Corporate Culture In A New Era: Views From The C-suite

Jillian Grennan is an Associate Adjunct Professor of Finance and Sustainability at the University of California, Berkeley Haas School of Business. This post is based on an article forthcoming in the Journal of Applied Corporate Finance by John Graham, Professor Grennan, Campbell R. Harvey, and Shivaram Rajgopal. Related research from the Program on Corporate Governance includes Learning and the Disappearing Association between Governance and Returns (discussed on the Forum here) by Lucian A. Bebchuk, Alma Cohen, and Charles C.Y. Wang; and What Matters in Corporate Governance? (discussed on the Forum here) by Lucian A. Bebchuk, Alma Cohen, and Allen Ferrell.

Corporate culture has been likened to an organization’s heartbeat–the less visible, somewhat intangible force that shapes its movements, health, and longevity.  Just as humans need a strong heartbeat to live, culture is often the difference between business success and failure.  However, it is difficult to design a culture that drives great business success.  Part of the challenge is in connecting the intangible attributes of a workforce to tangible outcomes like productivity and profitability.  Another component is aligning employees’ values, expectations, and behaviors to drive growth.  But, perhaps the biggest challenge in today’s business environment is knowing which cultural elements to champion in the moments that matter most for employees, as evidenced by the unprecedented workplace upheaval in recent years.

In our article, “Corporate Culture in a New Era: Views from the C-Suite,” recently published in the Journal of Applied Corporate Finance, we synthesize insights from a decade of interviews and surveys with chief executives and top financial executives.  For instance, drawing on survey data from 1,348 North American executives who represent many of the largest firms in the economy, we found a consensus among executives on the significant contribution of culture to long-term firm value.  This research underscores how culture, often overshadowed by easier-to-calculate financial metrics, is a critical, intangible asset that influences employee motivation, retention, and ethical behavior.  

Executives describe the crucial role culture plays in mergers and acquisitions, with many willing to walk away from deals if there are cultural misalignments between bidder and target.  Executives also connect culture to a spectrum of corporate policies and strategic decisions, from compliance to innovation to risk-taking, indicating its pervasive influence.  Given the many links between culture and firm performance, we advocate for a deliberate, leadership-driven cultivation of culture.  In doing so, we provide guidance into how to integrate cultural considerations into corporate governance and performance evaluations, with the recognition that doing so may help to unify employees’ perspectives and spur firm growth.

Our research suggests that culture is not a luxury good, rather it is essential to continually invest in culture throughout the business cycle.  Without continuous investment, the deliberate elements of culture deteriorate.  And while 92% of executives believe improving the current culture at their firms would increase firm value, they indicate there are many barriers to improving culture.  In several cases, executives expressed how neglecting a seemingly small issue in the company’s culture culminated in a scandal or led to much deeper-rooted cultural issues over time.  As one executive put it, “by failing to attend to the embers of the camp fire, the Board of Directors were (later) left battling a forest fire.”  This implies that best practices for executives seeking to foster an effective culture is to continuously invest in culture, as well as the governance and incentive systems that reinforce culture.

Investing in corporate culture is imperative because it shapes employees’ attitudes towards risk-taking and their strategic focus.  In our study, 85% of executives recognized that an ineffective culture leads to a higher risk of unethical or illegal employee behavior.  Effective cultures are shown to encourage appropriate risk-taking and a long-term outlook, which contrasts with ineffective cultures that foster short-termism.  For instance, executives indicate that culture influences decisions to pursue projects that boost immediate stock prices at the cost of long-term value.  Most executives agreed an effective culture could curb such practices, like prioritizing achieving short-term earnings targets instead of appropriately investing in value-creating projects. In fact, among the executives indicating that they prioritize long-term value creation, 80% said their culture guides their decisions.

Another key finding from our research is that leadership is the pivotal piece in the cultivation and sustenance of the culture. The CEO, in particular, is identified as the most influential figure in setting the current culture.  This is consistent with anecdotes that suggest the return on investment in culture is highest when employees are confident in leadership. Our study further elaborates the instrumental role the Board of Directors plays in reinforcing or, conversely, undermining corporate culture through their governance practices and oversight of the CEO.

These findings about culture have grown increasingly important as workplace conditions have evolved.  Now, during times of higher inflation and significant student-loan debt, younger and older workers are prioritizing different aspects of jobs and bringing even more diverse perspectives to the firm.  To unify employees’ expectations about how to fit in and succeed in the firm, leaders wishing to cultivate loyalty and retain employees need to address a myriad of pressures.  With evolving work patterns and increased demands on management and governance, there are many ways leaders can foster an effective culture that supports growth, and our research provides additional insights into best practices. 

For example, an executive who emphasized transparent communication at their firm also achieved success by enhancing clarity around career advancement. The CEO fostered a culture of openness and clear information exchange, encouraging employees to live out this culture every day at the firm, and importantly, championing these same cultural values at career development days.  During these events, employees had opportunities to explore various roles and see clear paths for career progression, gain honest insights from those already in the positions, and register for skills improvement workshops.  The CEO’s approach exemplifies how understanding the needs of employees and continuously investing in the culture can cultivate growth, and ultimately drive the firm’s success.

In conclusion, since the inception of our research agenda into corporate culture nearly a decade ago, the critical role of culture has increased according to CFOs–despite the reputation of finance chiefs to be skeptical of intangible business factors. Unsurprisingly, our research withstands the evolving challenges leaders encounter in motivating and retaining talent. Crucially, our findings deliver a compelling argument for both academics and practitioners: Corporate culture is not just important; it is perhaps more significant than many metrics traditionally emphasized.  For additional insights into some of the best practices that executives shared with us for reinforcing the cultural values and cultivating an effective culture, please see our article “Corporate Culture in a New Era: Views from the C-Suite,” as well as prior studies, “Corporate Culture: Evidence from the Field,” “Corporate Culture: the Interview Evidence” and “What Do Financial Executives Say about Corporate Culture and Strategy?

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