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Company Culture: The Value of a Strong Culture and the Risks of a Bad Culture


November 12, 2020

Companies across the country, and arguably around the world, are increasingly recognizing the value of organizational culture. Companies with stronger cultures, as measured for example by employee satisfaction, on average perform better. These patterns have been shown in academic research by Edmans (2011, 2012). As stated by Professor Charles O’Reilly at Stanford Graduate School of Business, “Culture can be a real competitive advantage or a competitive disadvantage.”

The Gupta Governance Institute has spent time this fall exploring ideas around corporate culture. In October, the Institute hosted an academic research seminar in which Professor Jillian Popadek Grennan of Duke University discussed how to measure culture, with participation from approximately 70 academics from around the world. In November, the Institute jointly hosted an invitation-only event with Egon Zehnder, with participation by executives and directors representing 13 different Fortune500 companies. Participants in these events had the opportunity to dive into many challenging aspects of corporate culture: How to measure culture? How to know if you have a good culture? How to sustain a good culture and how to fix a bad one? What to watch out for, in terms of ‘culture slippage’?

How to measure culture? The question of ‘How to Measure Culture’ was the focus of an October 9, 2020 seminar hosted by the Institute in which Professor Jillian Popadek Grennan of Duke University presented her latest research. Culture can be difficult to quantify, as there is no single number on the firm’s balance sheet on which investors can focus. Professor Grennan turns to the psychology literature to develop new proxies for corporate culture. Using these rigorous measures, her research highlights how different dimensions of culture relate to both firm performance and the riskiness of firm’s financial policies.

How to know if you have a good culture? A key takeaway from the Egon Zehnder event was the value of internal company surveys. You get what you measure. This has an obvious upside: if companies measure various components of culture, employees at all levels begin to focus more on these issues. What are the pertinent issues? Egon Zehnder highlights eight dimensions of culture: Achieving goals and accomplishing results, Collaborative, Customer-centric, Employee-oriented, Innovative, Principled, Thorough, and Transparent. Across all these factors, issues such as diversity and inclusion are paramount.

How to sustain a good culture and how to fix a fad one? There is immense value in facilitating feedback from employees, and in following up on that feedback. Companies should have hotlines, where people can report problems. When problems are addressed, employees learn that the company takes these issues seriously. The set of potential issues can be wide-ranging, including for example problems related to harassment, unfair treatment of co-workers, and poor relations with customers. Culture is set by the leaders of the organization, and leaders must stand up to bad behavior. When faced with a dilemma such as an employee who is a ‘bully’ but also has the highest sales numbers, the answer must be to stand up to that bully. The long-term cost of a bullying culture far outweighs the near-term cost of losing some sales if that employee leaves. Perhaps the single thing to remember here is: have a backbone – stand up to bad behavior.

What to watch out for in terms of culture slippage? Culture slippage is defined as relatively minor infractions, against the company’s stated culture standards. The costs of such slippage can be greater than one might think. As stated by Professor O’Reilly, culture represents “the pattern of individual and collective behaviors that are reinforced by people and systems over time.” Allowing bad behavior destroys this positive reinforcement process. The company’s culture norms must be continuously reiterated. In a survey of over 1300 North American executives, 85% of respondents stated that they believed that poorly implemented / ineffective culture increases the chances that an employee would do something unethical or even illegal (Graham, Grennan, Harvey and Rajgopal, 2019).

The importance of these issues today, during the COVID pandemic During a challenging time as organizations around the world struggle with the COVID-19 pandemic, the value of company culture is paramount. During the last crisis, the Great Recession of 2008 – 2009, companies with high social capital had stock returns that were 4 – 7% higher than firms with low social capital (Lins, Servaes and Tamayo, 2017). As the pandemic has forced many people to work from home, culture is arguably even more important. Many of the tenets underlying culture, for example collaboration and transparency, are substantially more challenging. But change also represents an opportunity. As so many people struggle with the many unique hardships brought upon by the pandemic, companies that communicate strong cultural norms will be rewarded.

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TD Bank Endowed Professor, Professor, Finance