Culture clash: Linking financial penalties to corporate culture and leadership

Between January 2005 and December 2014, two hundred sixty unique “employee behavior” events were covered in the news resulting in firm penalties totaling nearly sixty billion dollars. Seventy-five percent of these occurred after 2009 and more than half in the most recent two years. Clearly the explicit “cost” of bad behavior has gone up significantly. In our initial results, we find strong links between measurements of employee (dis)satisfaction and event occurrences. Although employee dissatisfaction may not guarantee a behavior event, behavior events are strongly related to dissatisfaction and CEO ratings. We also find that investment risk declines significantly after the announcement of the penalty, and financial results improve. These results are especially magnified for firms in the financial services and energy sectors. 

Previous literature is largely silent on this increasingly important topic. Grossman and Hart (1986) talk about the notion of an incomplete contract with respect to employees and financial performance. Guiso et. al. (2013) provides an excellent overview of the literature in this area, and focus on measuring corporate culture impact. They find empirical evidence linking corporate culture measures to financial results but do not examine extreme events, which is our focus here. There have been several studies that look at the specific adverse events, such as Zitzewitz (2006) and Bliss, Potter, and Schwarz (2012) who look at the mutual fund late trading and market timing scandal in the early 2000’s but there is no organizational link in these studies. To date, to our knowledge, no paper has tried to empirically link corporate culture and behavior with adverse financial events and penalties.