Organizations and Markets

The Elusive Concept of Corporate Culture

| Peter Klein |

Corporate culture, like pornography, is difficult to define, but perhaps easy to recognize. Attitudes, beliefs, ways of solving problems — “cognitive frames,” if you prefer a fancy term — seem to differ among organizations, and to affect performance and characteristics. But a scientific explanation of corporate culture has proved elusive. Economists, in particular, have not gotten much past the analysis in Kreps’s 1986 paper “Corporate Culture and Economic Theory,” despite important contributions from Crémer (1993), Lazear (1995), and Hermalin (1998). (Ben Hermalin provides a nice summary of the literature here, and George Akerlof and Rachael Kranton provide some related discussion here.) Certainly there has been little empirical work on the economics of corporate culture.

So I was pleased to see this paper by Henrik Cronqvist, Angie Low, and Mattias Nilsson, “Does Corporate Culture Matter for Firm Policies?” The paper takes the Forrest Gump approach (which I’ve advocated elsewhere) that “corporate culture is what corporate culture does.” In other words, rather than try to define it, treat it as a latent concept and look for its effects. From the abstract:

We construct a parent-spinoff firm panel dataset that allows us to identify culture effects in firm policies from behavior that is inherited by a spinoff firm from its parent after the firms split up. We find positive and significant relations between spinoff firms’ and their parents’ choices of investment, financial, and operational policies. Consistent with predictions from economic theories of corporate culture, we find that the culture effects are long-term and stronger for internally grown business units and older firms. Our evidence also suggests that firms preserve their cultures by selecting managers who fit into their cultures. Finally, we find a strong relation between spinoff firms’ and their parents’ profitability, suggesting that corporate culture ultimately also affects economic performance. These results are robust to a series of robustness checks, and cannot be explained by alternatives such as governance or product market links.

This strikes me as a fruitful approach. Culture is treated as a residual, like Solow’s (1957) treatment of technological change. Of course, the drawback is that culture itself remains a black box. But perhaps this is the best economic analysis can do.

14 March 2007 at 11:27 pm Peter G. Klein 6 comments