Corporate Culture – Duke University

00:00 – [Narrator] This is Duke University.

00:13 – 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.

00:23 This project’s been supoorted by the COLE Center here at Fuqua, and by CFO Magazine.

00:30 Now if you read the headlines, you see corporate culture often gets blamed or gets credit for dramatic corporate events.

00:37 So for example the VW emissions scandal and recent events at Wells Fargo, we read about corporate culture leading to maybe a bad outcome.

00:46 With Google, corporate culture gets at least some of the credit for Google having such a fantastic and successful company.

00:52 So corporate culture is everywhere, and I have to admit I approached this research project as a bit of a skeptic.

00:58 What exactly is this corporate culture?

01:01 Is it really as important as these headlines say it is?

01:04 And if it is, how does it work?

01:06 These are questions that I wanted to answer and our research team wanted to try to answer.

01:11 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.

01:20 What they think of it.

01:21 How it works at their companies.

01:23 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.

01:35 So we had quite a large number of companies and a lot of depth and importance of those companies.

01:40 Now it took 50 MBA students as research assistants

to help us pull this off.

01:46 We’re really thankful for that help and we couldn’t have done it without them.

01:50 Alright, first question: is corporate culture important?

01:53 Yes, executives tell us resoundingly corporate culture is very important and it affects many parts of the company.

02:01 So we went about trying to address this in two different ways.

02:05 One was we gave executives a long list of possible value drivers, things that create value at their companies.

02:12 And we asked them to rank those items.

02:14 And it turns corporate culture came out on top, the biggest value driver at companies.

02:20 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.

02:30 Okay, so corporate culture very important, it came out on top.

02:34 Not just in the United States but around the globe.

02:37 In Africa, Europe, in Asia, in Latin America, we saw culture showing up as either number one or maybe a close second.

02:44 So culture’s very important.

02:46 Second way we addressed this is we just straight on asked, “How important is corporate culture at your firm?”

02:52 And here about 90% of executives told us culture is either important or very important.

02:58 And most of them said very important.

03:00 So we’ve established then that corporate culture is very important.

03:04 The next question is what is it.

03:07 What exactly is corporate culture?

03:09 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.

03:16 I’ll paraphrase.

03:17 The first is that corporate culture is like the tendons in our body.

03:22 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.

03:31 Okay, like that.

03:32 Culture is what helps the company reach it’s potential.

03:36 Okay, holds the company together, if you will.

03:38 Another example is in the example of an orchestra.

03:42 Corporate culture is like sheet music.

03:44 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.

03:52 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.

04:00 Likewise the culture is what helps a company reach its potential.

04:04 It helps the employees march together.

04:07 So those interviews give us a nice idea of what culture is.

04:10 But like true academics we want to put more structure on it.

04:13 We wanted a little framework, a little model if you will.

04:16 So we relied on existing research and kind of built on that.

04:21 And what existing research says is there’s kind of two ways you can break down a company.

04:25 One part is the formal institutions, okay.

04:28 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.

04:40 Those are important.

04:41 People have done a lot of research on them.

04:43 We’re not researching them so much in this paper.

04:46 On the other side, you have the informal aspects that we call corporate culture.

04:51 And culture has really two main components:

04:53 the values and the norms.

04:56 Okay, a little lingo.

04:58 But the values, they’re sort of like the 10 commandments.

05:00 They’re chiseled on stone.

05:03 They’re the things we aspire to, that we’d like to achieve.

05:07 But the norms are actually the day-to-day living as we strive to reach those values.

05:13 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.

05:26 In fact, we’re one of the few papers to focus on norms.

05:28 And our conclusion is, without the norms the values and these other things don’t matter very much.

05:34 You can look at a recent editorial by the former CEO of IBM in the editorials of the Wall Street Journal.

05:41 And he says something very similar.

05:43 Values, you look along websites you see very similar values across companies.

05:48 But the norms, where the feet hit the ground if you will, the living out of the values, the norms that is,

05:55 is really what matters.

05:57 So how does culture work?

06:00 You need to have values, norms, and these formal things, the compensation policy for example, working together

06:07 and reinforcing each other to actually achieve an effective corporate culture.

06:12 So you need all of these aligned.

06:17 Now a little more detail, how does culture work.

06:20 What we wouldn’t want to do is think, “Oh, if I get a good culture, I’ll get a good outcome.”

06:26 What we’d rather have you think of it as really a two-step process.

06:30 The second step is, if I have an effective culture, I get the desired outcome.

06:35 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?”

06:43 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

06:52 to give you an effective culture.

06:55 And this is what we think companies should focus on a lot is what it takes to get an effective culture.

07:01 What are some of the outcomes from having an effective culture?

07:04 Or an ineffective culture as it might be?

07:07 I’m gonna talk about four things briefly.

07:10 If you look in the research paper, there’s probably a dozen more outcomes you could talk about,

07:14 we could talk about.

07:15 One is investment risk.

07:17 We just lived through a financial crisis: a deep depression, or deep recession excuse me.

07:23 And what we’ve noticed is some companies seem to take on too much risk.

07:29 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.

07:39 A little surprising to us, a number of companies told us their companies take on too little risk.

07:45 They’re too satisfied with the status quo.

07:47 And again it’s the culture isn’t quite right to encourage the company to take on entrepreneurial risks.

07:54 So bottom line here on investment risk is if you have an effective culture you take the appropriate amount of investment risk.

08:02 Alright, ethics.

08:04 85% of executives tell us that when the culture is not right, it can lead to unethical, or even illegal, actions by employees.

08:16 So it’s not just the headlines that we read about.

08:18 It’s actually 85% of executives saying they need to get the culture right at their company or things could go sour.

08:27 Third, short-term versus long-term.

08:29 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.

08:36 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.

08:44 When they have the good outcome focusing on the long-term, it’s because the culture is working right.

08:49 They have an effective culture.

08:51 And then finally, let me give you a more specific example: mergers and acquisitions.

08:56 Very important investment decision if you will.

08:59 So here we ask if your company has a target company in mind.

09:03 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.

09:12 But the culture is not properly aligned, so you have a misaligned culture.

09:18 When that happens, we wanted to ask executives, “How much of a discount would you require “to acquire that target?”

09:26 And that would give us a sense of just how important culture is.

09:30 So misaligned culture, how much would that reduce the price you’re willing to pay?

09:34 And we thought we’d hear maybe 15%, 20%.

09:37 In fact, the main thing we heard is most companies wouldn’t pursue an acquisition at all if the culture is misaligned.

09:46 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.

09:56 Alright, let me give you a little more detail here on some of the statistical stuff we did.

10:03 So far I’ve been at pretty high level.

10:05 So we ran regressions where we tried to explain how does a company get an effective corporate culture that would lead to creativity.

10:14 So let’s think of creativity or innovation you might call it.

10:17 Well the value that is going to lead to creativity is adaptability.

10:22 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.

10:31 But, as we said before, it’s not just the value that matters, it’s also the norms.

10:36 So what are the norms that lead to creativity?

10:40 It’s developing new ideas organically

10:42 within your company, and the employees having comfort in offering and receiving critiques.

10:48 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.

11:00 Now interestingly, there’s another value that was listed but had a negative effect on creativity.

11:06 When a company is really results driven, results oriented, maybe too focused on the bottom line, that does not lead to creativity.

11:14 It actually hurts it.

11:16 Alright, second example, ethics.

11:19 What value leads to ethical behavior?

11:22 Well, integrity is such a value.

11:24 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.

11:35 Here, trust among employees is the most important norm and also willingness of the employees to report unethical behavior.

11:44 So if you have that happening in your work environment, you get the good positive ethical outcomes that you desire.

11:50 Now there’s a lot more detail in the paper that you can look at if you want.

11:54 I’m just trying to give you a sampling today.

11:57 Alright to summarize so far, corporate culture is first order important.

12:01 We think of culture as being made up of values and norms.

12:05 The norms are the day-to-day living of those values.

12:08 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.

12:19 So that sounds all nice, but do all companies have effective cultures?

12:24 If it’s that easy, does everyone achieve it?

12:26 No they don’t.

12:28 About 15% of companies tell us they have their culture right where they want it.

12:33 The rest don’t.

12:34 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.

12:43 So about a third of companies say they have a lot of work to do.

12:47 How do you improve your corporate culture?

12:49 Alright, starts with leadership.

12:52 The leaders must define the culture and they must live those corporate and cultural values.

12:58 We’re not talking about the board of directors.

12:59 The board of directors hires the CEO.

13:02 But the CEO and the leadership team are the ones that instill that corporate culture into the company.

13:09 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.

13:17 So we need employees of all levels to buy in and to live the culture on a day-to-day basis.

13:23 Second point, the company must invest in corporate culture.

13:28 It must dedicate time and resources to instill and to reinforce the culture at the company.

13:34 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.

13:49 And finally, this is a continuous, long-term commitment by the company.

13:54 This is not something you achieve in a weekend retreat somewhere.

13:57 This has to be happening week after week at the company to really get the culture to where you need it to be.

14:03 So I told you at the beginning, I started as a skeptic.

14:06 Well our research team has concluded that culture is in fact very important.

14:10 And I hope I’ve been able to convey to you some of the ways that culture works at the firm.

14:15 I got two research papers out there that you can look up if you want more details.

14:19 The first paper has a lot of the statistical analysis from survey results.

14:24 The second focuses on the interviews.