Corporate culture: The interview evidence

Abstract

Culture is given credit for some of the greatest business successes and blamed for some of the biggest failures. Policymakers often point to dysfunctional corporate culture in banking as a first-order contributor to the recent financial crisis.1 Several books identify culture as a key driver of Google's success.2

We try to answer these questions in multiple ways. First, we surveyed 1348 chief executives and financial officers (CEOs and CFOs, referred to interchangeably as executives or managers) across a wide range of North American public and private firms. The details underlying the survey evidence and an econometric investigation into the effects of culture on business outcomes are reported in an accompanying paper5 by the same four authors that supplement this paper; referred to henceforth as GGHR. Second, the survey contained several open-ended questions. We analyze the text of these questions to enhance our understanding of the survey respondents' views of the corporate culture. Third, we conducted in-depth interviews with business executives representing over 20% of the US equity market capitalization. The purpose of this paper is to discuss the interview evidence and the open-ended responses from the survey. We summarize the survey statistics to provide context for the interviews and open-ended responses.

Survey evidence offers a number of insights into corporate culture. Briefly, the survey shows that managers are largely united in believing that corporate culture is one of the most important forces behind value creation and the ultimate success or failure of a firm. The majority of executives consider corporate culture to be a top three value driver at their companies. Almost every officer believes that improving their corporate culture would increase their firm's value. The current CEO is seen as the most influential person responsible for setting the firm's current culture.

The interviews offer insight into how other firm policies and practices may reinforce or work against the effectiveness of the culture. Boards affect culture not via active management but primarily via CEO choice. The finance function may influence the culture, especially when it serves an internal governance role by acting as steward of integrity. Incentive compensation and hiring, firing, and promotion decisions also may modify the effectiveness of a firm's culture. Some schemes reinforce the culture by rewarding employees for living the values of the culture while other schemes that are not well aligned with the culture lead employees to ignore the cultural values.

Additional survey evidence reveals what decisions and actions are influenced by corporate culture. Managers believe that corporate culture has a substantial effect on the creativity at the firm, the productivity of employees, and hence, on firm value and on profitability. Cultural fit is seen as so important in an M&A deal that most managers would walk away from acquiring a target whose culture is misaligned with the bidder's culture, while other managers would require heavy discounts on the purchase price of the target (between 10% and 30%). More than half of the officers believe that culture is a very important or an important reason why firms either take too much or too little risk in their investments. Effective culture plays a large role in instilling a long-term focus on employees and managers. Most officers believe that a poorly implemented, ineffective culture increases the chances that an employee might act unethically or even illegally. A majority believe that an effective culture would reduce the tendency of companies to engage in value-destroying end-of-quarter practices such as delaying valuable projects to hit consensus earnings.

The interviews help to explain why certain decisions and actions are influenced by corporate culture. Executives caution time and again that the company has to “walk the talk” and live the values espoused for the culture to be effective. Hence, researchers might want to be careful before relying on stated values without validating whether these values are reflected in practice. Executives suggest examining the social norms within the firm would give a better sense of the values. A brazen recent example of this disconnect between stated values and norms is a lawsuit filed by an investor against Goldman Sachs. The suit accused the bank of contradicting its executives' frequent public statements on how important integrity is to the bank. In the judge's decision, he wrote words such as “honesty,” “integrity,” and “fair dealing” apparently do not mean what they say; they do not set standards; they are mere shibboleths (values regarded as no longer important in action). He concluded Goldman's claims of honesty and integrity are “simple puffery.”6

Very few officers believe that their culture is exactly where it should be. When asked what prevents their firm's culture from being where it should be, most survey respondents state that leadership needs to invest more time to develop the culture. Other significant factors determining the effectiveness of the firm's culture are social norms that strengthen: (1) coordination and trust among employees; (2) agreement about the firm's goals, values, and long-term interests; (3) constructive criticism, learning, and the development of new ideas; (4) the sense of urgency with which employees worked; and (5) the predictability of employees' actions and willingness to whistle-blow when something is awry.

Finally, interviewed executives suggest several ways to measure a given firm's culture, including conference call transcripts/analyst reports, employee age/tenure/turnover, studying the company's external communication, press portrayal of the CEO, understanding circumstances surrounding a CEO change, including the culture of the prior firm of the new CEO, external websites with employee opinions such as Glassdoor.com, assessments of whether the culture is in sync with the needs of the business, evaluating the communication patterns inside the company, and actions taken by management.

Before we conducted in-depth interviews with corporate executives, we began by performing a thorough literature review to identify the key themes and unanswered questions in the multidisciplinary corporate culture literature. Based on this review, we created a series of questions that we asked corporate executives during interviews.

Given our interest in investigating the causes and effects of corporate culture in the context of finance and accounting, our 18 interviews were primarily with CFOs, though we also interviewed one CEO and several other top-level managers (e.g., one chief marketing officer). Given the potentially sensitive nature of corporate culture, and to encourage frank discussion, we promised the executives anonymity. The first interview was conducted on October 22, 2014 and the final interview concluded on April 3, 2015.

Interviews are very time-consuming and involve conducting background research about the company, interview time, transcribing, and coding the responses. However, they are an ideal way to begin a project on a topic as subjective as corporate culture. Each interview began with open-ended questions such as, “What, in your view, is corporate culture?” and “How would you describe the corporate culture at your firm?” The interview process allowed us to initially capture broad themes and narrow the focus as the interview proceeded. We also use interviews to identify under-researched topics, and as input in developing survey questions. We categorized the interview responses, which provide many insights into answering the questions posed in the introduction. All interviews were conducted via telephone. Many of the clarifying questions in the interviews are similar to those that appear on the survey instrument. All the contacted executives agreed to be interviewed, and all interviews were done before the survey was administered. The interviews varied in length, lasting from 40 to 90 min. The executives were forthcoming in their responses and were enthusiastic about the topic. With the interviewee's permission, each interview was recorded and transcribed, ensuring accuracy in the presented quotations later in the paper.

Untabulated results reveal that all the companies, which each of our interviewed executives worked, are important to the US economy and make up about 20% of the market capitalization of the NYSE plus NASDAQ. They are much larger than the typical Compustat firm with average (median) sales of $47 billion ($34 billion), and they are more levered, more profitable, and have lower sales growth and higher credit ratings.

While we believe that interviews are a useful way to obtain data that provide insights into corporate culture, we acknowledge that there are limitations. Interviews such as ours suffer from problems such as potential response bias, a limited number of observations, whether questions are misinterpreted, do interviewees really do what they say, do they tell the truth, do they recall the most vivid or their most representative experience. An interview about corporate culture also faces challenges related to whether it is long enough to cover the multiple dimensions of the firm's culture and whether the term corporate culture means the same thing to all respondents. Finally, it is not possible to make statistical statements about cause and effect. Nonetheless, it is our hope that the interview evidence provides fresh insights into the issues we study, perhaps uncovering issues otherwise underdeveloped in research.

Several interviewed CFOs mentioned that the cultural fit of a potential M&A target is very important and is widely discussed in terms of: “integration and targeting a company and what value it could ultimately bring and speed at which things could get done, or way in which talent will assimilate.” Another executive argues that several failed acquisitions are attributable to lack of cultural integration: “you find that lot of deals [M&A transactions] failed to deliver the promised return. Many failed because the companies overpay but others failed because they aren't successful integrating the two and getting the synergies and usually the main driver is culture. If the cultures don't fit, not close enough that one can change and adapt, I bet almost every time that transactions will deliver less than expected.”

To quantify the value importance of culture in an M&A context, in GGHR, we asked CFOs the following hypothetical where two similar firms, A and B, are being targeted. Target B has a misaligned culture though both firms were similar in terms of strategic and operational benefits. In particular, we asked CFOs to quantify a “discount” if any applied to company B. GGHR reported that a remarkable 54% of respondents would not even make an offer for B, given the cultural misalignment. 32% of respondents would discount their offer price for B, with 22% offering a discount as steep as 20% or more of the purchase price of company B.

The interviews offer some color to the result that most firms would walk away from an acquisition of a target that is not a cultural fit: “we would test for cultural fit. If the gap was wide enough it did not matter if it was a great price. We won't move forward. That would disqualify a potential acquisition.” Another manager put it this way, “as a business development guy, I would definitely pay more for the company whose culture is closer. Less friction and assimilation cost, we can get it all done easier, faster and at less cost.” Commenting on the downside risk, one executive mentioned “I think it would be first-order premium. There have been disasters of purchases that had negative value in the end. You purchase the right to never-ending problems because of cultural factors and I would describe this as compatibility.”

Another executive emphasized a bad cultural fit comes down to how much you trust the employees. For example, this executive explained that he “had an attractive valuation on a firm that was a great fit strategically, but the CEO was known to be difficult. I didn't invest because I knew he would have to fire the CEO in a year and I had lots of uncertainty about what kind of person would work for a leader like that.” When asked how exactly the company tested for the cultural fit of the target, one executive responded, “we had a checklist set of questions that we would ask about the elements of the culture and we would compare them with the key elements of our culture. For example, we would look for strong focus on customer, high levels of integrity, open door communication and so on … (among) a list of 10–12[things we looked for in a target].” These comments suggest that a lot remains to be done to understand the role of culture in M&A transactions.

Finally, one executive told us when cultures are very different, as long as they are both effective cultures, the approach at his firm used was not to integrate: “I'm not going to integrate it, touch it, anything. I'm going to have your back and protect that culture. Keep your culture, but connect it to our firm. We'll protect the culture and connect the brand.” This executive highlighted, however, that for these different cultures to co-exist and be effective, employees needed to act with respect and trust for other employees' actions.

In this subsection, we explore the factors that underlie the creation of a company's culture. Then, we investigate which factors promote an effective culture that helps the firm execute its strategy and achieve its goals, and/or which factors work against the effectiveness of the culture.

Given the pervasive effects of culture documented above, one might wonder about the relative magnitude of the downside risk of ineffective culture versus the upside benefits of effective culture. A GGHR survey shows that 39% of respondents believed that the potential “value creation from effective culture is greater than value destruction from ineffective culture” relative to 42% who believed the opposite. Unprofitable firms and those that are poorly positioned in their industries are most acutely aware of the downside potential of the ineffective corporate culture.

Several interviewed CFOs provide examples of how the downside from an ineffective culture could occur much faster than the upside from an effective culture. For instance, one executive said, “culture is also a big factor when it comes to value destruction. Firms that don't have the culture of integrity and compliance end up a lot of time destroying, through the behavior of their executives, what it took them years and years to build them.” Another executive remarked, “the downside risk of culture will always be bigger than the upside because the downside can happen in a nanosecond. The upside is built up over time. [XX] is a great example of that. After the merger, the culture was so difficult and the leader was so focused on one way to do it that he basically almost lost the company. Basically [YY] came in to take it over because of how this guy was running it. Once they changed him out and took it over and stuff, every dollar of synergy that was originally planned to get done from the merger actually got achieved.” Market leaders and profitable firms are those more attuned to the positive effects of the corporate culture. For example, one can argue that an effective culture such as Google's has created far more upside value.

Given the common executive view about the value-creating potential of effective corporate culture, one might wonder why all firms do not have optimal cultures at all times. GGHR show that only 15% of respondents believe that their corporate culture is “exactly where it should be.” In contrast, 54% felt believe their culture “needs some work but is close to where it should be” and 21% believe that their culture needs “considerable work,” and 11% believe that their culture needs a “substantial overhaul.”

We probe the 85% of respondents who indicate that their culture is not perfect to understand what obstacles prevent cultural improvement. The most important factor appears to be “leadership needs to invest more time to develop the culture.” Inefficient workplace interactions and the need for the culture to catch up with recent changes in the business environment are significant but less important obstacles.

Written responses in the survey provide additional insight into leadership deficiencies with respect to ideal corporate culture. The following comments are typical: “founder syndrome,” “arrogance,” “micro-management,” “hierarchical communication (trickle down), slow adoption of technology (limited management exposure to new tools);” “managerial intransigence; lack of strategic focus”; “silos still exist”; “lack of initiative and culpability”; “frequent leadership changes, lack of vision”; “middle managers are unsuccessful in transmitting/enforcing the culture to their charges”; “contradictions to stated values trickle down to everyone”; “inconsistent tone at the top”; “(big) changes in management, where the management has come primarily from another company”; “the business is eat what you kill, which at times doesn't foster teamwork”; “missing financial targets set by CEO on a top down basis without input from staff”; “weak leadership at the very top”; “blocking agents in powerful positions within the firm”; and “various senior management styles which produce conflicting messages.”

Several researchers have attempted to measure various dimensions of a firm's culture using publicly available data. These include: (1) firm fixed effects; (2) data from environmental, social, governance (ESG) providers on particular aspects of firm's human relations and organizational policies namely employee relations (covering union relationships, the presence of profit sharing programs, employee involvement in decision making or employee stock/option ownership, health and safety strength, and retirement benefits packages) and the diversity index (covering female or minority CEO, progress in the promotion of women and minorities to top management positions, female and minority representation); (3) the firm's appearance in the rankings of the top 100 Great Places to Work14; and more fine grained data from the organization including the larger sample of the non-top 100 Great Places to Work firms15; (4) textual analysis of employee-generated reviews of their firm's culture from career intelligence websites such as Glassdoor.com, Careerbliss.com, and Vault.com16; (5) appearance of the word “trust” in the MD&A section of a firm's 10-K filing17; (6) corporate philanthropy18; (7) political orientation of the senior managers proxied by donations to Republicans or Democrats19; (8) compliance records20; and (9) the CEO's unethical behavior.21

There is room for improvement in how culture is measured empirically. For instance, several focus exclusively on human relations variables or corporate social responsibility and ESG measures although a firm's culture likely encompasses many other dimensions. Textual analysis, which covers a variety of dimensions, has achieved some successful external validation,22 but researchers have to assume which words, a priori, would best capture a firm's culture. In an attempt to establish additional means to empirically measure culture, we ask CEOs and CFOs to suggest other potential publicly available data to measure corporate culture.

Some executives think it is very difficult to identify external markers of culture in a satisfactory way from public data. For example, one executive commented, “I don't think you could determine it without the benefit of working there to be quite honest.” A CFO of a large consumer products company stated that they do not discuss culture explicitly in annual reports or conference calls, “you would not see references to our culture. It was implied, it wasn't direct.” When asked how they assess the culture of another company, say, a potential acquisition, a CFO replied, “I talk to people. In the company we just acquired, I was very engaged in talking to the leadership as well as the next level of leadership in that company. I visited the company and got a sense of the engagement of the employees, are these people going to be bought in, are they going to be excited about this change.”

Other executives cautioned against concluding too much about a firm's culture from its externally visible trappings. For example, one executive said, “we have 100% retention, but are we retaining the people that are crap and we really need to fire them, but we don't really like to fire people, so we just move them around all the time?” Another CFO warned against relying on mission statements and published employee codes of conduct. He said, “every company would have in today's world the employee code of conduct but that won't give you much insight on culture because that is so much focused on the behavior that aren't acceptable and compliant and they look very similar from company to company.” Another executive had a similar reaction but a slightly different take on this issue, “At [XX], they were very good at talking about it and having that vision and getting it out there and communicating it clearly. It was just the implementation where they sucked.” To evaluate this question, we asked a survey question asking how closely their current corporate culture tracks closely with the firms' stated values? Only 51% of executives say the culture matches the values “very closely.” Hence, researchers need to be cautious before assuming that the firm's stated values correspond to its operational culture.

Given that the values espoused by management, the social norms adopted by employees to live out those values, and the formal institutions at the firm all work together to determine the effectiveness of the current culture, we conclude that no single source of publicly available data adequately captures such nuance. A better approach to measuring culture might be to aggregate across data sources to quantify each of these determinants of culture.

Corporate culture is perhaps the most under-researched value driver among the important contributors to firm performance. In particular, GGHR report that 91% of surveyed executives believe that corporate culture is important to their firms. A total of 79% place culture among the top three or the top five value drivers of their company. A total of 54% of executives would walk away from an acquisition target that is a cultural misfit. Senior leadership, especially the current CEO, sets the current culture in most firms. The board of directors and compensation schemes reinforce the current culture of the firm, both in positive and negative ways.

Effective cultures boost profitability and value by aiding employee productivity and creativity. Effective cultures also enable employees to focus on the long term, embrace an appropriate amount of risk, avoid real earnings management, and comply with regulations. Firms with effective cultures encourage employees to suggest improvements and develop ideas organically, and also to blow the whistle if they notice something amiss in the trenches. We realize that empirical research in culture is hampered by measurement difficulties. Interviewed executives suggest several avenues to measure a firm's corporate culture.

Literature on corporate culture in economics, finance, and accounting is beginning to emerge. Many first-order questions remain to be addressed. Can we develop defensible measures of culture from public sources of data? Can we identify causal associations in large sample data between culture and firm value, profitability, risk-taking, choice of M&A targets, M&A performance, and employee creativity and productivity? How much of the blame for the financial crisis can be attributed to corporate culture in banks?

From the early days of this project, we have heard, loudly and over and over, how important culture is, especially from CFOs who are typically the numbers people and are usually suspicious of hard-to-quantify aspects of the business environment. We believe that our paper conveys a powerful message that academics and practitioners need to hear. Corporate culture does matter, a lot, more than many of the things that academics study. The importance of the topic means culture deserves the research attention of serious, rigorous scholars and we hope GGHR and this paper will serve as a bridge to enable such future work.