Communicating Culture Consistently: Evidence from Banks

Jillian Grennan is Assistant Professor of Finance at the Duke University Fuqua School of Business. This post is based on her recent paper.

Corporate culture is integral to business success, and its role in banking has attracted considerable attention since the financial crisis of 2007 and 2008. For example, Fahlenbrach, Prilmeier and Stulz (2012) found banks that performed poorly in the 1998 crisis also performed poorly in the recent crisis. This persistence is consistent with a culture explanation. Egan, Matvos, and Seru (2018) found many financial advisors repeatedly engage in misconduct, but they seem to suffer little career consequences because some firms don’t seem to mind.

As a finance professor at Duke University, I study how culture affects firms and what they can do to shape it. In a research study with John Graham, Campbell Harvey, and Shiva Rajgopal, we surveyed 1,348 corporate executives and found that 90 percent believed that culture was important at their firms while 92 percent said improving their firm’s culture would increase the value of the company. But only 16 percent of firms said their culture was where it needed to be, and it wasn’t clear that these executives even knew how to change that.

In my latest research study, I focus on banks. Given the persistent conduct failures and ethical lapses facing the financial services industry, it seems clear that many of these executives need to improve their firms’ cultures. Yet part of the challenge to reforming culture is limited empirical understanding of the mechanisms that link culture to success. My new research shows that banks perform better when they communicate their culture consistently—I document the financial benefit of culture to banks, and show one potential indicator of an effective culture.

To reach these conclusions, I looked at historical versions of websites from 2004 to 2017 for 300 U.S. banks, from household names to smaller, regional institutions. I read through the various sections of the websites—About Us, Careers, Investor Relations, and so on—looking for words related to key cultural values, such as integrity, collaboration, and risk management, which is particularly relevant to banking. Surprisingly, the majority of banks inconsistently communicate their values across their websites. For example, most banks tell their investors they have lots of integrity, but many banks don’t convey that nearly as often to their employees, who are tasked with carrying out this trust and integrity.

Next, I link the bank’s consistency in communicating cultural values to performance. Those with more consistency achieve greater return on equity and better operating and stock performance. These findings hold during the crisis years and in the post crisis period. The same results hold true across the banking spectrum. This is not just a big bank phenomenon. Other bank attributes such as leverage, deposit ratios, Tier-1 capital ratios, risk appetite, and governance also cannot explain the finding. Further, it doesn’t seem to be the cultural values themselves that matter—it’s whether bank leaders are consistently emphasizing those values. This makes sense given that not all banks emphasize the same values. Some banks might emphasize integrity, while others focus more on innovation.

Crucially, I also find the culturally inconsistent banks are more exposed to private mortgage-backed securities during the crisis. This is important, because any banker should be able to identify a bad loan; but private mortgage-backed securities were a new thing during the crisis, and not much was known about them. It’s in those situations, when employees don’t know what to do, that the employees rely on these implicit rules, the culture, to guide them. I found the firms that didn’t communicate their culture as consistently got into much more trouble with these securities. This finding is a key to understanding how and why culture is integral to success. It suggests the positive influence of communicating culture consistently derives from aligning employees’ expectations, especially when unforeseen events arise.

To be certain that it is consistency in cultural communication underlying my findings, I show that my measure of inconsistency matches external sources. Using the transcripts of earnings guidance, I look for those unscripted moments in which executives make comments about culture, employees, or qualitative aspects of performance. I find a significant negative correlation between executives that align expectations about culture in their guidance calls and the number of cultural values that are miscommunicated. I then exploit this correlation in the data to show my findings are robust to the many factors that I may not observe in the data.

In conclusion, I hope that the bankers can take away from this research that they need to do a better job of consistently communicating their cultural values across stakeholders. In general, I found they have become more consistent since the crisis, but there is still plenty of room for improvement. The two cultural values I found most likely to be inconsistently communicated are integrity and a commitment to customer service—the two exact areas you would think banks would know they most needed to improve as they dealt with the distrust arising from the recession. Banks rely on trust from everyone in the system, and this research shows one clear way they can effectively build it.

I also hope that this study encourages other academics to focus on ways to improve culture. Some of my research establishes the importance of cultural values and norms, or day-to-day practices that employees adhere to, for performance. While my other research focuses on the role of formal institutions such as governance leading to underinvestment in culture. This is my first attempt at studying a mechanism for improving culture that is internal to the firm. But there are many other factors internal to the firm (e.g., onboarding, hiring, and mentorship, etc.) that seem important and worth studying.

The complete paper is available here.

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