DOI: 10.1111/jacf.12576
O R I G I N A L A RT I C L E
Corporate culture and organizational architecture
James A. Brickley
Clifford W. Smith
Jerold L. Zimmerman
University of Rochester, Rochester, New York, USA
Correspondence
Clifford W. Smith University of Rochester, Rochester, ZIP 14620, NY, USA.
Email: cliff.smith@simon.rochester.edu
This paper draws on discussions in our book, Managerial Economics and Organizational Architecture (2021, 7th edition) McGraw-Hill and J. Zimmerman with D. Forrester, Relentless: The
Forensics of Mobsters’ Business Practices (2021) Willowcroft Publishing.
INTRODUCTION
CORPORATE CULTURE
In several articles published in the JACF, we have discussed our theory of Organizational Architecture. It provides
a structure that can be consistently applied in addressing
organizational problems and designing more effective corporations. Our articles identified three critical aspects of
organizations:
Perhaps the most frequently used term to capture less-formal organizational aspects is corporate culture—hundreds of books and
articles discuss this topic. Within this literature, corporate culture
is generally understood as “the way things are done around here.”2
Admittedly, such a complex topic is difficult to summarize succinctly, but it is undoubtedly considered important. For example,
in one survey of senior US corporate executives, over half identified corporate culture as a top-three driver of their firm’s success,
and 90% agreed that improving its culture would increase profits.3 Within this array of articles and books, managers regularly are
exhorted to develop high-powered, productive corporate cultures.
Yet concrete guidance on how this goal might be accomplished is
rarely provided.
Culture has also been defined more specifically as the beliefs,
attitudes, standards, and behavioral norms that characterize the
members of an organization. Following this lead, we have found
it useful to divide corporate culture into two major components:
shared values and norms. Shared values—like integrity, openness,
and compassion—are ideals employees should strive to follow.
Cultural norms are the day-to-day practices that reflect these values. Although values are difficult to observe directly, norms can
often be inferred from a firm’s customs, slogans, heroes, social
rituals, dress, and speech.4
∙ The assignment of decision rights within the firm (identifying who has the authority as well as the responsibility to make
specific decisions);
∙ The structure of systems to evaluate the performance of
individuals as well as business units; and
∙ How rewards to those employees are determined.1
Stated briefly, our argument is that successful corporations
assign decision rights in ways that effectively link decisionmaking authority with the relevant information for making
productive decisions. When assigning decision rights, senior
leadership—including both the company’s senior executives
as well as its Board of Directors—must also ensure that the
company’s reward and performance-evaluation systems provide
decision makers with appropriate incentives to employ their
information to make value-increasing decisions. Even though no
two firms might adopt precisely the same architecture, successful
firms ensure that these three critical aspects of organizational
architecture are coordinated.
While our past work has focused on the more formal aspects of
the firm’s architecture, our framework is useful in discussing less
formal organizational facets as well.
1
We hesitate to simply use “organizations” to refer to these three organizational features
because common usage of that term refers only to the organization’s hierarchical structure,
while generally ignoring the performance-evaluation and reward systems. We thus use organizational architecture to help focus specific attention on all three of these critical organizational
features.
22
© 2023 Cantillon & Mann.
2
www.thruue.com/services/culture/
Graham, J., J. Grennan, C. Harvey, and S. Rajgopal. 2018. “Corporate Culture: Evidence from the Field.” Columbia Business School Research Paper No. 16-49 (October). Guiso,
L., P. Sapienza, and L. Zingales. “The Value of Corporate Culture.” Journal of Financial
Economics 117, 60-76 provides evidence that firm performance is stronger when employees
perceive top managers as trustworthy and ethical. They, however, find no evidence that other
“advertised” corporate values, such as innovation, are associated with firm performance.
4
While slogans, statements, etc. are suggestive of a firm’s corporate culture (or at least the
culture that management is trying to create), they are do not always reflect the underlying
values of employees and norms within a firm. For example, Wells Fargo’s 2015 annual report
stressed (in enlarged red print) that we never take for granted the trust our customers have placed in
us, and we understand the important role we play in helping grow the US economy. As discussed
below, one year later, the public learned that employees throughout the bank had created
millions of unauthorized deposit and credit-card accounts at the expense of their customers.
3
wileyonlinelibrary.com/journal/jacf
J. Appl. Corp. Finance. 2023;35:22–31.
For instance, Southwest Airlines lists 18 cultural values on its
website. To instill these values, Southwest established Culture
Committees to recognize employees through internal awards such
as their Spirit Award or President’s Award as well as milestone
anniversary celebrations. The airline throws creative events such
as Spirit Parties, Chili Cook-offs, and Southwest Rallies. These
cultural norms reinforce the values and exemplify the desired
behavior Southwest aims to encourage in all its employees.5
To be effective, corporate culture should be coordinated with
the three more formal components of the firm’s organizational
architecture to ensure a consistent and reinforcing structure that
elicits the desired behavior from employees. Just ensuring that a
person’s performance is matched to their assigned tasks and has
sufficient rewards to motivate her or him to make decisions that
benefit the organization is not necessarily sufficient. A company
that values collaboration among its employees might adopt norms
such as an open office design that includes a large common area
where workers not only eat but also might interact by playing
various games. Inconsistencies between formal HR practices and
corporate cultures can be problematic. For example, a firm that
seeks to encourage individual creativity through explicit rewards
and recognition will find this more difficult in a culture stressing
conformity (in attire and behavior).6
Developing a corporate culture typically begins with a mission
statement, a short description of the organization’s purpose, the
goal of its operations, the kinds of products it makes or services
it provides, and its primary customers or markets.7 After crafting a mission statement, the company then frequently describes
values employees should strive to follow in order to achieve the
firm’s stated mission. For example, Starbucks states, Our mission:
to inspire and nurture the human spirit—one person, one cup and
one neighborhood at a time.8 It then lists several values Starbucks
employees should aim to achieve its mission:
∙ Create a culture of warmth and belonging, where everyone is
welcome.
∙ Act with courage, challenging the status quo and finding new
ways to grow our company and each other.
∙ Connect with transparency, dignity, and respect.
∙ Deliver our very best in all we do and hold ourselves
accountable for results.
After carefully delineating its mission and values, the firm
then might articulate observable norms that would encourage its
employees to behave in ways that reflect those values. Corporate mottos frequently provide signals that attempt to succinctly
express the company’s culture. To characterize its corporate culture FedEx chose: When it absolutely, positively has to be there
overnight. The United States Marine Corps motto, Semper fidelis,
is the Latin for always faithful. Abbott Laboratories has dedicated
itself to Creating Life-Changing Technologies.
5
//careers.southwestair.com/culture
Baron, J., and D. Kreps. 1999. Strategic Human Resources, p. 20. NY: John Wiley and Sons,
Inc..
7
We concentrate our discussion in this paper at the corporate level. Large firms often consist
of multiple divisions, which depending on their business strategies might optimally develop
their own “subcultures.”
8
www.starbucks.com/about-us/company-information/mission-statement
6
Experts and advisers on corporate culture often hold up Google
as an example. The company provides free meals, employee trips
and parties, financial bonuses, open presentations by high-level
executives, gyms, a dog-friendly environment, and so on. Many
of these perks are components of its overall reward system. These
policies help Google attract employees who are both talented and
driven, people expected to be among the best-of-the-best.
Although less-formal organizational aspects are dismissed (or
simply ignored) by some, we argue that for most corporations,
they can be quite important. (But the level of importance generally
differs across employees; the nuances of the firm’s culture are likely
to be more important for the vice president of human resources
than for a delivery truck driver). In analyzing corporate culture,
we believe that one advantage of our approach is its identification
and emphasis on important facets of a firm’s culture, together with
its analysis of how managers might affect its culture through identifiable actions. We focus on four important roles that a strong
corporate culture plays in successful organizations:
∙ Employee recruitment and selection.
∙ Providing non-monetary rewards and sanctions.
∙ Helping to set employee expectations.
∙ Enhancing communication.
Corporate Culture and Employee Recruitment and Selection. Fostering a desired culture begins with recruitment. Effective
human resource departments adopt recruiting strategies that aim
to attract employees who share their organizations’ values. Take
the case of West Point, whose efforts to train future military
officers are guided by the following statement:
The United States Military Academy’s mission is to
educate, train and inspire the Corps of Cadets so that
each graduate is a commissioned leader of character
committed to the values of Duty, Honor, Country and
prepared for a career of professional excellence and service to the nation as an officer in the United States
Army.9
Military academies develop their cultures by first carefully
recruiting and selecting candidates they believe to possess qualities of leadership and character. Thereafter, through an intensive
4-year college program, they further reinforce these shared values
they aim to instill in their officers. Over their 4 years, they weed
out cadets who fail to demonstrate the desired cultural values of
Duty, Honor, and Country. Our military academies also focus on
taking a longer view. They seek to recruit and develop officers who
have the potential to serve their country over extended military
careers.
Legal, accounting, consulting, and investment banking firms
all make use of similar “apprenticeship” programs before admitting new partners. New hires work long hours under partners who observe their work ethic, personality, and cultural
characteristics—frequently over a period of several years—to
ensure they match the firm’s culture. This is also an apt description
9
www.usma.edu/SitePages/Home.aspx
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23
of the process of recruiting new faculty members prior to granting
tenure by a university.
Corporate Culture and Non-Monetary Rewards and Sanctions. A core assumption within economics is that people are
self-interested; almost all of us are assumed to prefer more of
the things we value to less. In these analyses, money (income
or wealth) is generally included not as an end in itself, but to
acquire other things that they value: housing, food, transportation, good health, entertainment, and a better life for themselves
and their family, friends, and society. Moreover, money is not people’s sole motivator. They also value things like independence,
security, prestige, recognition, respect, and acceptance. A strong,
effective corporate culture can reward employees with peer recognition, a long safe and rewarding career, and a good work-life
balance—all things that cause people to want to come to work. At
the same time, the threat of sanctions by peers can be an important deterrent to violating shared values and norms. Feelings of
guilt and shame from violating thecompany’s culture (e.g., letting
their peers down) can also be an important motivator.
Corporate Culture and Employee Expectations. The decisions of employees to exert effort and cooperate with other
employees can depend on their expectations about how coworkers will behave. For example, if the workday begins at 8:30
but your boss is in his office at 8:00, you are more likely to
arrive before 8:00. Nevertheless, such expectations for employees
are bound to be shaped, at least in part, by the company’s formal architecture. If co-workers are paid a commission on sales,
an employee would be more likely to expect them to help increase
sales. But expectations are also affected by less formal aspects of the
corporation—things we are identifying as elements of corporate
culture. Microsoft is often credited with a reputation for hiring
creative, hard-working individuals. If two Microsoft employees
were placed together on a team, even without prior interaction,
each likely laexpects the other to be clever and hard-working.
Employing both the formal as well as the less formal aspects
of the firm’s architecture generally will be more effective in fostering expectations that promote productive choices and effort by
employees. For instance, employees who are rewarded based on
product quality might be more likely to work harder if they believe
that those co-workers whose efforts affect the quality of the product are equally industrious and committed to its success. And with
this in mind, managers intent on increasing employee focus on
manufacturing quality might reinforce recent changes in the firm’s
formal evaluation and reward systems with things like motivational posters, slogans, executive speeches, an employee-relations
campaign, and clever use of the media, all aimed at creating a
“quality-centered” culture.
In his much-cited paper, David Kreps points out the limits
of formal contracts in promoting coordination and cooperation
among employees.10 Established norms, in a world characterized
by “high bargaining costs” and “imperfect information,” are seen
as promoting coordination among independent decision makers, with repeated interactions working to ensure that cooperative
10
Kreps, D. 1990. “Corporate Culture and Economic Theory.” In Perspectives on Positive Political Economy, edited by J. Alt and K. Shepsle, 90-143, Cambridge University Press (Chapter
4). This chapter has garnered 4021 Google Citations as of 6/10/23.
JOURNAL OF APPLIED CORPORATE FINANCE
behavior (and its opposite) end up being both recognized and
appropriately rewarded.
Corporate Culture and Communication. Ensuring that
employees and managers understand and follow the firm’s mission and value statements normally requires on-going corporate
retreats, training sessions, company newsletters, social media, and
other forms of communication. And employees’ opportunities to
observe their supervisors and colleagues living up to the professed
corporate values can reinforce their own commitment to following
these cultural norms.
For these purposes, the use of printed material may be of limited use. In fact, few organizations even attempt to draft manuals
detailing all the firm’s important policies and procedures—not
only would such an attempt likely prove infeasible, but such a
tome would likely have few readers. Many if not most corporate policies are communicated to employees in less formal ways.
And these less-formal means of communication tend to be more
effective.
Aspects of the corporation such as slogans, role models, and
social rituals can be methods of communicating the corporate culture to employees in particularly memorable ways. For example, a
slogan like Target’s Expect More. Pay Less. reinforces the message
that employees are expected to focus on the customer experience
(product offerings, store cleanliness, customer service, etc.) while
managing costs and allowing the company to charge relatively
low prices. Apple’s Think Different communicates to employees, as
well as suppliers and customers, that the company values creativity in both its product design and retailing. Sabert, a global leader
in food packaging and service, begins its mission statement by
communicating its fundamental purpose as a company: We exist
to enhance and advance the way people enjoy food.
Jacques Crémer defines a firm’s corporate culture as shared
knowledge within the firm of facts and behavioral rules that are
not held by outsiders. His analysis suggests that a good corporate
culture can speed decision-making and reduce the costs of information acquisition and processing among employees throughout
the firm.11 To be most effective, firms must communicate how an
employee might exemplify the firm’s culture. For example, after
identifying employees who have performed particularly well, the
firm might simply add a performance bonus to those individuals’
next paycheck. Admittedly, this might also serve to inform others if the employees tell co-workers about their bonuses. But if
such employees were also called to the front of the room at a large
corporate event, their accomplishments described and extolled, a
plaque and a check presented, followed by an article in the corporate newsletter, this would clearly communicate to a broader
audience that these activities are recognized and rewarded.
Company parties and training sessions can help disseminate
this type of information by increasing interactions among employees. For example, at an apartment REIT, maintenance supervisors
responsible for different apartment complexes were regularly gathered for training purposes. Much of the time was devoted to
discussions among supervisors devoted to sharing valuable innovations. This encouraged employees at different locations to
experiment with different approaches to problems, and in this
11
Crémer, J. 1993. “Corporate culture and shared knowledge.” Industrial and Corporate
Change 2, 351-386.
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24
fashion, productive solutions spread throughout the REIT. This
is likely to be especially important for employees who otherwise
might see each other infrequently, or whose prior interaction had
just been over the phone or through e-mail. Hence training sessions might allot lengthy periods for breakout sessions, meals,
breaks, and happy hours rather than just focusing narrowly on
classroom participation.
A System of Complements. When consistent with and working in concert with the more formal aspects of the firm—its
decision-right assignments, control systems, and reward systems—
less formal aspects like management speeches, posted signs, and
role models can all help communicate and reinforce the goals
of the firm. We believe that both have the potential to promote productive aspects of a coherent culture within the firm’s
architecture.
But not everyone agrees. Some dismiss the “softer” elements of
corporate culture—role models, company folklore, and rituals—
as unimportant. They stress the formal aspects of a firm’s
architecture as being the primary, if not the sole, determinant of a
firm’s value. Frederick Taylor is an example from near this end of
the spectrum. He argued that the designs of work processes and
incentive systems were the primary determinants of firm value.12
Alternatively, the effectiveness of softer aspects has led some management gurus to assert that a productive corporate culture can be
molded with little attention to formal evaluation and compensation schemes. Quality expert W. Edwards Deming is nearer this
end of the spectrum. He went so far as to argue that incentive pay
is detrimental to a productive organization.
Our analysis suggests that it is a mistake to think of these
harder and softer aspects of the organization as mutually exclusive or in competition with each other; both can play valuable
roles in enhancing firm performance. The various elements of the
organization are more likely to be complements than substitutes.
Effective managers recognize these interactions, designing both to
be reinforcing features of a productive corporation.
Wells Fargo—A Corporate Culture Gone Awry. So far, we
have focused on how within the firm’s organizational architecture a well-crafted corporate culture can motivate employees to
achieve the organization’s goals and create value. The Wells Fargo
fake-account scandal began in the fall of 2016. It provides a good
example of how an ill-structured culture, coupled with flawed
incentive and monitoring systems, can promote dysfunctional
employee behavior that harms overall firm performance.
In 2015 Wells Fargo was among the most admired companies
in the world. It had largely escaped the 2007–2008 financial crisis
and had experienced the best 5- and 10-year stock returns among
US banks. Its market cap was around $277 billion, making it the
10th most valuable US company.
But in 2016, regulators fined Wells Fargo $185 million for
opening millions of “fake” bank accounts and issuing credit
cards without customer consent. The announcement produced a
major scandal resulting in substantial declines in the firm’s reputation and market value, additional regulatory penalties, and
civil/criminal charges filed against its former executives. In the Fall
of 2023, Wells Fargo was still grappling with how to “fix itself.13 ”
In April 2017, the Wells Fargo board publicly disclosed its Sales
Practices Investigation Report. The report concluded that a poor
culture in its Community Banking division was a major cause of
employee misbehavior14 :
12
14
13
Taylor, F. 1923. The Principles of Scientific Management. New York: Harper & Row.
“Wells Fargo is Still in Fix-It Mode,” Wall Street Journal, 9/6/23.
∙ There was a growing conflict over time in the Community
Bank between Wells Fargo’s Vision & Values and the Community Bank’s emphasis on sales goals. Aided by a culture of
strong deference to the management of the lines of business
(embodied in the oft-repeated “run it like you own it” mantra),
the Community Bank’s senior leaders distorted the sales model
and performance management system, fostering an atmosphere
that prompted low quality sales and improper and unethical
behavior.
∙ The Community Bank identified itself as a sales organization,
like department or retail stores, rather than a service-oriented
financial institution. This provided justification for a relentless focus on sales, abbreviated training, and high employee
turnover.
∙ Senior management in the Community Bank had a deep-seated
adherence to its sales model, which generally called for significant annual growth in the number of products sold each year.
Even when challenged by their regional leaders, the senior leadership of the Community Bank failed to appreciate or accept
that their sales goals were too high and becoming increasingly
untenable.
∙ The Community Bank’s senior management tolerated low
quality accounts as a necessary by-product of a sales-driven
organization; its senior leaders failed to adequately consider
that low quality accounts could be indicative of unauthorized
accounts.
∙ There was a disinclination among the Community Bank’s
senior leadership, regardless of the scope of improper behavior or the number of terminated employees to see the problem
as systemic.
∙ Former head of the Community Bank, Carrie Tolstedt, and the
Community Bank group risk officer not only failed to escalate
issues outside the Community Bank, but also worked to impede
such escalation, including by keeping from the board information regarding the number of employees terminated for sales
practice violations.
The report further concluded that the formal elements of the
firm’sOrganizational Architecture were defective:
∙ Keeping the sales model intact and sales growing meant that
the Community Bank’s performance management system had
to exert significant and in some cases extreme, pressure on
employees to meet or exceed their sales goals.
∙ Many employees felt that failing to meet sales goals could
(and sometimes did) result in termination or career-hindering
criticism by their supervisors.
∙ Compensation incentives contributed to problematic behavior
by over-weighting sales [instead of ] customer service or other
factors.
‘‘Wells Fargo Bank. “Key Findings from Board Investigation, Action Plan update and Path
Forward.” April 12, 2017.
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25
Wells Fargo’s internal control system had numerous flaws,
which further enabled employee misbehaviors. In summary, both
the harder and softer aspects of Wells Fargo’s Organizational
Architecture reinforced each other in producing a dysfunctional
organization—exactly opposite the desired effect.
CORPORATE ETHICS CODES
Corporate codes of ethics are one aspect of a firm’s culture
that typically is committed to writing. Virtually all corporations
require their employees to acknowledge that they have read,
understand and will follow the firm’s code of conduct. These
codes mandate that employees behave ethically and comply with
relevant laws and regulations.
Most people have a reasonably clear idea of what they mean
when describing an individual as “ethical.” They value qualities
such as honesty, integrity, fairness, and commitment to the task
at hand. Most would say they adhere to the “golden rule,” which
urges employees to treat others as they would like to be treated.
Nevertheless, moral philosophers have been debating ethics for
millennia without producing a universal rule for classifying individuals’ actions as “ethical” or otherwise. And there is even less
consensus when it comes to defining the ethics of organizations
like public corporations that involve large groups of people. In
discussing corporate ethics, there is bound to be confusion. After
all, a corporation is simply a collection of individuals—or more
precisely, a set of contracts that bind together individuals—with
different, often conflicting interests. It is in this sense that we
would argue corporations themselves do not behave ethically or
unethically—only individuals do.
Our perspective raises several questions: If corporate executives,
managers, and employees are not pursuing their own interests,
then whose interests might they be serving? That of their bosses?
The company’s shareholders? The firm’s board of directors? And
what if major conflicts exist among these various interests?
The Informational Role of Ethics Codes. Even though ethics
codes are unlikely to resolve fundamental corporate ethics questions, eradicate self-interest, or change individuals’ preferences,
these codes still have the potential to modify employee behavior. Thus far, we have generally assumed that corporate managers
and employees know how to increase corporate value. But in an
array of circumstances, this presumption would be questionable.
In extreme cases, managers’ and employees’ uncertainty about
appropriate ethical standards might even be a greater corporate
problem than their failure to work hard or to act in accordance
with standards that are well-established and clearly defined.
One source of potential confusion is that ethical standards vary
both over time as well as across countries. Societal changes such
as the civil rights and women’s rights movements have certainly
altered conceptions of socially acceptable behavior. Thus, some
actions that might have been acceptable one or two decades ago
would not be today. Moreover, the progressive globalization of
corporations is increasingly forcing corporate employees to recognize and adapt to differences in national and regional cultural
expectations.
Clashes between Corporate Culture and Differing Generational Values. There is at least one big challenge in crafting a
JOURNAL OF APPLIED CORPORATE FINANCE
corporate culture that reflects the shared values of all the employees and managers within the firm—namely, different generations
of employees apparently have different values. This can produce
clashes among employees.
A recent study by Johns Hopkins University found that different generations have remarkably different core values.15 Their
values appear to be shaped by a combination of their environment
and their experiences when growing up. Because experiences and
environments differ across generations, their values differ, as well.
Table 1 summarizes their key findings.
These differences highlight an important management challenge: finding ways to integrate people with differing generational
values. Since all corporations of any size have employees from
several generations, we saw that clash unfolding today as firms
struggle to establish in-office work policies following the pandemic. For example, when surveying its employees currently
working in either remote or hybrid roles, Deloitte found that
if their employer asked them to work on-site full-time, fewer
than 10% of Gen Zs, but fully 75% of Millennials, said they
would consider looking for a new job.16 And Elon Musk reportedly clashed with millennials within his organization. Musk has a
live-at-work ethos that most find difficult to emulate, and many
openly deplore. His values clash with those of many of his younger
workers who value the flexibility and convenience of working from
home, who question their commitment to a job, and who dislike
the “daily grind.”17 These profound generational differences suggest the potential value of new managerial approaches to dealing
with employees.
CHANGING CORPORATE CULTURE
Managers trying to make substantial changes in their corporate
culture often face enormous obstacles.18 Corporate culture begins
to form when the firm’s founder starts to hire its first employees.
The shared values of these early employees begin to set the tone for
the company. Managers tend to hire new employees with similar
shared values, beliefs, and work ethics.
As the organization grows, its culture becomes more ingrained.
But in cases where employee recruitment focuses narrowly on getting people with the right skills, cultural mismatches can arise;
new hires can have very different cultural values than the firm’s
shared values. Mismatches create corporate culture vampires,
employees who might appear productive and supportive, but who
behind the scenes could be undermining the firm’s strategy (and
morale) by criticizing both the company and its managers.
To the extent that a counterproductive culture has become
engrained within a firm’s policies and personnel, large culture
shifts may require wholesale layoffs and restaffing. For instance,
15
Odukoya, A. 2022. “The Changing Generational Values”. //imagine.jhu.edu/blog/2022/11
/17/the-changing-generational-values/
16
Parmlee, M. “2023 Gen Z and Millennial Survey.” http://www.deloitte.com/global/en/
issues/work/content/genzmillennialsurvey.html
17
Higgins, T. 2023. “Elon Musk Is All About the Nonstop Grind. And He Can’t Stop Talking About It.” Wall Street Journal. www.wsj.com/articles/elon-musk-is-all-about-the-nonstopgrind-and-he-cant-stop-talking-about-it-551d2abd
18
Walker, B., and S. Soule. 2017. “Changing Company Culture Requires a Movement, not a
Mandate.” Harvard Business Review. hbr.org/2017/06/changing-company-culture-requires-amovement-not-a-mandate
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26
TA B L E 1
Generation
Changing personal values across generations.
Baby boomers
Generation X
Generation Y (millennials)
Generation Z
Born
1946 to 1964
1965 to 1980
1981 to 1996
After 1996
Values
Competitive
Work centric
Conservative
Work-life balance
“Work hard, play hard” mentality
Independent
Materialistic
Questioning
Flexible
Self-prioritization
Diverse
Inclusive
Mental health prioritization
Communicative
Stability and balance
Collaboration
Flexibility
consider the culture of a typical US Federal agency. A 2017 survey
reported that 72% of federal employees believed that their agency
rarely or never would seek their ideas for improvements, and 71%
reported that the government was less open to new ideas than the
private sector.19 Changing such a culture is virtually impossible.
Few young overachievers seek government jobs because of the relatively low pay and the stifling bureaucratic inertia preventing even
small changes.
Thus, one should not be surprised to find that federal agencies consist overwhelmingly of career bureaucrats with the taste for
skillsets to prosper in that environment. Civil service laws create
high barriers to firing people. To replace them with younger, more
entrepreneurial employees would require wholesale changes in
Federal regulations, compensation plans, decision-making responsibility, and performance metrics. But such federal changes would
be opposed by entrenched employees. This process likely requires
decades and several presidential administrations, any of which
could derail the process.
Although less formal features of organizations can be important
in reinforcing and communicating organizational architecture,
they also can raise the costs of changing its culture. Though
it would require some effort, managers can change decision
rights, formal evaluation, and compensation schemes in relatively
straightforward ways. Moreover, these changes can be clearly communicated to the affected employees. But getting employees to
change their heroes, customs, and social rituals are almost certain to be more difficult and time-consuming. These cultural
features tend to be created through informal communication
channels, and so they take more time both to establish as well
as to dismantle.
That said, a corporate culture at times requires change. This
typically happens because some important aspect of the firm’s
environment has changed. Market conditions, technology, and
government regulation are major factors driving the firm’s choice
of its corporate strategy and hence its organizational architecture,
including its culture. Therefore, changes in these aspects of its
environment can make its old culture obsolete. Product innovation, new entrants offering competing products, or a change in the
firm’s legal or regulatory environment, thus, can prompt changes.
But a change also might be required because the firm simply erred
in crafting its existing culture.
But whatever the reason for the change, it is important to
recognize that because the various facets of a firm’s architecture
are interdependent, successfully navigating a productive change
requires a thoughtful plan for effective implementation. For example, McKinsey’s research suggests that less than a quarter of
organizational redesign efforts are successful.20 Because massive
culture changes tend to be quite costly, not to mention risky,
undertakings, most executives only tinker with their organizations’ culture “around the edges,” normally avoiding big shifts.
Though difficult, some firms appear to have successfully changed
their cultures.
The Case of PepsiCo. Replacing the chief executive officer can
be one way to set the stage for a change in corporate culture.
Indra Nooyi was appointed chief executive at Pepsi and served
in that position from 2006 to 2018. She was selected as CEO not
only because of her impressive track record of accomplishments
but also because she expressed a passion to change Pepsi’s culture
from the top down. At the time, Pepsi was known for its intensely
driven culture and its marketing of sugar-laden beverages—with
their potential health problems. Nooyi recognized that in addition to the declining demand for its core products the company
faced a problem of attracting and retaining a new generation of
employees.21 In Nooyi’s words:
Millennials want to work for a company that has a purpose and is making a difference to the world. To attract
and retain the best and the brightest to our company,
we had to create an environment that allows people to
bring their whole selves to work. That was a daunting
task.
Nooyi was instrumental in a major restructuring and refocusing of the company designed to accomplish both its product
and internal cultural objectives. She guided the spin-off of the
company’s bottling operations as well as its restaurants, including
KFC, Pizza Hut, and Taco Bell. As part of the company’s strategy
of diversifying into more healthful drinks and foods, she also oversaw the acquisition of Tropicana Products as well as Pepsi’s merger
with the Quaker Oats Co.
Uber. In 2017, a company investigation into sexual harassment claims resulted in the resignation of Uber’s CEO and the
20
19
www.prnewswire.com/news-releases/new-research-finds-72-percent-of-federalgovernment-employees-say-their-agency-rarely-or-never-seeks-ideas-for-improvement300466544.html
Aronowitz, S., A. De Smet, and D. McGinty. “Getting Organizational Redesign Right.”
McKinsey Quarterly, June, 2015.
21
Cao, S. (10/25/17). “PepsiCo CEO Indra Nooyi: Changing Corporate Culture Is Not
a ‘Feel-Good’ Project.” https://observer.com/2017/10/pepsico-ceo-indra-nooyi-changingcorporate-culture-is-not-a-feel-good-project/
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27
firing of more than 20 employees.22 Unlike the CEO change
at Pepsi, Uber’s CEO change was prompted by a scandal. Its
new CEO undertook the task of changing the company’s culture. Both employees and drivers were invited to participate in
developing new principles, and some 12,000 participated in this
process aimed at amending its corporate culture. They developed
the following principles:
∙ We build globally, we live locally.
∙ We are customer obsessed.
∙ We celebrate differences.
∙ We do the right thing.
∙ We act like owners.
∙ We persevere.
∙ We value ideas over hierarchy.
∙ We make big bold bets.
There are several aspects of Uber’s newly articulated principles
of corporate culture that are worth noting: (1) Because the scandal
emanated from the top of the organization, a top-down culture
change perhaps would be less effective; senior management had
ceded some of its moral authority. (2) Even if a quite similar
list might have been produced without the scandal, its articulation served to signal that a material change in Uber’s culture had
occurred; actions that might have been tolerated previously would
no longer be. (3) News of this scandal had been sufficiently public
that Uber faced potential defections by both drivers and customers. In part, this process was intended to forestall such losses.
(4) The open invitation for participation by both employees and
drivers increased the likelihood of buy-in, not only by those who
participated but also by those who declined to participate directly
yet still felt a sense of representation by others who were in similar
circumstances. (5) It provided transparency in the process. (6) It
helped to reinforce more formal elements of Uber’s organizational
architecture.
While it is difficult to tell whether its culture has been successfully changed, Uber has substantially outperformed its major
competitor, Lyft, in the stock market over the succeeding years.
Sealed Air. The company that invented bubble wrap, Sealed
Air offers another example of a company that successfully changed
its corporate culture.23 In the late 1980s, it faced a looming
change in its environment, one that worried the company’s senior
leadership. Its major patents were expiring, and along with them,
much of their ability to forestall competition. Given their track
record of 45%–50% increase in reported profits, senior management anticipated a substantial increase in competition. Their
historical market environment had allowed the company to operate with little competitive pressure to contain costs. As a result, the
firm had relatively inefficient operations. One indication of this
impending problem was that in Europe, where the firm enjoyed
less extensive patent protection, the company had fared poorly.
Anticipating the increase in competition, and to increase
efficiency and improve its chances for survival, the company’s
22
Dudovksiy, J. “Uber Organizational Culture: A Brief Overview.” 7/19/21. https://researchmethodology.net/uber-organizational-culture-starting-new-page/
23
Wruck, K. 1994. “Financial policy, internal control, and performance: Sealed Air
Corporation’s leveraged special dividend.” Journal of Financial Economics 36(2):157-192.
JOURNAL OF APPLIED CORPORATE FINANCE
executives initiated an array of decisions designed to improve
the culture of the company. Managers used every opportunity
to explain this emerging challenge to their employees. It also
structured stronger financial incentives throughout the firm to
focus more on efficiency and cash flow. To boost both its production efficiency and product quality, it launched manufacturing
improvements, instituted stringent capital-budgeting procedures,
cut back on unproductive investments, and increased the firm’s
leverage to place more pressure on employees to generate sufficient cash flow to service its debt and avoid bankruptcy. For
the most part, these changes appear to have had their desired
effect in changing the firm’s corporate culture. Following these
changes both earnings and stock price performance improved
substantially.
Sequencing Changes. Our point in insisting that changes in
the firm’s architecture be coordinated is not to suggest that all
these facets should be changed simultaneously. While within a
system of complements, many things must change to produce
the desired effect, it normally would be counterproductive to
change everything at once. Instead, we argue that although it is
critical to understand the entire array of components that might
require change, this should be viewed as just Step 1. Step 2
would be the development of a plan for implementing that set
of changes. An effective plan for implementation well may specify
that changes be instituted sequentially, perhaps in stages, rather
than all at once. Step 3 then would be the implementation of the
plan.
This type of organizational change is hard and can take time.
It is possible that the performance of the firm might decline
as initial steps are taken, but before subsequent complementary
changes are instituted in the firm’s architecture, including its culture. But this does not imply managers should abandon their
plans to make planned changes; they should keep their focus
on the longer-term goal of a more productive firm. At times
you must take one step backward before you can take two steps
forward.
CORPORATE CULTURE AND THE
OBJECTIVE OF THE FIRM
One key component of a firm’s corporate culture involves
communicating the organization’s objective function. Within
our organizational architecture framework, we assume that the
objective of the firm is to maximize shareholder value—and
that companies should design both their formal architectures
and corporate cultures toward this end. Various individuals and organizations, however, have argued that this view
is too narrow, that corporations should focus on broader
groups, radically changing their corporate objectives and
cultures.
Stakeholder Value Maximization. In 2019 the Business
Roundtable issued a statement, signed by 181 CEOs, that
proposed to redefine the purpose of the corporation. Their
statement on corporate purpose was as follows:
While each of our individual companies serves its own corporate purpose, we share a fundamental commitment to all our
stakeholders. We commit to:
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28
∙ Investing in our employees. This starts with compensating
them fairly and providing important benefits. It also includes
supporting them through training and education that help
develop new skills for a rapidly changing world.
∙ We foster diversity and inclusion, dignity and respect.
∙ Dealing fairly and ethically with our suppliers. We are dedicated
to serving as good partners to the other companies, large and
small, that help us meet our missions.
∙ Supporting the communities in which we work. We respect
the people in our communities and protect the environment
by embracing sustainable practices across our businesses.
∙ Generating long-term value for shareholders, who provide the
capital that allows companies to invest, grow and innovate. We
are committed to transparency and effective engagement with
shareholders.
∙ Each of our stakeholders is essential. We commit to deliver
value to all of them, for the future success of our companies,
our communities, and our country.
Stakeholder Value Maximization is not a completely new
idea. In 1969, Ralph Nader and several other lawyers launched
what they called the Project on Corporate Responsibility with this
statement:
Today we announce an effort to develop a new
kind of citizenship around an old kind of private
government—the large corporation. It is an effort
which rises from the shared concern of many citizens
over the role of the corporation in American society and
the uses of its complex powers. It is an effort which
is dedicated toward developing a new constituency
for the corporation that will harness these powers for
the fulfillment of a broader spectrum of democratic
values.24
The apparent gulf between our organizational architecture
framework and the position of either the Business Roundtable
or Ralph Nader is not as wide as you might think.25 We also
would argue that each of these groups of stakeholders is important.
For example, customers are incredibly important to any business;
without the revenue they provide, the company fails. The easiest
way to increase customer satisfaction with your product is simply to lower its price. But if revenues do not cover costs, you
will go out of business. Similarly, employees and suppliers also
are critical groups. A simple way to increase employee or supplier happiness would be to raise their wages or the prices paid for
their inputs. But then again, unless revenues exceed costs, the firm
fails.
Moreover, you do not have to go to the extreme of corporate
failure. If additional resources are diverted from shareholders, their
willingness to fund corporations who the Business Roundtable
acknowledged provide the capital that allows companies to invest,
24
Collins, J. 1979. “Case Study—Campaign to Make General Motors Responsible.” reprinted
In Ethical Issues in Business, edited by Thomas Donaldson and Patricia Werhane, 90.
Englewood Cliffs: Prentice-Hall.
25
Bebchuck and Tallarita’s research suggests that the Business Roundtable’s statement about
focusing more broadly on stakeholders as opposed to shareholders was more rhetorical than
real (Wall Street Journal, 8/18/21).
grow and innovate is reduced. And if that diversion were large
enough, few if anyone at all would fund these activities—at least
if undertaken by US corporations.26 Competing international
corporations and capital markets without these diversions would
thrive.
We believe that a fundamental advantage of a managerial focus
on maximizing stockholder value is that it not only demands
recognition of the important role played by each of these groups—
customers, employees, suppliers, as well as shareholders—but it
does more: It provides concrete guidance on exactly how corporate executives should deal with each group. For example, it would
imply that in dealing with employees, the objective is neither to
minimize their level of compensation nor maximize their happiness. Attempting to pay employees less than they could receive at
other firms is a policy that surely would lead to higher employee
turnover. And the first employees to quit would be among the
most productive, because those tend to be the employees with the
greatest opportunities at other firms. Shareholder value maximization implies that employees, suppliers, and customers should be
compensated fairly—but not excessively. The trick in each of these
cases is to find the right, or optimal level—not too little, but not
too much.
Let us now turn to the question of community support. Many
firms actively support the communities in which they operate.
But rather than doing so as an act of pure charity, it too can
reflect a value-maximizing business decision. Consider the business history of the city of Rochester. In the 1970s, when two of us
(Jerry and Cliff ) joined the U of R faculty, the three largest firms
in Rochester were Kodak, Xerox, and Bausch & Lomb. These
three companies contributed generously to an array of local organizations, including local colleges and universities and numerous
non-profit cultural organizations. Each of these firms relied on
a set of employees with strong technical educations. To recruit
and retain such people, their employment opportunities were
obviously important to their decisions. But the cultural and educational opportunities that were available within the community
for both them and their families were important as well. Thus,
these corporate contributions increased the attractiveness of the
community and so made it easier for them to hire and retain talented people. (In fact, a Chamber of Commerce publication in
the ’70s asserted that Rochester had more engineers than any of
23 other states!)
Today the Rochester business community is very different. Each
of these once major companies has fallen on more difficult times.
Although the population of the city is about the same as in
the ’70s, instead of three companies with large employee populations, there is a multitude of smaller firms. In this current
environment, the benefits to any of these companies of corporate philanthropy would be smaller. Although every CEO would
favor a more vibrant cultural community environment, each CEO
prefers that other CEOs make charitable contributions. This is a
classical “free-rider” problem and so no one should be surprised
26
Some investors are willing to sacrifice financial returns to promote social objectives (such
as environmental sustainability and racial justice). Delaware allows for-profit corporations to
organize as Public Benefit Corporations. The public benefit must be specified in the company’s certificate of incorporation. Most PBCs are relatively small with targeted customers and
investors who are particularly socially conscious (e.g., Patagonia Works).
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29
JOURNAL OF APPLIED CORPORATE FINANCE
to learn that aggregate corporate contributions in Rochester today
are smaller than in the 1970s.
Other examples: a company with a large plant in an inner city
might decide that investing corporate resources and personnel to
improve area schools would lead to more qualified job applicants
and eventually higher-quality, lower-cost products. Giving money
to the local university might benefit the firm by improving its
R&D and increasing its access to top graduates. Reducing pollution and improving the environment might lower its wage bill to
the extent a cleaner local environment makes it easier to attract
skilled workers and lower its risk of legal action for environmental
damage.
In sum, corporations’ intent on maximizing their long-run
firm value often find it in their interest to devote resources
to non-investor “stakeholders” such as employees, customers,
suppliers, and local communities. Maximizing firm value in
fact means devoting resources to each important corporate constituency to improve the terms on which they contract with
the company, both to maintain the firm’s reputation and to
reduce the threat of restrictive regulation. More precisely, it
means allocating corporate resources to each group that affects
firm value—but only to the point where the incremental benefits from such expenditures at least equal their additional
costs.
Friedman’s Position on Corporate Social Responsibility.
Nobel Laureate Milton Friedman articulated a frequently cited
standard of corporate social responsibility when he wrote:
Consider the issue of corporate philanthropy. There are several
reasons why it might be more efficient for the corporation to focus
on creating wealth and let its shareholders, employees, and customers choose the beneficiaries of their charitable contributions.
By maximizing their shareholders’ wealth, corporations effectively
maximize the size of the pie available for distribution; and in
so doing, they enlarge the pool of individual (non-corporate)
resources available for charity.
Admittedly, there are arguments for corporate contributions. For one thing, neither information nor analysis are free.
The corporation may have a greater understanding of some
of these issues—especially some of the more subtle ones—
because they can afford to devote more resources to their
analysis.
In contrast to Friedman, Nobel Laureate Oliver Hart and Luigi
Zingales assert that public companies should maximize something they call shareholder welfare as opposed to shareholder
wealth.28 The former amounts to satisfying shareholder preferences, which as Hart and Zingales argue, might be ascertained
by shareholder voting. But voting is fraught with both practical
(for instance, small investors rarely vote their shares) and theoretical problems (Kenneth Arrow raised concerns with whether
voting is an appropriate method of aggregating individual preferences into social preferences). Without evidence, we remain
unconvinced.
CONCLUSIONS
In a free-enterprise, private property system, a corporate
executive is an employee of the owners of the business. He has direct responsibility to his employers. That
responsibility is to conduct the business in accordance
with their desires, which generally will be to make as
much money as possible while conforming to the basic
rules of society.
What does it mean to say that the corporate executive has a “social responsibility” in his capacity as
businessman? If this statement is not pure rhetoric,
it must mean that he is to act in some way that
is not in the interest of his employers. For example,
that he is to make expenditures on reducing pollution
beyond the amount that is required by law in order
to contribute to the social objective of improving the
environment.
[The problem in this case is that] the corporate executive would be spending someone else’s money for a
general social interest…[when] the stockholders or the
customers or the employees could separately spend their
own money on the particular action if they wished to
do so.27
27
Friedman, M. 1979. “The Social Responsibility of Business is to Increase Its Profits.” New
York Times Magazine, reprinted In Ethical Issues in Business, edited by T. Donaldson and P.
Werhane, 191-7. Englewood Cliffs: Prentice-Hall.
Some executives, consultants, and academics stress the importance of the formal elements of a company’s organization, such
as its incentive compensation plans, while others emphasize
the role of less formal aspects of an organization, including
corporate culture. We believe that the formal elements of a
firm’s organizational architecture—the assignment of decision
rights, and its performance evaluation and reward systems—
and its corporate culture should be viewed as complements.
Well-designed organizations typically have reinforcing formal
and informal elements that fit with each other and with the
firm’s business strategy. Understanding the linkages between
the two can be especially important in helping managers who
want to change their corporate cultures or who want to make
the formal elements of their organizational architecture more
effective.
Executives face two serious challenges with respect to their corporate cultures. First, they must work to reshape their cultures
to implement new or revised corporate strategies that arise from
changing technologies, government regulation, or competition.
Second, they must find ways to recruit, motivate, and retain new
employees who bring different values than the existing employees because the existing staff (and especially senior managers)
grew up within quite different environments than these younger
employees.
28
Hart, O., and L. Zingales. 2017. “Companies Should Maximize Shareholder Welfare Not
Market Value.” www.ecgi.org and “Serving Shareholders Doesn’t Mean Putting Profit Above
All Else.” Harvard Business Review (10/12/17).
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30
Corporate culture can play an important reinforcing role
in helping an organization achieve its mission. A strong culture provides valuable non-monetary rewards, sets employee
expectations, and enhances employee recruitment retention, and
communication within the corporation.
How to cite this article: Brickley, James A., Clifford W.
Smith, and Jerold L. Zimmerman. 2023. “Corporate
Culture and Organizational Architecture.” Journal of
Applied Corporate Finance 35: 22–31.
https://doi.org/10.1111/jacf.12576
17456622, 2023, 4, Downloaded from https://onlinelibrary.wiley.com/doi/10.1111/jacf.12576 by National Sun Yat-Sen, Wiley Online Library on [20/02/2025]. See the Terms and Conditions (https://onlinelibrary.wiley.com/terms-and-conditions) on Wiley Online Library for rules of use; OA articles are governed by the applicable Creative Commons License
31