Corporate Culture in the Numbers

A company’s policies provide insight into its culture.

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Corporate culture has long been a vital, if elusive, element of a company’s success. Cost-cutting and entrepreneurial cultures, for example, have been credited for the long-term success of many companies. Conversely, culture clashes have been blamed for merger and acquisition failures and incompatible employees. But just how corporate culture can be measured is still a mystery. For instance, the causal link, if any, between casual Fridays and a “risk-taking culture” remains empirically undemonstrated.

Three researchers are beginning to get a handle on measurable and meaningful characteristics through which corporate culture manifests. Corporate policies captured by investment and financial styles and operational budgeting provide windows into a company’s culture. In their January 2007 working paper, Does Corporate Culture Matter for Firm Policies?, Henrik Cronqvist and Mattias Nilsson, assistant professors of finance at Ohio State University’s Fisher College of Business and Worcester Polytechnic Institute, respectively, and Angie Low, a Ph.D. student at Ohio State University and Nanyang Technological University, suggest that when companies spin off new business units, those new corporations will inherit their parent companies’ culture. This inheritance, the authors propose, is evident in the comparison of the corporate policies of parents with their spinoffs. They looked at 217 spinoffs (excluding those forced by mergers and those owned by multiple parents) from 1980 through mid-2005 to see whether those companies’ policies more closely resembled those of their parents or their industry peers.

The authors’ findings confirmed that the apple does not fall far from the tree: The spinoffs’ policies tended to be more similar to those of their parents than to industry norms. This held true for each of the dozen policies that the researchers studied, including those in the categories of investment styles (such as preferences for growth by acquisition), financial policies (such as financial leverage, cash holdings and dividend policies) and budgeting practices (such as research and development spending and advertising budgets).

The authors also found that culture tends to be more evident in spinoffs’ policies when the parent companies are older. Additionally, the cultural resemblance between parent and spinoff lasts a long time: “Up to 10 years from the date of the spinoff, parents and spinoffs still have significant similarities,” reports Cronqvist. These findings support the notion that companies’ cultures become more ingrained and distinct over time. As a result, culture is likely to persist — and resist management efforts to change it.


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