Corporate Culture, Not Lip Service, Counts

by Luigi Guiso, Paola Sapienza and Luigi Zingales

Establishing a bona fide “culture of integrity” can be costly for a corporation, but the economic returns are real

From Goldman Sachs to Google, “corporate culture” seems to matter. But does it? The former institution describes its culture as “a meritocracy built on … collaboration, teamwork and integrity,” yet it helped instigate the recent global financial crisis. The famous search engine uses blunter language—“don’t be evil”—to express its cultural values, but has found itself caught on the horns of international censorship dilemmas, copyright infringement claims, and government surveillance accusations. Everyone knows that talk is cheap, and so, it seems, is corporate culture. But if that were true, why would any company bother to establish it at all, even as mere lip service? 

“As much buzz as there is around corporate culture, nobody has looked inside institutions to see what the consequences are of having one culture versus another,” says Paola Sapienza, a professor of finance at the Kellogg School of Management. Sapienza set out to do just that in research coauthored with Luigi Guiso of the Einaudi Institute for Economics and Finance and Luigi Zingales of the University of Chicago. To preview, the research team found that companies perceived by their own employees to value ethics—but not necessarily those that advertise their ethical culture to outsiders—showed higher profits and other indicators of strong performance.

Measuring Company Culture

The main problem with seeking to investigate corporate culture, Sapienza explains, “is that the concept is very difficult to define.” The list of “cultural” bromides that a company claims to value might encompass anything from loyalty, consistency, and customer service to innovation, creativity, and charity. Sapienza and her collaborators narrowed their focus to two dimensions of “culture” that a majority of companies in the S&P 500 deemed important (according to their corporate websites): integrity and ethics. The researchers also gained access to a novel set of data: raw responses to surveys conducted by the Great Place To Work Institute, an organization that publishes an annual list of the “100 Best Companies to Work For” in Forbes magazine. The data included responses from employees at hundreds of public and private firms between 2007 and 2011. “This is about perception of culture by employees within a company, not just what a company or its management publicly claims its culture is,” Sapienza explains.

The GPTWI database gave the researchers a way to measure the presence or absence of “integrity” and “ethics” in company cultures, which led them to another question: “Is a ‘culture of integrity’ something that can be treated as an economic asset that affects a firm’s performance?” Sapienza says. To find out, she and her colleagues compared the cultural data in the GPTWI surveys against traditional measures of companies’ economic health, including returns on sales and stock market performance, the level of unionization among employees, and Tobin’s q—a proxy often used to measure firms’ future growth opportunities,” Sapienza explains. If maintaining certain cultural values were to affect positively these measures of corporate performance, “integrity capital” might be seen as a meaningful economic variable in its own right.

Walking the Walk Versus Talking the Talk

The first thing that Sapienza and her coauthors noticed, to their surprise, was that “we didn’t find any correlation between the cultural values that a company advertises and what its employees perceive from the inside once they're working there,” she says. It wasn’t that no companies were observed to value integrity—rather, whether they said so publicly or not had no bearing on the actual presence or absence of integrity in the organization, as perceived by its workers. A firm like Goldman Sachs, which proclaims to care about “integrity” on its website, is neither more nor less likely to be valued by its employees as an “integrity-filled” place to work than Google, which does not mention integrity in its corporate culture statement at all.

“But if there is no cost to claiming things about your culture that aren’t true, then does it create any value for the company?” Sapienza asks. “We found that the answer is yes.” Companies for which the employees did evince a strong culture of integrity were associated with stronger economic performance: a higher Tobin’s q ratio, better profits, and lower levels of unionization. “Maybe a higher level of trust is a good substitute for unionized labor relations, or maybe it is the other way around: management of firms with fewer unions is perceived as more ethical,” Sapienza says. “All these results indicate that there is some tangible, measurable economic value associated with  ‘good’ corporate values. It's more than a feel-good result.”

The results suggest an obvious question: If “integrity capital” translates to better economic performance, why doesn’t every company invest in creating it? “Some may care more or less about it, or they might simply not know,” Sapienza suggests. But she and her coauthors noticed that publicly traded companies in the GPTWI sample tended to have less “integrity-filled” cultures than their privately held counterparts. “Even though this would add to their bottom line, public companies seem to be investing less in it,” she says. “It’s a striking result, but we really don't know what the mechanism behind it is.”

Integrity Comes at a Cost

One clue, says Sapienza, may lie in another economic effect of corporate culture previously documented in the literature: that companies included in the “100 Best Places To Work” are underappreciated by the stock market, at first. “The market is slow at recognizing the value created by a ‘good’ culture,” Sapienza says. “It’s not like when a pharmaceutical company announces, ‘We just discovered a great drug,’ which the stock market will react to instantly. There is an increase, but it happens slowly and over time.”

To the CEO of a public company, beholden to quarterly market pressures, “it might make sense to invest less in this ‘integrity capital,’” Sapienza suggests. “Implementing a culture of integrity is expensive. It could be that because the stock market is myopic, so are these public companies.” Another possibility Sapienza offers is that because public companies have two audiences for every action they take—their own employees and the outside markets—implementing a culture of integrity simply involves too many costly communication compromises.

For example, if a company wishes to make an example out of an executive who has behaved badly as a means of establishing its integrity, it has to disclose that bad behavior to the outside world. “While the message to your own employees might be, ‘This behavior is unacceptable and will not be tolerated,’ the market might interpret the disclosure in a way that’s counterproductive,” Sapienza explains. “Many CEOs would tell you that if you disclose bad behavior, the market could think, ‘This is just the tip of the iceberg,’ and send stock prices down—even though you are doing the right thing. So there’s incentive there to not invest in establishing that culture, simply because of what it forces you to reveal.”

Sapienza cautions that these possibilities are “completely speculative,” and that field experiments based on the results would be the next logical step. “My hope is that a CEO will see this correlation and say, ‘Maybe changing culture will generate value … why don't I call Dr. Sapienza to set up an experiment,’” she says. “I don’t want anyone to jump to conclusions. I just want data.”


Republished with permission from Kellogg Insight, which is published by the Kellogg School of Management at Northwestern University. For more, visit


Board composition +
Refreshing Your Board of Directors
Patrick R. Dailey, Ph.D. and Joel M. Koblentz
Battle For the Boardroom
Ludo Van der Heyden and Chris Howells
Night of the Living Board
Matt Palmquist
Strategy & innovation +
The "Third Team" Approach to Board Effectiveness
Denis Mowbray and Coral Ingley (both from Auckland University of Technology)
Tapping The Strategic Potential of Boards
Chinta Bhagat, Martin Hirt, and Conor Kehoe
Board supervision +
Best Practices: Non Profit Governance
McDermott Will & Emery
Value-Focused Corporate Governance
Christian Orglmeister, Marcos Aguiar, and Daniel Azevedo
The Trouble With Too Much Board Oversight
Olubunmi Faleye, Rani Hoitash and Udi Hoitash
Culture +
Corporate Culture, Not Lip Service, Counts
Luigi Guiso, Paola Sapienza and Luigi Zingales
Building a Forward-looking Board
Christian Casal and Christian Caspar
Team building +
Collaborate Better
Leigh Thompson
Five Things Every CEO Must Do in the Next Era of Globalization
Hans-Paul Bürkner, Arindam Bhattacharya, and Jorge Becerra
Outgoing CEOs Shouldn't Pick Their Replacements
David F. Larcker, Stephen A. Miles, and Brian Tayan
Compliance +
Leadership +
10 Principles of Leading Change Management
DeAnne Aguire and Micah Alpern
The Double-Edged Sword of CEO Activism
David F. Larcker, Stephen A. Miles, Brian Tayan, and Kim Wright-Violich
Decoding Leadership: What Really Matters
Claudio Feser, Fernanda Mayol, and Ramesh Srinivasan
Risk management +
Exec. evaluation & comp +
Surviving the Sophomore Slump: Moves That Matter The Most
Roselinde Torres, Judy Johnson, James M. Citrin, and Susan S. Hart
Leapfrog Succession: Trend in Appointing CEOs
Roselinde Torres, Gerry Hansell, Kaye Foster, and David Baron
Do CEOs Deserve Their Pay?
Manfred F. R. Kets de Vries
Cyber security +
Why Senior Leaders Are On The Front Line Against Cyberattacks
Tucker Bailey, James Kaplan, and Chris Rezek
Are You In the Dark about Shadow IT?
Ryan Shadle and Brian Turley
Corporate Governance in the Age of Cyber Risks
In collaboration with RANE (Risk Assistance Network and Exchange)
The Board’s Role in Managing Cybersecurity Risks
Ray A. Rothrock, James Kaplan, and Friso Van Der Oord
Featured +
Planning Ahead – The Board’s Role in Crisis Management
M. Hill Jeffries, Kyle G. Healy, Marshall M. Chalmers
Agitators and Reformers: How to Respond to Activist Investors
Josh Hinkel, Henrik Poppe, Martin Toner and Chuck Whitten

Your library is currently empty. Browse the Boardspan Library to get started.

We use cookies to personalize content and to provide you with an improved user experience. By continuing to use this site you consent to the use of cookies.
Please visit our cookie policy for further details.