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«Corporate Culture: Evidence from the Field* John R. Graham Duke University, Durham, NC 27708 National Bureau of Economic Research, Cambridge, MA ...»

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Corporate Culture: Evidence from the Field*

John R. Graham

Duke University, Durham, NC 27708

National Bureau of Economic Research, Cambridge, MA 02138

Campbell R. Harvey

Duke University, Durham, NC 27708

National Bureau of Economic Research, Cambridge, MA 02138

Jillian Popadak

Duke University, Durham, NC 27708

Shiva Rajgopal

Columbia University, New York, NY 10027

PRELIMINARY VERSION: October 14, 2015 (data collection runs through October 31, contact

authors for updates, tables only point to high level unconditional results in this version)


We survey 933 North American CEOs and CFOs and interview 16 to understand (i) the importance, antecedents and consequences of corporate culture; (ii) the mechanisms that underlie the creation and effectiveness of corporate culture; as well as (iii) the factors that deter a firm from achieving its aspirational culture. Our survey and interviews reveal the following insights. First, executives characterize culture as “a beliefs system,” “a coordination mechanism,” “an invisible hand,” or “how employees interact with one another.” Second, 91% of executives say culture is important at their firm and 78% of executives view culture as one of the top 3 or top 5 factors that affect their firm’s value.

Cultural fit in M&A deals is so important that 48% of executives would walk away from a target that is a cultural misalignment. Third, 52% feel that culture is primarily set by the current CEO. Fourth, boards of directors do not directly choose the firm’s culture; instead, they influence the choice of culture by picking the CEO (who sets the culture). Boards also modify the eventual success of the culture by reinforcing or undermining the culture via specific policies they influence like incentive compensation. Fifth, an effective culture improves firm value and profitability by (i) fostering creativity and encouraging productivity; (ii) promoting more risk tolerance; (iii) mitigating myopic behavior; (iv) creating a climate for suggesting critiques and for allowing ideas to germinate organically; and (v) by compensating for mistakes in ways that the firm’s assets cannot. In addition to the above, executives describe the cultures at their firms in detail and also suggest several sources of publicly available data to measure corporate culture.

JEL Classification: G3, Z1 Keywords: Corporate Culture, Valuation, Finance, Compensation, Risk, Short-termism *Authors: Graham, john.graham@duke.edu, Harvey, cam.harvey@duke.edu, Popadak, jillian.popadak@duke.edu, Rajgopal, sr3269@columbia.edu. We thank CFO magazine and Fuqua’s Center on Leadership and Ethics (COLE) for their partnership in conducting the survey; the results presented herein do not necessarily reflect their views. We are especially grateful to our research team of 56 RAs who helped transcribe interviews, discover CXO emails, and send personal invitations to participants. Each of these RAs is recognized in the endnote. We thank the following people for providing helpful feedback on the survey instrument: Sigal Barsade, Charles Calomiris, John Core, Cesare Fracassi, Paul Ingram, Simi Kedia, Hamid Mehran, Thomas Noone, Susan Ochs, Charles O’Reilly and Suraj Srinivasan. We thank workshop participants at Fordham University and the 2015 IAES meetings in Boston for their helpful comments on an earlier draft of the paper.

1. Introduction Culture is given credit for some of the greatest business successes and blamed for some of the biggest failures.1 Though corporate culture is a very popular topic, many fundamental research questions remain

open. In this paper, we attempt to provide answers to the following questions:

1. What is corporate culture?

2. How important is corporate culture?

3. What mechanisms underlie the creation and effectiveness of corporate culture? How do other corporate policies (e.g., compensation) reinforce or work against culture?

4. What aspects of business performance does corporate culture affect? Does culture impact corporate risk-taking, growth, M&A, financial and tax reporting, whether employees take a longrun view, or corporate ethics?

5. Are the upside benefits of effective culture greater than the downside costs of ineffective culture?2

6. Do companies think their culture is ideal and if not, what deters firms from having the ideal corporate culture?

7. How can corporate culture be measured?

Our paper tries to answer these questions by analyzing a survey of 933 chief executive and financial officers (CEOs and CFOs, referred to interchangeably as executives or managers) across a wide range of North American public and private firms. These data are supplemented with 16 in-depth interviews of business executives. Briefly, we find 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. 51% of executives consider corporate culture to be a top 3 value driver and another 27% say it is a top 5 driver of firm value at their companies. 91% believe 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. Boards affect culture not via active management but primarily via CEO choice. Boards of directors and compensation schemes modify the success of a firm’s culture by attracting and/or retaining the right type of talent, by rewarding employees for living the values of the culture and by focusing employees on long term objectives.

Managers believe that corporate culture has substantial effect on the creativity at the firm, productivity of employees and hence, on firm value and on profitability. Cultural fit is seen as so important in an M&A deal that a striking 48% of managers would walk away from acquiring a target whose culture is misaligned with the bidder’s culture, while other managers would require heavy discounts to the purchase price of the target (between 10%-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 its investments.

Effective culture plays a large role in instilling a long term focus in employees and managers. 84% of officers believe that a poorly implemented, ineffective culture increases the chances that an employee might Policy-makers often point to dysfunctional corporate culture in banking as a first order contributor to the financial crisis (e.g., Dudley (2014)). Several practitioner books identify culture as a key driver of Google’s success (e.g., Edwards (2012), Schmidt and Rosenberg (2014)). The corporate culture at VW and Toshiba are recent examples of failures.

We use the word effective to describe a corporate culture that promotes employee behaviors that are needed to successfully execute the firm’s strategies and achieve corporate goals. We use ineffective to indicate a culture that does not promote these behaviors and may even work against them. We use these words to describe culture because common descriptors like good or bad culture can have unintended connotations to practitioners (like good culture meaning friendly work conditions, regardless of whether this helps the firm execute its strategies).

do something unethical or even illegal. 55% believe that an effective culture would reduce the tendency of companies to engage in end-of-quarter practices such as delaying valuable projects to hit market expected earnings numbers. Only 50% of officers would maximize NPV if doing so meant choosing a project with negative cash flows in the first two years – and the driver behind this decision is corporate culture.

Only about 15% of officers believe that their culture is exactly where it should be. When asked what prevents their firms’ 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 affecting the effectiveness of the firm’s culture include: (i) trust and coordination among employees; (ii) the decision process is consistent with the firm’s long term interests; (iii) there is widespread agreement among employees about the firm’s goals and values; and (iv) employees are willing to report compliance risks or unethical behavior.

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 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.

Our work relates to a number of strands in the literature. First, our findings are consistent with recent research pointing to the first-order importance of internal firm practices for determining productivity and performance (Bloom and Van Reenen (2007); Backus (2014); Kotter and Heskett (1992); Guiso, Sapienza, and Zingales (2015)). Second, our research highlights the the vital, but underappreciated, role that corporate culture plays in the value creation of a firm (Lazear (1995); Hermalin (2001); Akerloff and Kranton (2005) Van den Steen (2010)). Third, our results suggest that leadership style (Bertrand and Schoar (2003)), human resource incentive schemes (Lazear (2000)), and governance (Popadak (2015)) work to modify corporate culture. Finally, we provide some of the first evidence linking culture to ethics (Guiso, Sapienza, and Zingales, (2006)), myopia (Graham, Harvey, Rajgopal (2005)), whistle-blowing (Bowen, Call, Rajgopal (2010), Dyck, Morse, Zingales (2010)), and performance in an economic downturn (Fahlenbrach, Prilmeier, Stulz (2012)).

The rest of the paper proceeds as follows. Section 2 describes how we gather the data via a survey of hundreds of CEOs and CFOs and 16 direct interviews. Section 3 outlines the results linked to the survey questions and insights from interviews. Some concluding remarks are offered in the final section.

2. Interview and Survey Samples

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, to learn about their views on corporate culture. Given our interest in investigating the causes and effects of corporate culture in the context of finance and accounting, our 16 interviews were primarily with chief financial officers (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 of 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 to 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 minutes. 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.

Un-tabulated results reveal that the companies in the interview sample 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.

2.1 Survey Logistics

We obtained valuable feedback on the initial draft of the survey instrument from (i) 11 individuals, comprising of academics, regulators, culture consultants; and (ii) one professional expert on survey content, wording, and scientific design. Our goal is to minimize biases induced by the questionnaire and maximize the response rate. We use the penultimate version of the survey to conduct 20 beta tests to gather feedback and to make sure that the time required to complete the survey is reasonable (about 10-15 minutes). Based on this feedback, we made changes to the wording of several questions, and deleted some questions. The final survey, available at http://corpculture.org/survey.htm contains 14 main questions, some with subparts, and was administered over the Internet. The survey is anonymous and does not require subjects to disclose their names or their corporate affiliation and is IRB approved at the authors’ home institutions.

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