Corporate Culture

Corporate Culture

– [Narrator] This is Duke University. – I’d like to tell you
about a research project on corporate culture
that I’ve been working on with Cam Harvey and Jill Popadak from Duke and Shiv Rajgopal from
Columbia University. This project’s been supoorted
by the COLE Center here at Fuqua, and by CFO Magazine. Now if you read the headlines,
you see corporate culture often gets blamed or gets credit for dramatic corporate events. So for example the VW emissions scandal and recent events at Wells Fargo, we read about corporate culture leading to maybe a bad outcome. With Google, corporate
culture gets at least some of the credit for Google
having such a fantastic and successful company. So corporate culture is everywhere, and I have to admit I
approached this research project as a bit of a skeptic. What exactly is this corporate culture? Is it really as important as
these headlines say it is? And if it is, how does it work? These are questions
that I wanted to answer and our research team
wanted to try to answer. So what we did is we went out and surveyed 1,900 CEOs and CFOs from around the globe to ask them about corporate culture. What they think of it. How it works at their companies. We also interviewed companies one-on-one, executives from companies
one-on-one, that represent the 20% of the market capitalization of the U.S. stock exchanges. So we had quite a large
number of companies and a lot of depth and
importance of those companies. Now it took 50 MBA students
as research assistants to help us pull this off. We’re really thankful for that help and we couldn’t have done it without them. Alright, first question: is
corporate culture important? Yes, executives tell us resoundingly corporate culture is very important and it affects many parts of the company. So we went about trying to address this in two different ways. One was we gave executives a long list of possible value drivers,
things that create value at their companies. And we asked them to rank those items. And it turns corporate
culture came out on top, the biggest value driver at companies. More important than the strategic plan, than the operating plan,
more important than the CEO, and me a finance professor, more important than the finance function of the company. Okay, so corporate culture very important, it came out on top. Not just in the United
States but around the globe. In Africa, Europe, in
Asia, in Latin America, we saw culture showing
up as either number one or maybe a close second. So culture’s very important. Second way we addressed this
is we just straight on asked, “How important is corporate
culture at your firm?” And here about 90% of executives told us culture is either important
or very important. And most of them said very important. So we’ve established then
that corporate culture is very important. The next question is what is it. What exactly is corporate culture? So remember I told you we
interviewed a lot of executives and here’s a couple of interview
quotes I’d like to give you to give you a sense of what culture is. I’ll paraphrase. The first is that corporate culture is like the tendons in our body. The tendons hold together
the muscle and the bone and they let our muscle and
bone and body do the work it’s intended to do in a
healthy and productive way. Okay, like that. Culture is what helps the
company reach it’s potential. Okay, holds the company
together, if you will. Another example is in the
example of an orchestra. Corporate culture is like sheet music. You can hire the best trumpet
player, the best violinist, and if they’re not playing
on the same sheet music you won’t get a very good outcome. But if you have the culture,
if you have that sheet music, and they’re playing in the
same tempo, the same cadence, then you can have a wonderful outcome. Likewise the culture
is what helps a company reach its potential. It helps the employees march together. So those interviews give us a
nice idea of what culture is. But like true academics we want
to put more structure on it. We wanted a little framework,
a little model if you will. So we relied on existing research
and kind of built on that. And what existing research says
is there’s kind of two ways you can break down a company. One part is the formal institutions, okay. And these formal institutions
are things you can write down: the governance of the company,
the compensation policies, the hiring and firing practices, you know kind of tangible things. Those are important. People have done a lot
of research on them. We’re not researching them
so much in this paper. On the other side, you
have the informal aspects that we call corporate culture. And culture has really
two main components: the values and the norms. Okay, a little lingo. But the values, they’re sort
of like the 10 commandments. They’re chiseled on stone. They’re the things we aspire
to, that we’d like to achieve. But the norms are actually
the day-to-day living as we strive to reach those values. And one of the main
contributions of our paper, in the academic sense at
least, is to kind of provide evidence that these norms
are very very important: the day-to-day living of the values. In fact, we’re one of the
few papers to focus on norms. And our conclusion is,
without the norms the values and these other things
don’t matter very much. You can look at a recent
editorial by the former CEO of IBM in the editorials of
the Wall Street Journal. And he says something very similar. Values, you look along websites
you see very similar values across companies. But the norms, where the feet
hit the ground if you will, the living out of the
values, the norms that is, is really what matters. So how does culture work? You need to have values,
norms, and these formal things, the compensation policy for
example, working together and reinforcing each
other to actually achieve an effective corporate culture. So you need all of these aligned. Now a little more detail,
how does culture work. What we wouldn’t want to do is think, “Oh, if I get a good culture,
I’ll get a good outcome.” What we’d rather have you think of it as really a two-step process. The second step is, if I
have an effective culture, I get the desired outcome. But the first step, and the one that we’re really more focused on, is “What do we need to do to
achieve that effective culture?” And here it’s really again
the norms, the values, and these formal aspects
like the compensation policy and governance have to all work together to give you an effective culture. And this is what we think
companies should focus on a lot is what it takes to get
an effective culture. What are some of the outcomes from having an effective culture? Or an ineffective culture as it might be? I’m gonna talk about four things briefly. If you look in the research paper, there’s probably a dozen more
outcomes you could talk about, we could talk about. One is investment risk. We just lived through a financial crisis: a deep depression, or
deep recession excuse me. And what we’ve noticed
is some companies seem to take on too much risk. Now what the executives
at these companies tell us is that having a bad
culture is what leads to companies taking on too much risk. A little surprising to
us, a number of companies told us their companies
take on too little risk. They’re too satisfied with the status quo. And again it’s the
culture isn’t quite right to encourage the company to
take on entrepreneurial risks. So bottom line here on investment risk is if you have an effective culture you take the appropriate
amount of investment risk. Alright, ethics. 85% of executives tell
us that when the culture is not right, it can lead to unethical, or even illegal, actions by employees. So it’s not just the
headlines that we read about. It’s actually 85% of executives saying they need to get the culture
right at their company or things could go sour. Third, short-term versus long-term. Sometimes it’s said that
in the United States companies focus too much on the short-term and they should focus
more on the long-term. Again, executives tell
us that when they have the bad outcome focus too
much on the short-term, that’s cause the culture’s
not working right. When they have the good outcome
focusing on the long-term, it’s because the culture is working right. They have an effective culture. And then finally, let me give
you a more specific example: mergers and acquisitions. Very important investment
decision if you will. So here we ask if your company
has a target company in mind. And it’s very aligned
on the operational side and the target’s doing
just what you want it to do to acquire it and bring
it into your company. But the culture is not properly aligned, so you have a misaligned culture. When that happens, we
wanted to ask executives, “How much of a discount would you require “to acquire that target?” And that would give us a sense of just how important culture is. So misaligned culture,
how much would that reduce the price you’re willing to pay? And we thought we’d hear maybe 15%, 20%. In fact, the main thing
we heard is most companies wouldn’t pursue an acquisition at all if the culture is misaligned. So that kind of tells us
just how important culture is in general; but also, in the
M and A context, how important it is to align the cultures
before you proceed. Alright, let me give you
a little more detail here on some of the statistical stuff we did. So far I’ve been at pretty high level. So we ran regressions
where we tried to explain how does a company get an
effective corporate culture that would lead to creativity. So let’s think of creativity or innovation you might call it. Well the value that is going to lead to creativity is adaptability. So a company that has a
value where it can react as times change and as
the environment changes, that’s a value that leads to creativity. But, as we said before,
it’s not just the value that matters, it’s also the norms. So what are the norms
that lead to creativity? It’s developing new ideas organically within your company, and
the employees having comfort in offering and receiving critiques. If that’s the work environment you have on a day-to-day basis
where you are developing new ideas organically and
giving and accepting critiques, that’s the environment
that leads to creativity. Now interestingly, there’s
another value that was listed but had a negative effect on creativity. When a company is really results
driven, results oriented, maybe too focused on the bottom line, that does not lead to creativity. It actually hurts it. Alright, second example, ethics. What value leads to ethical behavior? Well, integrity is such a value. That sounds wonderful,
but what are the norms that are required, the day-to-day living that is required in order
to achieve that value and to achieve good ethical behavior. Here, trust among employees
is the most important norm and also willingness of the employees to report unethical behavior. So if you have that happening
in your work environment, you get the good positive
ethical outcomes that you desire. Now there’s a lot more detail in the paper that you can look at if you want. I’m just trying to give
you a sampling today. Alright to summarize so
far, corporate culture is first order important. We think of culture as being
made up of values and norms. The norms are the day-to-day
living of those values. And we think of it in a
two-step process with the values and norms working together
along with other things like compensation policy
give you an effective culture which gives you the outcomes. So that sounds all nice,
but do all companies have effective cultures? If it’s that easy, does
everyone achieve it? No they don’t. About 15% of companies tell us they have their culture
right where they want it. The rest don’t. And in fact about a third
of companies tell us they need to have a considerable work or substantial overhaul
to get their culture to where they need it to be. So about a third of
companies say they have a lot of work to do. How do you improve your corporate culture? Alright, starts with leadership. The leaders must define the culture and they must live those
corporate and cultural values. We’re not talking about
the board of directors. The board of directors hires the CEO. But the CEO and the
leadership team are the ones that instill that corporate
culture into the company. Now it’s very important that the culture permeate the mid-level management and the rank and file employees also, or of course it’s not going to succeed. So we need employees
of all levels to buy in and to live the culture
on a day-to-day basis. Second point, the company must
invest in corporate culture. It must dedicate time
and resources to instill and to reinforce the
culture at the company. So this involves recognizing
when employees act in a way that’s in
accordance with the culture, celebrating those achievements, and even having promotional
and hiring decisions based on achieving the
culture of the firm. And finally, this is a
continuous, long-term commitment by the company. This is not something you achieve in a weekend retreat somewhere. This has to be happening week
after week at the company to really get the culture
to where you need it to be. So I told you at the beginning,
I started as a skeptic. Well our research team
has concluded that culture is in fact very important. And I hope I’ve been able to convey to you some of the ways that
culture works at the firm. I got two research papers out
there that you can look up if you want more details. The first paper has a lot
of the statistical analysis from survey results. The second focuses on the interviews.

18 thoughts on “Corporate Culture

  1. Great summary. I"m on the faculty of the Defense Acquisition University and plan to bring this message to our program managers of large acquisition programs

  2. Here's the problem with this research. They only interviewed corporate executives, not mid-level managers or the employees who execute the day-to-day tasks. There, you'd get real answers as to why most corporate cultures don't work. The reason is top management, the executives, who are being interviewed, are incentivized to only work for shareholders. It's why most people are underpaid and overworked and that is the strongest message you can send that your culture doesn't matter. It's who manages up the best.

  3. Have you thought that someone will help you to automate the onboarding new hires with an wonderful, inspiring way? Those guys giving that amazing option, you may easily create your own onboarding academy.Just open CASE .XCOURSE .XYZ and watch like academy helped known company to engage employees and save 190 hours labor per month.

  4. Sir, it was excellent , gave a crystal clear view. Sir I wanted to know can autocratic culture create sustainability in the long term? Kindly reply

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