Corporate culture: Evidence from the field

We interview 20 senior executives and will conduct a large scale survey of hundreds of executives across a wide range of public and private U.S. firms in October 2015 to understand the importance, antecedents and consequences of corporate culture.  We probe executives to understand the mechanisms that underlie the creation and effectiveness of corporate culture as well as the factors that deter a firm from achieving its aspirational culture.  Our interviews reveal the following insights.  First, executives characterize culture as “the way we do things around here,” “a beliefs system”, “a coordination mechanism,” “an invisible hand” or “how employees interact with one another.”  Second, most executives view culture as a top 3 or top 5 factor affecting their firm’s performance.  Third, culture is created by the firm’s leaders.  It evolves over time to respond to the firm’s life cycle and market position as well as economic trends in the labor force such as increased job-hopping, outsourcing, and diversity in ages, geography, and attitude.  Employees either fit the culture of a firm or leave or are eventually let go. Fourth, surprisingly, boards of directors do not play an active role in setting the firm’s culture but incentive compensation and the finance function are important modifiers of the culture by reinforcing or undermining the values set by management.  Fifth, an effective culture improves firm performance by (i) enabling superior execution on strategy; (ii) reducing agency costs; (iii) promoting more risk tolerance; (iv) mitigating myopic behavior; (v) creating a climate for whistleblowing; and (vi) helping in macroeconomic downturns.  Beside the above, executives describe the cultures at their firms in detail and also suggest several sources of publicly available data to measure a firm’s culture.  Because the values espoused by management, the engagement and momentum demonstrated by employees to live those values, and the incentive systems at the firm determined the culture, no single source of publicly available data adequately captures such nuance.  A better approach is needed to measuring cultural aggregates across data sources to quantify each of these determinants of culture.