Culture will not solve all of the conflicts that arise between the sales and credit groups but it is an important step in being able to integrate credit procedures with the operations of the corporation and understanding potential roadblocks or points of contention with regard to corporate operations. The credit professional’s balancing act of educating, aligning and balancing the differences will remain among their most important functions.

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