We hear a great deal about corporate culture and its relevance to such matters as internal control, risk management, whether to pursue a merger or acquisition, and the effect on regulators’ investigations and enforcement actions. It seems we can’t get away from hearing about it, and we begin to wonder whether this thing called culture is real; and, if it is, what its effect is and whether it can be influenced in a meaningful way.

Much attention is given to culture’s effect on how well a company deals with legal and regulatory compliance. For years, regulators have been pushing the importance of a corporate culture that drives a high level of ethics and integrity. Securities and Exchange Commission and Department of Justice officials, speaking to compliance with such laws as the Foreign Corrupt Practices Act and avoiding related enforcement actions, have emphasized maintenance of a culture that does not tolerate illegal behavior. The head of the SEC’s Office of Compliance Inspections and Examinations adds that while a culture of compliance is an elusive concept and a significant challenge, it has a huge impact on how ethically a company performs.

The Federal Sentencing Commission also weighs in with its guidelines, noting that an effective compliance and ethics program requires a company to promote an organizational culture that encourages ethical conduct and a commitment to compliance with the law. The New York Stock Exchange listing standards speak to a code of business conduct and ethics fostering a culture of honesty and accountability. And the Delaware Court of Chancery focuses on culture, such as in the Disney case when Chancellor Chandler contrasted “ideal corporate governance practices and the unwholesome boardroom culture at Disney.”

What Is Corporate Culture?

First, let’s look at what it is not. It’s not a series of objectives. For example, in defining its culture, the University of Pennsylvania’s President recently wrote that the University’s culture is deeply rooted in tradition, counterbalanced by contemporary practicality, being one of “collaboration, kept on its toes by lively competition [and] of academic excellence, artistic expression, student athleticism, scientific inquiry, legal pedagogy, healthcare leadership, and community connection.” And it continues from there, sounding to me more like a broad-based mission statement.

It is said that a company’s culture is embedded in an organization’s core values, but experience shows that values truly affect behavior only if they’re supported by guiding principles that are well understood and embraced in everyday thinking, decision making, and actions.

Culture also is not something that might sound positive that’s a basis for advertising claims, such as the tag line “truth in engineering” used by Audi. Today, in light of the emissions deception scandal, that’s an advertising spin taken to the height of hypocrisy.

Then what is culture? One definition says culture is the professional atmosphere of a company, along with its values, customs, and traditions. There are many other descriptions, some focusing on what culture does. The COSO internal control framework says “organizational culture … sets expecta­tions of behavior that reflects a commitment to integrity and ethical values, oversight, accountability, and performance evaluation.” The COSO enterprise risk management framework adds, “official policies specify what the board and management want to happen [whereas] corporate culture determines what actually happens, and which rules are obeyed, bent, or ignored.”

It is said that a company’s culture is embedded in an organization’s core values, but experience shows that values truly affect behavior only if they’re supported by guiding principles that are well understood and embraced in everyday thinking, decision making, and actions. And business processes—including performance evaluation, compensation, promotion, and other HR programs—must be structured to provide foundational support for ongoing operationalization of the values.

Is Culture Real?

Culture is not tangible—we can’t touch it. But that doesn’t mean culture isn’t real, with great impact on an organization, because indeed it is and it does.

Does anyone believe that the cultures of Daimler and Siemens didn’t tolerate and encourage bribery? That General Motors didn’t have a culture embracing “good soldier” managers who would ignore known problems? That Toshiba didn’t have a culture requiring that managers report meeting rigid profit goals, whether the profits were real or not? Or that Volkswagen didn’t have a culture where use of defeat devices wasn’t deemed acceptable?

Those cultures allowed and perpetuated negative behavior, but there are numerous companies where culture drives positive actions. Can anyone argue with the results of Apple’s culture of innovation and attention to detail, developing devices not driven by asking customers what they want, but rather by creating products that current and potential customers didn’t know they wanted but would soon find they couldn’t possibly do without? Or the culture of Berkshire Hathaway that identifies companies that become great long-term performers, and leaving management in place to continue to provide outsized returns? Or the soundness of Johnson & Johnson managers’ iconic decision to pull Tylenol off pharmacy shelves, which was a direct result of the company’s established culture?

Why Does It Matter?

Culture matters because it is very real and, if established widely and deeply throughout an organization, drives corporate behavior on a consistent basis. That is precisely why management, boards of directors, regulators, auditors, and others are so focused on it.

I have worked with many company CEOs who have made great decisions due in part to their organizations’ long-established cultures. Corporate culture has provided a basis and context for decision making related to operational performance, human resources, dealings with customers, legal and regulatory compliance, and virtually every facet of a business’s activities and dealings. A negative culture can sink a company, while a positive one sets a foundation for excellence and success.

Who Is Responsible?

Some corporate governance aficionados say the board of directors is responsible for establishing a company’s culture. Well, that’s like saying the board of directors is responsible for running the company on a day-to-day basis. Technically a board could take on that responsibility, but in virtually all instances the board delegates that role to the CEO. With respect to culture, it’s impossible for a board to create a culture, though it can influence the culture though input and guidance to the CEO. It is the CEO that is by far the most significant driver of culture, along with his or her senior management team that embeds it throughout the organization.

It is true that in some organizations a culture is built from the bottom up, creating a diversity of cultures depending on location, line of business, or other factors—such that there is no consistent culture at all. For such companies, there is scant framework for decision making, and usually those organizations are the worse for it.

Can an incoming CEO change a company’s culture? Yes, it can, though it’s often said that doing so is like turning an aircraft carrier. But I’ve seen where a decision on an important issue shifted a company’s culture very quickly. Examples include one CEO making a high-level HR decision, another deciding how sales personnel are rewarded, and a third positively recognizing new customer contracts only if they satisfy specified criteria. Those decisions quickly became known throughout the management ranks of these companies, and the cultures and behaviors were quickly and fundamentally changed.

The following quote is on point and accurate: “Culture starts at the top, but it doesn’t start at the top with pretty statements. Employees will see through empty rhetoric and will emulate the nature of top-management decision making … A robust ‘code of conduct’ can be emasculated by one action of the CEO or CFO.” But the source of the quote is perhaps even more telling: Andrew Fastow, the former CEO of Enron!

How important is a cultural fit when looking at a merger or acquisition target?

The answer is that usually the fit is critical. Combinations without a good fit have lost tremendous value, whereas where cultures mesh the likelihood of future success rises dramatically. While different cultures can be combined over time, doing so takes a great deal of management’s time and energy and might or might not work.

Why the Fuss?

The reality is that culture is critically important to an organization’s success in meeting its goals—or failing to do so. Regulators continue to focus on corporate culture in investigations and enforcement actions, boards of directors increasingly recognize the relevance, and CEOs and their senior management teams realize how behavior and decision making can be guided in a positive, on-strategy, and on-policy way. External and internal auditors understand how corporate culture drives actions, and are looking ever more closely. The cultures of acquisition targets are being scrutinized. And we’re seeing more boards looking at candidates for board seats with an eye on cultural compatibility.

The “fuss” is real, and for good reason—culture indeed does truly matter.

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