Ideas for Leaders #641

Corporate Culture: A Key Drivers of a Firm’s Value

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Key Concept

A survey of more than 1300 executives confirms that for most leaders, corporate culture is one of the top five contributors to a firm’s value — and that current CEOs are most responsible for establishing an effective culture.

Idea Summary

How important is corporate culture to the success of a company, and what factors play into developing an effective or ineffective culture? A team of researchers from Duke University’s Fuqua School of Business and Columbia Business School explored these questions through an extensive survey of 1348 CEOs and CFOs, followed up by in-depth interviews with about 20 corporate leaders. The results were published in two separate papers: Corporate Culture: Evidence from the Field, and Corporate Culture: The Interview Evidence.

The surveys and follow-up interviews yielded the following insights into corporate culture:

The importance of culture as a driver of firm value. For 54% of respondents, culture was one of the top three drivers of firm value, while an additional 25% put culture in the top five. Thus, nearly 80% of participants considered corporate culture to be one of the top five contributors to the value of a company.

The CEO as the driving force of culture. Asked to name whom or what was most responsible for setting the corporate culture, a majority of respondents (55%) named the current CEO. The owner was cited by only 32% of respondents, while 30% named founders as the most important determinant of corporate culture. Interestingly, a meagre 12% cited the board of directors as being most influential on corporate culture.

Social norms as determinants of and contributors to effective culture. Social norms are the keys to developing and maintaining an effective corporate culture. Employees must buy into the positive behaviours and attitudes that reflect the desired culture. Among the social norms cited by respondents as determinants of an effective culture were coordination (77%) and trust (85%) among employees; agreement about goals and values (70%) and long-term decision making (73%); a sense of urgency (61%); and consistent actions (55%).  

Formal institutions that can modify a firm’s culture. The survey and subsequent interviews also revealed which firm policies, practices and formal institutions could either reinforce or undermine an effective corporate culture. Hiring, firing and promotion policies, incentive compensation, and the finance function all played an important positive role in the culture of a firm. For example 50% of respondents said incentive compensation and the finance function in their companies reinforced a positive culture. The results were mixed in the area of governance, with 56% saying their board of directors reinforced the culture, 11% saying it worked against an effective culture and a surprising 33% saying the company’s governance had no impact on culture.

Business outcomes. According to respondents, culture has an impact on a wide variety of business outcomes, including creativity (57%), profitability (54%), productivity (62%), and the firm’s growth rate (51%). For the 60% of respondents who considered the risk taking in their companies appropriate, 61% credited the company’s culture.

Given the substantial influence of corporate culture in all of these areas, it is no surprise that culture makes the top five (and for many, the top three) contributors to firm value.

 

Business Application

As noted above, the key driver of a company’s culture is you, the CEO. However, only 15% of respondents said they believed that their company’s culture was “exactly where it should be.” Clearly many CEOs are not getting the job done. Three reasons stand out, and need to be addressed:

Leadership deficiencies. These deficiencies range from arrogance, micro management and intransigence to lack of vision, conflicting messages and weak leadership at the top or blocking agents in power positions in the firm. In some cases, leaders don’t get staff input on financial targets and then blame others when those targets aren’t met.

Underinvestment in the culture. Developing and maintaining a corporate culture takes time, and there are no short cuts. As one leader told the research team: “One thing I’ve realized as I’ve reached the most senior management is how much work it is and how conscious you have to be to sustain and adapt that culture.”

Wrong social norms. Stated values become meaningless if the social norms do not keep pace — or even worse, deliberately work against the culture. To ensure an effective and productive culture, leaders must determine whether 1) people are behaving in the way they should be behaving, and if not, 2) why not?

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Authors

Institutions

Source

Idea conceived

  • September 2016

Idea posted

  • January 2017

DOI number

10.13007/641

Subject

Real Time Analytics