Fifty Shades of Corporate Culture

If a culture of integrity is value enhancing, why don't all firms have such cultures? In our paper, Fifty Shades of Corporate Culture, we investigate the possibility that corporate culture is difficult to engineer because inherent trade-offs are involved. For example, Enron's aggressive risk-taking culture was arguably responsible not only for its initial success, but also for its ultimate failure. Research in psychology and behavioral economics finds a trade-off between ethics and creativity at the individual level (e.g., Ariely and Gino 2012). In this paper, we investigate whether a similar trade-off between creativity and ethics exists at the corporate level.

We develop a new measure of integrity as it relates to corporate culture – the number of employees who register for and use AshleyMadison.com (“AM”), a website that facilitates extramarital affairs. Our key variable of interest is the number of active users at any point in time in a given firm, where active means the user has not only registered, but also exhibited some activity in the account (e.g. purchased credits to send a message). This is done to exclude “phantom” accounts, or accounts that were created without the intention of being used. It is important to note that our measure of firm culture is based on the actions of individual employees, and not based on surveys of employees’ perceptions. While survey-based measures can be quite useful in many contexts, the least ethical cultures are those most likely to be comprised of employees that lie on such surveys.  This makes it difficult to detect an underlying link between personal ethics and corporate ethical outcomes.

We find that our measure is associated with firm-level unethical behavior: it predicts a greater probability of SEC enforcement actions for accounting misstatements, and lower corporate ethics ratings by external analysts. However, consistent with research in psychology, we find that the measure also predicts more innovation (R&D intensity, successful patenting rates, subsequent patent citations, and patent diversity) and risk-taking (leverage, volatility, probability of default). Furthermore, we do not find strong evidence that the shareholders attempt to change lax corporate cultures. In other words, firms appear to be in equilibrium, balancing the costs and benefits to lax cultures.

We do not claim to identify a causal relationship between firm culture and corporate outcomes. For example, we cannot infer from our tests that AM membership causes more innovation or, more generally, that certain cultures cause firms to become more creative. Although causality is certainly plausible, we cannot make such claims because the mechanism we posit is, by definition, endogenous. Firms select employees to fit their existing cultures. Culture itself is likely determined by the firm's environment (e.g., Schein, 1992). However, our results are consistent with the hypothesis that firm culture and ethical behavior are closely linked, which provides support for the renewed emphasis on firm culture on the part of regulators as a means to control unethical corporate behavior. Our results also suggest that there is a trade-off between an ethical, rules-driven, process-oriented culture and a culture that encourages innovation. This indicates that it is difficult to engineer a perfect corporate culture due to potential trade-offs between employee creativity, risk-taking, and integrity. These tradeoffs can potentially explain why we don’t observe all firms gravitating towards one, “ideal” corporate culture.

William David Grieser and Nishad Kapadia are both Assistant Professors at Tulane University, Qingqiu Li is a Doctoral Student at Michigan State University, and Andrei Simonov is an Associate Professor at Michigan State University.