Corporate culture: The interview evidence

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 What is corporate culture? How important is corporate culture? What mechanisms underlie the creation and effectiveness of corporate culture?4 How do other formal institutions (e.g., governance or compensation) reinforce or work against culture? Do companies think their culture is effective and if not, what deters firms from having an effective corporate culture? Are the upside benefits of an effective culture greater than the downside costs of ineffective culture? What aspects of business performance does corporate culture affect? Does culture impact firm value, productivity, corporate risk-taking, growth, M&A, financial and tax reporting, whether employees take a long-run view, and/or corporate ethics? How can corporate culture be measured? 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. We started the interviews by asking, “What is corporate culture?” Interviewed executives characterize culture as “a beliefs system,” “a coordination mechanism,” “an invisible hand,” “how employees interact with one another,” “a standard of behavior,” “norms around how people treat people,” “part work ethic, part ambiance of the work environment,” “how the company really works, the operating style,” and “the tone for what type of company this is.” Next, we asked the interviewees, “How would you describe the culture at your firm?” Interviewees often described the cultural values espoused by employees as well as the day-to-day practices of their employees. The executives often related their firm's culture to the way decisions were made within the organization and the group dynamics. The executives' views of corporate culture parallel the academic definition of culture. According to management theorists Charles O'Reilly, Jennifer Chatman, and David Caldwell, culture includes “the values and norms widely shared and strongly held throughout the firm that help employees understand which behaviors are and are not appropriate.”7 Cultural values are standards that employees strive to fulfill, while norms are the day-to-day practices that attempt to live out these values. Economists Luigi Guiso, Paola Sapienza, and Luigi Zingales give the example of impeccable customer service being a cultural value, while the associated social norm would be lived out by employees exhibiting a day-to-day positive attitude toward customers.8 Adaptability: we classify cultures as valuing “adaptability” when participants used words such as: start-up culture, aggressive, scrappy, dynamic, innovative, thinking outside of the box, reaching beyond the obvious, little to no bureaucracy and hierarchy, creative, entrepreneurial, can-do, always looking for a better way, flexibility, proactivity, agility, shape the future, constantly looking for innovation, fast-paced, or disruptive. One executive stated, “[Company XX] didn't want processes, they didn't want systems, they didn't want bureaucracy, they wanted people to take responsibility and make decisions even if those decisions turned out to be wrong—fail quickly and then move on. Become a learning machine essentially, where you take each cycle of data, feed it back into the algorithm and make changes based on what you see—as opposed to trying to get it right the first time and spending a year preparing for that first time instead of a week and iterating on the data.” The opposite of adaptable cultures includes descriptions such as “buttoned down, traditional, centralized authority, conventional, traditional, buttoned-up, remote command and control.” An anecdote from an interviewed CFO of a large multinational brings this idea to life, “at [XX], I would describe the culture as very hierarchical. People behave in a way that acknowledges the position in the hierarchy with great deference. At [XX], an analyst would defer to a director just based on position in the hierarchy.” Collaboration: we classify cultures as valuing “collaboration” when participants used words such as: teamwork, cooperative, friendly, supportive, family, participatory, universal recognition, no superstars, sharing, little to no politics, collegial, helpful, selfless behavior, cooperation, no confrontation, or extremely close-knit atmosphere. An example from the interviews is, “certainly the majority of our management are promoted from within. The management team was all partners in the business, rather than employees. Our culture is one of humility, of collaboration, and determination. It's very much that we work together to achieve great things.” Another example is as follows, “we don't show up at work to hit home runs, we show up at work to help advance the runner.” Community: we classify cultures as valuing “community” when participants used words such as: involvement and partnership in the community, respectful of diversity, community-oriented, empowering our employees, delivering sustainable outcomes, inviting and fun environment, citizenship, servant leadership, caring, progressive, open-minded, inclusive, develop all types of talent, we hire people with passion and expect it from all our co-workers, commitment to the environment, caring for those in the communities where we work, employees are valued, giving back to the community, treat all people with dignity and respect, be a passionate leader, optimism and social responsibility, or what's best for our stakeholders as a whole. Customer-oriented: we classify cultures as valuing “customers” when participants used words such as: customer-centric, people-focused, market-driven, service first, customer delight and attention to their needs, the customer is always right, behavior to meet the client demands, we take pride in our service, we listen to our customers, a strong bias on understanding the business issue from the point of view of the customer, creative in meeting the customers' needs, mission to satisfy the customer, ensuring our service meets our promises to customers, meeting and exceeding customer expectations. As one of our interviewees said, “we spend a lot of time on customer service because we believe long term that's going to be the only differentiator we have. To drive that down, through the company, it's engaging with customers all the time from the senior executive level down, reinforcing that culture of owning the customer's problem and fixing it. We do that by spending a lot of time training employees about how it is that we want them to engage with customers and pointing out simple opportunities that they have to engage a customer all the time. We thank customers all the time. We send gifts to customers who spend some time thanking us, and going out of their way. Those are all the things we try to do to foster a customer-service culture.” Detail-oriented: we classify cultures as valuing “details” when participants used words such as: paying attention to detail, develop deep expertise, be precise, emphasis on quality, decisions based on analytics, technology-focused, data-driven, providing the most reliable and highest quality products, consistency in work and products, strong process and engineering focus permeates, continuous process improvement, functional experts solving problems, scientific leaders, evidence-based decision-making, and adherence to design. Integrity: we classify cultures as valuing “integrity” when participants used words such as: compliance driven, credibility focused, accuracy of financials, honest, trustworthy, transparent, accuracy and credibility of financials, compliance with regulations and laws, sincerity, honesty, ethical, moral, accountability. Results-oriented: we classify cultures as valuing “results” when participants used words such as: continuous improvement, accountability, demand excellence, work hard, achieve results, high performance, focused on results, be #1, high expectations, all demanding, investor-driven, internally and externally competitive, make a profit no matter what, produce results not excuses, the right results the right way, utilizing the best talent for the best results, personal ownership of results. In response to the first survey question in GGHR, 14% of the executives indicated that their current culture was in transition or explicitly stated parts of their culture needed to change to be effective. For example, one executive described the cultural transformation at his firm during an explosive growth phase: “to start with, there was a ridiculous degree of individual authority. Many projects, that would later become workgroups of substantial size, were just one individual's job. There was so much going on that communication about a particular project or decision would not have been feasible. And then later, the founder and I engineered more explicitly one of the largest culture shifts in the company away from decentralized decision-making to a much more review-oriented culture.” A few participants indicated that their culture was ineffective and not conducive to growth and profitability because it was “selfish, rudderless, confused, misguided, fragmented, or unrealistic.” An executive illustrated how instability at the top leads to an ineffective culture, “when you have continuity within your team and continuity within your focus that helps a great deal. Whereas if you look at [XX], their perpetual change at the top and their reengineering of what they are going to do and how they are going to go to market create a culture where the associates are very unsure of what is going to happen. There is also a lot of negative press, which is very self-reinforcing to an individual and affects his or her performance.” Executives, however, were quick to point out that there is no unique culture or set of cultural values that is effective at all firms or even within the same firm at all times. A quote summarizes this sentiment: “Clearly, the kind of camaraderie that [XX] enjoys might not be appropriate in a lot of other financial sectors where this deeply humble collaboration is not necessarily the best approach.” There is also, the downside to a very strong culture and it can become a set of handcuffs, limiting freedom of thought, limiting the ability for outside talent to hit the ground running and become part of the The survey asks the following three questions to investigate the importance of corporate culture: (1) How important is corporate culture at your firm? (2) In terms of all of the things that make your firm valuable, where would you place corporate culture? (choose among Top 3, Top 5, Top 10, not in Top 10); and (3) Do you believe that improving your corporate culture would increase your firm's value? As reported in GGHR, 91% of survey respondents consider corporate culture to be “very important” or “important” at their firm. This result is corroborated by the finding that 54% of respondents rank culture as a “top 3” driver of firm value and an additional 25% rank culture as a “top 5” contributor. Thus, collectively, 79% of participants consider culture to be among the top five factors affecting firm value. The interviews provide potential reasons why managers believe that corporate culture is so important for corporate performance. When we asked executives to consider the importance of culture to firm value relative to other factors that create value, most indicated that culture is among the top 3 value-creating forces. No interviewee said corporate culture was outside the top 10. Moreover, various CFOs rated culture as more important than brand, employee talent, financial health, market position, operating plan, product, strategy, unique competitive advantage, and vision for the company. As one executive states, “there is a relation between the financial performance of a company and the culture. A good culture can lead to better results. If you started two businesses, they had the same manufacturing process, same raw materials, distribution, everything was the same,” and one had an effective culture and one had an ineffective culture, “the good culture would outperform the bad culture. This is because the people in the effective culture would be working toward mutual success, they would all be striving to achieve success, whereas, in the ineffective culture, people might just be in it for themselves, trying to get up the corporate ladder, just a more divisive environment. Ultimately, the strong culture is going to succeed.” Another executive pointed out that culture creates competitive advantage by raising a barrier to imitation: “our competitors cannot copy our culture. It's a force multiplier.” When asked whether respondents believed that improving culture would increase their firm value, GGHR report that an overwhelming 92% said yes. But executives acknowledged that changing a firm's culture, at least in the short run, is hard: “culture is always longer term because that is the code/behavior of the company. Until there is a deliberate effort to change it, that persists.” When we asked executives more about the relationship between strategy and culture, they indicated that a firm with an effective culture and mediocre strategy will outperform a company with an ineffective culture and superior strategy. The executives provided such rich detail about the relationship between culture and strategy and how best to align culture and strategy that we wrote an accompanying paper9 that supplements this paper. As an example of the interaction between culture and strategy, one manager mentioned that a company could muddle through with a strong culture and a weak strategy but not the other way around: “when I see companies that are not doing particularly well even if they have a really great strategic plan, it is because they don't communicate that plan well. Then, it almost doesn't matter if you have a plan. Because people on the frontline, the people who are actually selling to your customers, if they don't get that, it's not going to work. The culture actually helps even if you don't have a great plan and you're not communicating well because culture helps tremendously to make sure that you are continuing to do the right things for the company in the long run.” Executives we interviewed provide compelling examples of why corporate culture is important for all firms and at all stages in the firm's development. Consider this example given by one of the interviewees, “the previous CEO did not ascribe to culture. He didn't think it was important. [One of his sayings was] ‘if you want friends, buy a dog.’ He did not have the warm fuzzy approach; he did not want to meet with employees that would have made him uncomfortable. He was brilliant, and a good person, but he didn't bring caring and compassion to the workplace so we didn't have a culture. I [as new CEO] basically filled a huge void. I said we are going to have a culture and values. People were just dying for it. They were so thirsty. Honestly, there was such a void, that it just felt really good for people, and was adopted quickly. The employees wanted to buy into it.” Finally, executives emphasized that having an effective corporate culture helps their firms find common goals in the face of challenges inherent in running an organization with diverse geographies, ages, and attitudes. As one executive said, “we are very diverse. Our San Francisco group is young, likes to work as a team in a common space with very flexible hours. They tend to be more entitled than some of my older employees based out of Boston. The two groups don't necessarily work together very well. On top of that, we have over 1,000 creative people. Creative people really don't like structure. They like to be freewheeling with ideas, and they like to operate somewhat autonomously. Yet all of our divisions, even though they look different, they are working towards that common focus. We have done very well as a company and a key part of that is because we are so involved with our associates trying to work towards that common goal.” The common focus and common goal imply that there is a common culture among all these differences. 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. In GGHR, we ask participants to rank order who or what is the driving force behind setting the firm's current culture. 55% of respondents identify the current CEO as the most important driver of the firm's current culture. A total of 32% of participants identify the owner, 30% i