Investigating the relationship between corporate culture and firm performance, the authors find no meaningful relationship when culture is measured based on firms’ advertised corporate values. But when using employee feedback to measure corporate culture, they find a statistically positive relationship. Their results also indicate that perceived management integrity and ethical standards are higher for private firms than for public firms and higher for firms located in the southern United States than for firms in other parts of the country.
What’s Inside?
Using information regarding corporate culture advertised on firm websites and a unique dataset of employee survey data from the Great Place to Work Institute (GPTWI), the authors investigate the impact of corporate culture on firm performance.
Regression results indicate that corporate culture has no statistical impact on firm performance when culture is measured by the keywords used by firms to describe their corporate culture on their websites. But when corporate culture is measured using feedback about culture from employees, the authors find a statistically positive relationship between firm performance and corporate culture. Their regression results indicate that a strong corporate culture, as perceived by employees, generally leads to better outcomes in terms of higher productivity, increased profitability, better industrial relations, and increased attractiveness to prospective job candidates.
How Is This Research Useful to Practitioners?
Corporate culture is important to most firms. The authors point out that 85% of S&P 500 Index firms have one or more dedicated websites to describe their corporate culture—the principles and values that should inform the behavior of all employees. Even though corporate culture is difficult to measure and quantify, the authors’ results indicate that corporate culture, as perceived by employees, appears to have a meaningful impact on firm performance.
Based on these findings, practitioners may be able to develop quantifiable measures of corporate culture and use these measures to construct investment strategies that are linked to differences among firms’ corporate cultures.
How Did the Authors Conduct This Research?
The authors first examine the relationship between firm performance and corporate culture; culture is measured by the corporate values advertised by S&P 500 firms on their websites between June and October 2011. Specifically, the authors collect and examine all of the words used to describe key corporate values on firm websites. They group the 50 most commonly used words into nine “value” categories based on word similarity. For example, if a firm uses the word “honesty” to describe integrity, then the words “integrity” and “honesty” are grouped together in the value category. On average, S&P 500 firms use four of the nine value categories to describe their corporate culture, and 15% of S&P 500 firms do not advertise values from any of the nine categories. The most commonly used value category—innovation—is advertised by 80% of S&P 500 firms, followed by integrity and respect, which are each advertised by 70% of firms.
Dummy variables are created for each of the nine value categories. Regressions of such firm performance measures as Tobin’s q and return on sales are run with each dummy variable and a set of control variables. Results show that, in all regressions, advertised corporate values do not appear to be related to firm performance.
Next, the authors examine the GPTWI data on employee perceptions of corporate culture. The GPTWI collects firm data from employers and data regarding perceptions about the work environment from employees through confidential surveys.
Similar regressions of firm performance measures on the managerial integrity (or managerial ethics) perceived value measure and a set of control variables are run for the sample of 385 publicly traded firms in the GPTWI sample.
In further analyses, the authors find that the level of integrity/ethics in public firms is significantly lower than that in private firms. Perception of managerial integrity is also higher for firms in the southern part of the United States than for those in other parts of the country. Interestingly, the presence of a founder on the board of directors or other traditional measures of corporate governance do not appear to affect employees’ perceived degree of managerial integrity/ethics.
Abstractor’s Viewpoint
We often hear firm executives talk about their unique corporate cultures and how they influence how their firms do business. However, because corporate culture is difficult to measure, studies examining the impact of corporate culture on firm performance have been relatively nonexistent. For this reason, this study is unique, and the key finding that corporate culture can affect firm performance is very interesting.
Of course, the challenge for practitioners in using these results is in the measurement of corporate culture; practitioners do not have access to a unique database of employee perceptions about corporate culture. But the results of this study suggest that there may be value in exploring alternative methods to measure perceptions of firm corporate cultures using publicly available data.