Corporate culture in a new era: Views from the C-suite*

Corporate culture has been likened to an organization's heartbeat—the less visible, somewhat intangible force that shapes its movements, health, and longevity. Just as humans need a strong heartbeat to live, culture is often the difference between business success and failure. Google's culture is frequently celebrated as a cornerstone of its innovation and achievement.1 Zappos's superior customer service stems from a teamwork culture, cultivated as early as the hiring stage. In contrast, the troubles at VW, Toshiba, Uber, and Wells Fargo are routinely held up as examples of cultural failures.2

Yet designing a culture that can be credited with great business success is difficult, especially when considering the global catalysts shifting workers to hybrid arrangements and placing new demands on management practices and governance structures.3 Employees are increasingly seeking work that aligns with their personal values, rather than just financial incentives.4 Similarly, employees, especially when not immersed full-time in toxic office cultures, are feeling empowered as whistleblowers and increasingly reporting to the SEC failures within their companies.5

Amidst these transformations, we believe now is the time to reflect on what corporate culture means, and how it contributes to a company's productivity, efficiency, and value creation. To do so, we analyze executives’ answers to questions about culture, including “How do companies build and maintain a culture focused on enhancing efficiency and value?” “What role do other formal institutions, such as board oversight and compensation systems, play in reinforcing (or undermining) culture?” and “How does one measure the effectiveness of a corporate culture?”

It is in this context of reflection and inquiry, that we synthesize insights from a comprehensive survey of chief executives and financial officers (CEOs and CFOs, referred to interchangeably as “executives” or “managers”) of a wide range of North American public and private companies.6 Along with specific questions about corporate culture and its role in their organizations, we also conducted in-depth interviews of executives representing over 20% of the US equity market capitalization. As we review the insights, we endeavor to incorporate the perspectives on culture, most relevant to this era of unprecedented change for leaders and workers.

In the pages that follow, we begin by summarizing the survey findings to provide context for the interviews and open-ended responses. Among the most important findings is that a majority of the executives responding to the survey considered corporate culture as “a top three value driver” at their companies, and almost all agreed that improving their corporate culture would increase their firm's value. And although the CEO was identified as “the most influential person” in setting the firm's current culture, corporate boards were also seen as affecting culture—but primarily through their choice and oversight of the CEO.

The finance function was also seen as having potentially important effects on corporate culture, especially in its internal governance role as steward of corporate assets and investor capital. Incentive compensation along with hiring, firing, and promotion decisions were also identified as working to reinforce cultural values in successful companies while undermining values in others. Indeed, cultural fit was seen as important enough in a contemplated M&A deal that most managers claimed they would walk away from a target whose culture is badly aligned with the bidder's culture.

There was also a consensus that culture is a major influence on corporate risk-taking, and plays a critical role in instilling a long-term focus in employees and managers. Conversely, a poorly implemented, ineffective culture was seen as increasing the odds of illegal or unethical employee or managerial behavior. Somewhat surprisingly (at least to us) was how widespread the practice of “real earnings management” appeared to be, with over 40% of our responding CFOs acknowledging the willingness of their companies to postpone investment in value-increasing projects to hit quarterly earnings targets.

The executives who responded to our survey also warned of a widespread disconnect between companies’ stated values and their prevailing social norms. Very few officers said they believed that their own culture was exactly where it should be. And when asked how their culture could be improved, most respondents state that leadership needs to invest more time to develop the culture by encouraging: (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 and predictability with which employees worked; and (5) willingness to identify problems when something goes awry.

Finally, executives suggested a number of ways to assess a given firm's culture, including conference call transcripts and analyst reports, employee tenure and turnover, examination of the company's external communication and press portrayals of the CEO, and external websites with employee opinions such as Glassdoor.com. A common belief was that no single source of data can measure the nuance of culture but rather triangulating between various sources may be most successful. To that extent, we linked the survey and interview data with crowd-sourced employee reviews from platforms like Glassdoor, and the cultural values advertised on corporate websites, and yielded insightful correlations. However, there is a considerable need for further research to establish definitive causal relationships between culture and various measures of firm performance.

Corporate culture is under siege, driven by shifts in employees’ personal values and working norms, in the wake of the pandemic. As highlighted by the rise of movements like “Quiet Quitters,” “Lazy Girl Jobs,” and the “Great Resignation,” many leaders are rethinking how best to motivate and retain employees. This shift is further intensified by the increasing necessity for digital reskilling, especially with the rise of technologies like generative AI.

Having an effective corporate culture can foster a motivated workforce and bring success to firms. Why? Because an effective culture enhances profitability and value by promoting employee productivity, creativity, long-term focus, appropriate risk-taking, compliance with regulations, and limiting earnings management. Through a series of in-depth interviews and a comprehensive survey, we found that culture works by bringing unity to employees’ perspectives through the expectations they have for how they need to behave to fit in and succeed in their firm. When executives invest in culture, as well as the governance and incentive systems that reinforce it, they can achieve an effective culture. These cultures help executives realign employee expectations with their changing work environment, enhancing resilience and ultimately, business success.

This study synthesizes existing evidence to argue that corporate culture, often misunderstood and under-researched, is a crucial driver of firm performance and value. Over 90% of surveyed CEOs and CFOs acknowledge its impact on productivity and value, with many willing to abandon acquisition targets due to cultural mismatches.

Senior leadership, particularly CEOs, largely shapes a company's culture, reinforced by board-directed compensation schemes. Despite measurement challenges, our interviews suggest ways to quantify culture's effectiveness and benefits. However, much more attention needs to be paid to culture in research in economics, finance, and accounting. Researchers need to heed executives’ suggestions and build robust measures of culture from public data. While our approach of triangulating survey and interview data with crowd-sourced employee reviews and advertised values on websites shows promise, much more work needs to be done to determine causal links between culture and risk-taking, profitability, firm value, M&A decisions, and employee creativity and productivity.

In fact, CFOs, who are often skeptical of intangible factors, have consistently emphasized culture's importance throughout our work. Giving quantitatively-minded leaders, quantitative measures of culture may finally help make the business case for investing time and resources in culture. As our research makes clear corporate culture is vital, possibly more so than traditionally emphasized finance metrics. And so, in this new era for leaders and employees, interpreting success or failure requires a nuanced understanding of how corporate culture interplays with broader organizational and economic trends.

From the early days of this project almost a decade ago, we heard repeatedly and insistently, 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 the series of surveys and interview findings summarized in these pages hold up to the test of time and the new challenges leaders face to motivate and retain employees. Importantly, the evidence conveys a powerful message that academics and practitioners need to hear: Corporate culture does matter, and it may well matter a good deal more than many of the things that finance academics have long focused most of their attention on.