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  • - [Narrator] This is Duke University.

  • - I'd like to tell you about a research project

  • on corporate culture that I've been working on

  • with Cam Harvey and Jill Popadak from Duke

  • and Shiv Rajgopal from Columbia University.

  • This project's been supoorted by the COLE Center here

  • at Fuqua, and by CFO Magazine.

  • Now if you read the headlines, you see corporate culture

  • often gets blamed or gets credit

  • for dramatic corporate events.

  • So for example the VW emissions scandal

  • and recent events at Wells Fargo,

  • we read about corporate culture leading

  • to maybe a bad outcome.

  • With Google, corporate culture gets at least some

  • of the credit for Google having such a fantastic

  • and successful company.

  • So corporate culture is everywhere,

  • and I have to admit I approached this research project

  • as a bit of a skeptic.

  • What exactly is this corporate culture?

  • Is it really as important as these headlines say it is?

  • And if it is, how does it work?

  • These are questions that I wanted to answer

  • and our research team wanted to try to answer.

  • So what we did is we went out and surveyed

  • 1,900 CEOs and CFOs

  • from around the globe

  • to ask them about corporate culture.

  • What they think of it.

  • How it works at their companies.

  • We also interviewed companies one-on-one,

  • executives from companies one-on-one, that represent

  • the 20% of the market capitalization

  • of the U.S. stock exchanges.

  • So we had quite a large number of companies

  • and a lot of depth and importance of those companies.

  • Now it took 50 MBA students as research assistants

  • to help us pull this off.

  • We're really thankful for that help

  • and we couldn't have done it without them.

  • Alright, first question: is corporate culture important?

  • Yes, executives tell us resoundingly

  • corporate culture is very important

  • and it affects many parts of the company.

  • So we went about trying to address this

  • in two different ways.

  • One was we gave executives a long list

  • of possible value drivers, things that create value

  • at their companies.

  • And we asked them to rank those items.

  • And it turns corporate culture came out on top,

  • the biggest value driver at companies.

  • More important than the strategic plan,

  • than the operating plan, more important than the CEO,

  • and me a finance professor, more important

  • than the finance function of the company.

  • Okay, so corporate culture very important,

  • it came out on top.

  • Not just in the United States but around the globe.

  • In Africa, Europe, in Asia, in Latin America,

  • we saw culture showing up as either number one

  • or maybe a close second.

  • So culture's very important.

  • Second way we addressed this is we just straight on asked,

  • "How important is corporate culture at your firm?"

  • And here about 90% of executives told us

  • culture is either important or very important.

  • And most of them said very important.

  • So we've established then that corporate culture

  • is very important.

  • The next question is what is it.

  • What exactly is corporate culture?

  • So remember I told you we interviewed a lot of executives

  • and here's a couple of interview quotes I'd like to give you

  • to give you a sense of what culture is.

  • I'll paraphrase.

  • The first is that corporate culture

  • is like the tendons in our body.

  • The tendons hold together the muscle and the bone

  • and they let our muscle and bone and body do the work

  • it's intended to do in a healthy and productive way.

  • Okay, like that.

  • Culture is what helps the company reach it's potential.

  • Okay, holds the company together, if you will.

  • Another example is in the example of an orchestra.

  • Corporate culture is like sheet music.

  • You can hire the best trumpet player, the best violinist,

  • and if they're not playing on the same sheet music

  • you won't get a very good outcome.

  • But if you have the culture, if you have that sheet music,

  • and they're playing in the same tempo, the same cadence,

  • then you can have a wonderful outcome.

  • Likewise the culture is what helps a company

  • reach its potential.

  • It helps the employees march together.

  • So those interviews give us a nice idea of what culture is.

  • But like true academics we want to put more structure on it.

  • We wanted a little framework, a little model if you will.

  • So we relied on existing research and kind of built on that.

  • And what existing research says is there's kind of two ways

  • you can break down a company.

  • One part is the formal institutions, okay.

  • And these formal institutions are things you can write down:

  • the governance of the company, the compensation policies,

  • the hiring and firing practices,

  • you know kind of tangible things.

  • Those are important.

  • People have done a lot of research on them.

  • We're not researching them so much in this paper.

  • On the other side, you have the informal aspects

  • that we call corporate culture.

  • And culture has really two main components:

  • the values and the norms.

  • Okay, a little lingo.

  • But the values, they're sort of like the 10 commandments.

  • They're chiseled on stone.

  • They're the things we aspire to, that we'd like to achieve.

  • But the norms are actually the day-to-day living

  • as we strive to reach those values.

  • And one of the main contributions of our paper,

  • in the academic sense at least, is to kind of provide

  • evidence that these norms are very very important:

  • the day-to-day living of the values.

  • In fact, we're one of the few papers to focus on norms.

  • And our conclusion is, without the norms the values

  • and these other things don't matter very much.

  • You can look at a recent editorial by the former CEO of IBM

  • in the editorials of the Wall Street Journal.

  • And he says something very similar.

  • Values, you look along websites you see very similar values

  • across companies.

  • But the norms, where the feet hit the ground if you will,

  • the living out of the values, the norms that is,

  • is really what matters.

  • So how does culture work?

  • You need to have values, norms, and these formal things,

  • the compensation policy for example, working together

  • and reinforcing each other to actually achieve

  • an effective corporate culture.

  • So you need all of these aligned.

  • Now a little more detail, how does culture work.

  • What we wouldn't want to do is think,

  • "Oh, if I get a good culture, I'll get a good outcome."

  • What we'd rather have you think of it

  • as really a two-step process.

  • The second step is, if I have an effective culture,

  • I get the desired outcome.

  • But the first step, and the one

  • that we're really more focused on, is

  • "What do we need to do to achieve that effective culture?"

  • And here it's really again the norms, the values,

  • and these formal aspects like the compensation policy

  • and governance have to all work together

  • to give you an effective culture.

  • And this is what we think companies should focus on a lot

  • is what it takes to get an effective culture.

  • What are some of the outcomes

  • from having an effective culture?

  • Or an ineffective culture as it might be?

  • I'm gonna talk about four things briefly.

  • If you look in the research paper,

  • there's probably a dozen more outcomes you could talk about,

  • we could talk about.

  • One is investment risk.

  • We just lived through a financial crisis:

  • a deep depression, or deep recession excuse me.

  • And what we've noticed is some companies seem

  • to take on too much risk.

  • Now what the executives at these companies tell us

  • is that having a bad culture is what leads to

  • companies taking on too much risk.

  • A little surprising to us, a number of companies

  • told us their companies take on too little risk.

  • They're too satisfied with the status quo.

  • And again it's the culture isn't quite right

  • to encourage the company to take on entrepreneurial risks.

  • So bottom line here on investment risk

  • is if you have an effective culture

  • you take the appropriate amount of investment risk.

  • Alright, ethics.

  • 85% of executives tell us that when the culture

  • is not right, it can lead to unethical,

  • or even illegal, actions by employees.

  • So it's not just the headlines that we read about.

  • It's actually 85% of executives saying

  • they need to get the culture right at their company

  • or things could go sour.

  • Third, short-term versus long-term.

  • Sometimes it's said that in the United States

  • companies focus too much on the short-term

  • and they should focus more on the long-term.

  • Again, executives tell us that when they have

  • the bad outcome focus too much on the short-term,

  • that's cause the culture's not working right.

  • When they have the good outcome focusing on the long-term,

  • it's because the culture is working right.

  • They have an effective culture.

  • And then finally, let me give you a more specific example:

  • mergers and acquisitions.

  • Very important investment decision if you will.

  • So here we ask if your company has a target company in mind.

  • And it's very aligned on the operational side

  • and the target's doing just what you want it to do

  • to acquire it and bring it into your company.

  • But the culture is not properly aligned,

  • so you have a misaligned culture.

  • When that happens, we wanted to ask executives,

  • "How much of a discount would you require

  • "to acquire that target?"

  • And that would give us a sense of

  • just how important culture is.

  • So misaligned culture, how much would that reduce

  • the price you're willing to pay?

  • And we thought we'd hear maybe 15%, 20%.

  • In fact, the main thing we heard is most companies

  • wouldn't pursue an acquisition at all

  • if the culture is misaligned.

  • So that kind of tells us just how important culture is

  • in general; but also, in the M and A context, how important

  • it is to align the cultures before you proceed.

  • Alright, let me give you a little more detail here

  • on some of the statistical stuff we did.

  • So far I've been at pretty high level.

  • So we ran regressions where we tried to explain

  • how does a company get an effective corporate culture

  • that would lead to creativity.

  • So let's think of creativity

  • or innovation you might call it.

  • Well the value that is going to lead

  • to creativity is adaptability.

  • So a company that has a value where it can react

  • as times change and as the environment changes,

  • that's a value that leads to creativity.

  • But, as we said before, it's not just the value

  • that matters, it's also the norms.

  • So what are the norms that lead to creativity?

  • It's developing new ideas organically

  • within your company, and the employees having comfort

  • in offering and receiving critiques.

  • If that's the work environment you have

  • on a day-to-day basis where you are developing

  • new ideas organically and giving and accepting critiques,

  • that's the environment that leads to creativity.

  • Now interestingly, there's another value that was listed

  • but had a negative effect on creativity.

  • When a company is really results driven, results oriented,

  • maybe too focused on the bottom line,

  • that does not lead to creativity.

  • It actually hurts it.

  • Alright, second example, ethics.

  • What value leads to ethical behavior?

  • Well, integrity is such a value.

  • That sounds wonderful, but what are the norms