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Is there a linkage between corporate culture and the bottom line?

In a nutshell… yes. Corporate culture is linked to so many business decisions and business outcomes. You might be surprised!

Today’s post is a follow-on to last week’s post, A Fish Rots from the Head Down, in which I wrote about the need for company leadership to model the behaviors they want to see from their employees in order to transform, inspire, and drive the company’s intended culture.

Culture is such an important part of any business. It really is the foundation upon which the business happens, i.e., fails or succeeds. And there’s some academic research that supports this stance.

I recently stumbled upon some culture research done by Duke University’s Fuqua School of Business a couple years ago. The findings are quite interesting, as they uncovered the link between culture and both business successes and business failures. If you’d like to read the details of this research, there are two papers: Corporate Culture: Evidence from the Field and Corporate Culture: The Interview Evidence.

I’ll focus on the latter, which was based on both surveys of 1,348 CEOs and CFOs and in-depth interviews with executives representing 20% of the U.S. equity market capitalization. Questions addressed in this paper included:

  1. What is corporate culture?
  2. How important is corporate culture?
  3. What mechanisms underlie the creation and effectiveness of corporate culture? How do other formal institutions (e.g., governance or compensation) reinforce or work against culture?
  4. Do companies think their culture is effective and if not, what deters firms from having an effective corporate culture?
  5. Are the upside benefits of an effective culture greater than the downside costs of ineffective culture?
  6. What aspects of business performance does corporate culture affect? Does culture impact firm value, productivity, corporate risk-taking, growth, M&A, financial and tax reporting, whether employees take a long-run view, and/or corporate ethics?
  7. How can corporate culture be measured?

The answers to these questions are fascinating and really support everything we (at least, I) tend to believe and write/talk about when it comes to corporate culture and how critical it is to a business.

Some interesting findings from this research include:

  • Most executives would walk away from an M&A deal if the target acquisition is not aligned culturally with their existing cultures; others would require a heavy discount on the purchase price.
  • Culture is set by the CEO.
  • The Board doesn’t drive culture but can influence it through their choice of a CEO.
  • Executives agree that for a culture to be effective, the values must be backed up by behaviors and norms.
  • Culture is a top-three value driver of the business and one of the most-important forces behind value creation.
  • An effective culture improves the company’s value and profitability through:
    • fostering creativity and encouraging productivity
    • higher risk tolerance
    • mitigating myopic behavior
    • creativity and innovation
  • Effective cultures (a culture that promotes employee behaviors that drive successful execution of the company’s strategies) happen when the company walks the talk and lives the values.
  • An ineffective culture (does not promote those behaviors and might even work against the right behaviors) increases the chances that employees will act unethically or illegally. 
  • Few executives agreed that their culture is where it ought to be.
    • Why not? Leadership needs to invest more time to develop the culture.
  • Ways to measure the culture include:
    • conference call transcripts/analyst calls
    • employee age, tenure, and turnover
    • external communications by the company
    • portrayal of the CEO in the press
    • understanding the circumstances around a CEO change
    • employee opinions, e.g., Glassdoor
    • assessments of whether the culture is aligned with the needs of the business
    • evaluation of internal communication patterns
    • management actions

These are just some of the highlights from this research. There is so much great information in both of these reports; I’d recommend taking the time to download and read both of them. I don’t think you’ll be disappointed in what you learn! You might even learn a new word – at least, I did: shibboleth: a custom, tradition, value, norm, etc. that is no longer important. Do you have any of these in your organization?

I used to believe that culture was “soft” and had little bearing on our bottom line. What I believe today is that our culture has everything to do with our bottom line, now and into the future. -Vern Dosch, Author, Wired Differently