Corporate Culture - YouTube

- [Narrator] This is Duke University.

- 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.

This project's been supoorted by the COLE Center here

at Fuqua, and by CFO Magazine.

Now if you read the headlines, you see corporate culture

often gets blamed or gets credit

for dramatic corporate events.

So for example the VW emissions scandal

and recent events at Wells Fargo,

we read about corporate culture leading

to maybe a bad outcome.

With Google, corporate culture gets at least some

of the credit for Google having such a fantastic

and successful company.

So corporate culture is everywhere,

and I have to admit I approached this research project

as a bit of a skeptic.

What exactly is this corporate culture?

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

And if it is, how does it work?

These are questions that I wanted to answer

and our research team wanted to try to answer.

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.

What they think of it.

How it works at their companies.

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.

So we had quite a large number of companies

and a lot of depth and importance of those companies.

Now it took 50 MBA students as research assistants

to help us pull this off.

We're really thankful for that help

and we couldn't have done it without them.

Alright, first question: is corporate culture important?

Yes, executives tell us resoundingly

corporate culture is very important

and it affects many parts of the company.

So we went about trying to address this

in two different ways.

One was we gave executives a long list

of possible value drivers, things that create value

at their companies.

And we asked them to rank those items.

And it turns corporate culture came out on top,

the biggest value driver at companies.

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.

Okay, so corporate culture very important,

it came out on top.

Not just in the United States but around the globe.

In Africa, Europe, in Asia, in Latin America,

we saw culture showing up as either number one

or maybe a close second.

So culture's very important.

Second way we addressed this is we just straight on asked,

"How important is corporate culture at your firm?"

And here about 90% of executives told us

culture is either important or very important.

And most of them said very important.

So we've established then that corporate culture

is very important.

The next question is what is it.

What exactly is corporate culture?

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.

I'll paraphrase.

The first is that corporate culture

is like the tendons in our body.

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.

Okay, like that.

Culture is what helps the company reach it's potential.

Okay, holds the company together, if you will.

Another example is in the example of an orchestra.

Corporate culture is like sheet music.

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.

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.

Likewise the culture is what helps a company

reach its potential.

It helps the employees march together.

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

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

We wanted a little framework, a little model if you will.

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

And what existing research says is there's kind of two ways

you can break down a company.

One part is the formal institutions, okay.

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.

Those are important.

People have done a lot of research on them.

We're not researching them so much in this paper.

On the other side, you have the informal aspects

that we call corporate culture.

And culture has really two main components:

the values and the norms.

Okay, a little lingo.

But the values, they're sort of like the 10 commandments.

They're chiseled on stone.

They're the things we aspire to, that we'd like to achieve.

But the norms are actually the day-to-day living

as we strive to reach those values.

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.

In fact, we're one of the few papers to focus on norms.

And our conclusion is, without the norms the values

and these other things don't matter very much.

You can look at a recent editorial by the former CEO of IBM

in the editorials of the Wall Street Journal.

And he says something very similar.

Values, you look along websites you see very similar values

across companies.

But the norms, where the feet hit the ground if you will,

the living out of the values, the norms that is,

is really what matters.

So how does culture work?

You need to have values, norms, and these formal things,

the compensation policy for example, working together

and reinforcing each other to actually achieve

an effective corporate culture.

So you need all of these aligned.

Now a little more detail, how does culture work.

What we wouldn't want to do is think,

"Oh, if I get a good culture, I'll get a good outcome."

What we'd rather have you think of it

as really a two-step process.

The second step is, if I have an effective culture,

I get the desired outcome.

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?"

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

to give you an effective culture.

And this is what we think companies should focus on a lot

is what it takes to get an effective culture.

What are some of the outcomes

from having an effective culture?

Or an ineffective culture as it might be?

I'm gonna talk about four things briefly.

If you look in the research paper,

there's probably a dozen more outcomes you could talk about,

we could talk about.

One is investment risk.

We just lived through a financial crisis:

a deep depression, or deep recession excuse me.

And what we've noticed is some companies seem

to take on too much risk.

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.

A little surprising to us, a number of companies

told us their companies take on too little risk.

They're too satisfied with the status quo.

And again it's the culture isn't quite right

to encourage the company to take on entrepreneurial risks.

So bottom line here on investment risk

is if you have an effective culture

you take the appropriate amount of investment risk.

Alright, ethics.

85% of executives tell us that when the culture

is not right, it can lead to unethical,

or even illegal, actions by employees.

So it's not just the headlines that we read about.

It's actually 85% of executives saying

they need to get the culture right at their company

or things could go sour.

Third, short-term versus long-term.

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.

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.

When they have the good outcome focusing on the long-term,

it's because the culture is working right.

They have an effective culture.

And then finally, let me give you a more specific example:

mergers and acquisitions.

Very important investment decision if you will.

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

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.

But the culture is not properly aligned,

so you have a misaligned culture.

When that happens, we wanted to ask executives,

"How much of a discount would you require

"to acquire that target?"

And that would give us a sense of

just how important culture is.

So misaligned culture, how much would that reduce

the price you're willing to pay?

And we thought we'd hear maybe 15%, 20%.

In fact, the main thing we heard is most companies

wouldn't pursue an acquisition at all

if the culture is misaligned.

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.

Alright, let me give you a little more detail here

on some of the statistical stuff we did.

So far I've been at pretty high level.

So we ran regressions where we tried to explain

how does a company get an effective corporate culture

that would lead to creativity.

So let's think of creativity

or innovation you might call it.

Well the value that is going to lead

to creativity is adaptability.

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.

But, as we said before, it's not just the value

that matters, it's also the norms.

So what are the norms that lead to creativity?

It's developing new ideas organically

within your company, and the employees having comfort

in offering and receiving critiques.

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.

Now interestingly, there's another value that was listed

but had a negative effect on creativity.

When a company is really results driven, results oriented,

maybe too focused on the bottom line,

that does not lead to creativity.

It actually hurts it.

Alright, second example, ethics.

What value leads to ethical behavior?

Well, integrity is such a value.

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.

Here, trust among employees is the most important norm

and also willingness of the employees

to report unethical behavior.

So if you have that happening in your work environment,

you get the good positive ethical outcomes that you desire.

Now there's a lot more detail in the paper

that you can look at if you want.

I'm just trying to give you a sampling today.

Alright to summarize so far, corporate culture

is first order important.

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

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

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.

So that sounds all nice, but do all companies

have effective cultures?

If it's that easy, does everyone achieve it?

No they don't.

About 15% of companies tell us

they have their culture right where they want it.

The rest don't.

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.

So about a third of companies say they have

a lot of work to do.

How do you improve your corporate culture?

Alright, starts with leadership.

The leaders must define the culture

and they must live those corporate and cultural values.

We're not talking about the board of directors.

The board of directors hires the CEO.

But the CEO and the leadership team are the ones

that instill that corporate culture into the company.

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.

So we need employees of all levels to buy in

and to live the culture on a day-to-day basis.

Second point, the company must invest in corporate culture.

It must dedicate time and resources to instill

and to reinforce the culture at the company.

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.

And finally, this is a continuous, long-term commitment

by the company.

This is not something you achieve

in a weekend retreat somewhere.

This has to be happening week after week at the company

to really get the culture to where you need it to be.

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

Well our research team has concluded that culture

is in fact very important.

And I hope I've been able to convey to you

some of the ways that culture works at the firm.

I got two research papers out there that you can look up

if you want more details.

The first paper has a lot of the statistical analysis

from survey results.

The second focuses on the interviews.