Firms Perform Better When They Communicate Culture Consistently

Professor Jillian Grennan studies the banking sector

Finance, Leadership
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Culture is a nebulous concept, but integral to business success.

Jillian Grennan, a finance professor at Duke University’s School of Business, has built a career from studying how culture affects firms and what they can do to shape it. In a 2015 study, Grennan and her Fuqua colleagues found 90 percent of executives believed that culture was important at their firms, and 92 percent said they believed improving their firm's corporate culture would improve the value of the company.

But only 15 percent of firms said their culture was where it needed to be, and it wasn’t clear that firms knew how to change that.

In her latest working paper, Grennan shows how banks performed better when they communicated their culture consistently. The new research simultaneously documents the financial benefit of culture to firms and shows them a path toward implementing an effective culture. Grennan discusses her findings in this Fuqua Q&A.

How did you study the way banks communicate their culture, and what did that tell you about their performance?

I looked at historical versions of websites from 2004 to 2017 for 300 U.S. banks, from household names to smaller, regional institutions. I dug into various sections of the sites – About Us, Careers, and Investor Relations, and so on – looking for words related to key components of culture, such as integrity, collaboration, innovation, and risk management, which is particularly relevant to the banking sector.

I found that a majority of banks inconsistently communicate their values across their websites. For example, most banks tell their investors they have ton of integrity, but many banks don’t convey that nearly as often to their employees, who are tasked with carrying out this trust and integrity.

Those that did so consistently before the financial crisis had a greater return on equity, better operating and stock performance during the crisis than those that didn’t. And while banks in general became more consistent after the crisis, those who were consistent beforehand continued to perform better. Researchers know that leverage and risk management were big factors for banks in the financial crisis.  By comparison, I find the losses that can be attributed to inconsistent communication of cultural values to be about half the size of those big factors.

The same results hold true across the banking spectrum. This is not just a big bank phenomenon, nor one seen only at smaller banks.

Not all firms emphasize the same values. Some firms might emphasize integrity, while others focus more on innovation. But it doesn’t seem to be the values themselves that matter; it’s whether bank leaders are consistently emphasizing whatever their values are that makes a difference.

How can you be sure the consistent communication of culture is what made those banks perform better?

I control for various bank characteristics and other factors that could have affected returns before the crisis. I reviewed earnings guidance calls during which CEOs and CFOs went off-transcript. I looked for mentions of cultural elements during those unscripted moments, and I found the times in which culture came up more often strongly correlated with the firms that emphasized culture consistently on their websites.

Crucially, I also found the culturally inconsistent banks were more exposed to private mortgage-backed securities during the crisis. This is important, because any banker should be able to identify a bad loan; but private mortgage-backed securities were a new thing during the crisis, and not much was known about them. It’s in those situations, when employees don’t know what to do, that the employees rely on these implicit rules, the culture, to guide them. I found the firms that didn’t communicate their culture as consistently got into much more trouble with these securities.

What can banks take away from this research?

Quite simply, banks need to do a better job of consistently communicating their cultural values across stakeholders. In general, I found they have become more consistent since the crisis, but there is still plenty of room for improvement. The two cultural values I found most likely to be inconsistently communicated are integrity and a commitment to customer service – the two exact areas you would think banks would know they most needed to improve as they dealt with the distrust arising from the recession.

Banks rely on trust from everyone in the system, and this research shows one clear way they can effectively build it.

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