The Journal of Things We Like (Lots)
Select Page
Jillian Grennan & Kai Li, Corporate Culture: A Review and Directions for Future Research in Handbook of Financial Decision Making (Gilles Hilary & David McLean eds., forthcoming 2023), April 28, 2022 draft available at SSRN.

In the 2022 Annual Review of Financial Economics, Jillian Grennan, with lead author Gary B. Gorton and Alexander K. Stentefis, document studies by economists that use “corporate culture” to explain M & A choices and consequences, individual and business risk-taking, as well as corporate malfeasance.1 Such research has been propelled by new data sets and methods. For example, employee grievances and networks are now revealed on the web and natural language processing now translates texts into cultural elements. Work in this mode also emerges because much remains to be explained about corporate decisions after the usual analysis under the property rights and agency cost paradigms. Grennan and her co-authors propose corporate culture as a new “theoretical paradigm” for corporate finance research.2

The problem with this paradigm, as the authors note is that “culture” is an “omnibus term.” Unpacked, it includes “values, norms, conventions, shared beliefs, customs, traditions, symbols, rituals, knowledge, identity, ideologies, identities, and shared mental models.”  Corporate culture includes everything from employee perceptions of managers’ ethics (positively associated with Tobin’s Q) to stock options for rank-and-file employees (positively correlated with financial misreporting).3​ Mathematical representations of corporate culture are few in number.  We have measurements of company reputations, homogeneous beliefs across the company, and managerial preferences. But these tell us little. Researchers have shown us that “employees’ firsthand impressions of the manager’s instructions, along with their secondhand interpretations from communicating with each other about the manager’s instructions, together shift the observed culture away from the manager’s intended one.” Furthermore, there also is “within-person cultural diversity”–individuals believe contradictory things. Consequently, despite reviewing research that finds correlations between “cultural” changes and financial decisions, the authors call for “More theoretical work on corporate culture.”

Fortunately, Jillian Grennan takes steps to developing such a theory in her book chapter with Kai Lin, Corporate Culture: A Review and Directions for Future Research. They begin by noting that in the 1950’s, anthropologists assembled a list of 164 different definitions of societal culture. They draw on sociological theory to describe culture as part of the informal institutional structure of firms. They understand that culture has two faces:  meaning-creating and behavioral patterning. The expectations employees have about “how they need to behave to fit in and succeed in their firm” are part of corporate culture. Changes in such expectations are then studied to understand the dynamics of corporate culture.

In society, culture often is relatively stable and of uncertain value. Businesses, however, can train meanings and audit actions. In so doing, they intentionally try to modify how employees behave.  Although intangible, changes in culture can be relevant and add value. By providing meanings and valorizing expectations, culture helps define employee preferences and pattern behavior.

In society, culture often refers to broadly shared structures of meaning and action. In contrast, in firms, both small and large, behavior is not explained by looking for an overarching culture, such as the tone set by those at the top. Cultural diversity is what employees experience. Ethnic ancestry, familial and other commitments, as well as specific experiences all influence what employees find meaningful and what they take as routine. Joining a project team, for example, brings about cultural changes both for the joiner and the rest of the team but these changes and their effects will vary depending on the experiences that the employees had on other project teams. On the other hand, in firms, stories can spread like wildfires and certain memes may be required in all communications.

Because corporate culture can be intentionally created and is limited in its reach, it enables marginal analysis. The sources of cultural change are broad, including people, systems, and events. The authors propose analysis of catalysts of cultural change and their effects to further develop theories of corporate culture.

Behavioral economics explores the borders between rational and irrational preferences.  Cultural analysis explores what is meaningful. Cultures shape how rationalities, in their various forms, are valued. Cultural analysis thus explores the borders between rational and meaningful preferences to explain decision making.

Research on corporate culture has explored the meanings of integrity, trust, adaptability, cultural flexibility, collaboration, teamwork, hard work, mastery, innovation, confidence, respect, quality, safety, consumer-orientation, detail-orientation, results-orientation, community, communication, transparency, corruption avoidance, pro-social (ESG) values, individualism, gender, risk-taking, uncertainty avoidance, and time-framing. Developing a larger theory from this research, however, is hampered by differences in defining each of these terms. Unfortunately, the idiosyncratic nature of culture, as well as the multiplicity of catalysts of change, stand in the way of any global theory of corporate culture.

Understanding that firms are not values melting pots and that different meanings are operative on their own terms as well as in conjunction with other cultural elements complicate intentional changes of corporate culture. Such changes are mandated in many settlements of corporate non-compliance lawsuits. Deferred- and Non- Prosecution Agreements (DPAs and NPAs) presume, as do Grennan and Li, that “culture guides employees’ actions.” What Greenan and Li importantly add is that it is often “difficult to decipher the cultural meaning of what is observed.”

Like most teachers, I understand that shouting at the beginning of class “Stop Talking” won’t produce the desired result. Yet, most DPAs assume that when corporate leaders say “Stop Non-complying” compliance will follow.  Before you next rely on “tone at the top” to set a corporate agenda, I recommend reading this book chapter.

Download PDF
  1. Gary B Gorton, Jillian Grennan & Alexander K. Zentefis, Corporate Culture, 14 Annu. Rev. Financ. Econ. 535 (2022).
  2. Andrew C. Call, Simi Kedia, Shivaram Rajgopal, Rank and File Employees and the Discovery of Misreporting: The Role of Stock Options, 62 J. Account. Econ. 277 (2016).
  3. Andrew C. Call, Simi Kedia & Shivaram Rajgopal, Rank and File Employees and the Discovery of Misreporting: The Role of Stock Options, 62 J. Account. Econ. 277 (2016).
Cite as: Robert Rosen, Corporate Culture is Complicated, JOTWELL (March 27, 2023) (reviewing Jillian Grennan & Kai Li, Corporate Culture: A Review and Directions for Future Research in Handbook of Financial Decision Making (Gilles Hilary & David McLean eds., forthcoming 2023), April 28, 2022 draft available at SSRN), https://corp.jotwell.com/corporate-culture-is-complicated/.