Corporate Culture and Performance
Summary
Kotter and Heskett conducted an empirical study of whether corporate culture affects financial performance, examining more than two hundred companies over eleven years with data on culture strength, culture content, and performance measures including revenue growth, share price and net income.
Their findings are more qualified than the popular version. Strong cultures, meaning those where values are widely shared and intensely held, correlate only weakly with long-run performance. Some strong-culture companies performed poorly, and Kotter and Heskett argue this is because a strong culture that fits a changed environment badly is worse than a weak one, since it prevents adaptation.
What did correlate strongly was what they call adaptive cultures: those that value customers, shareholders and employees together, that value leadership at every level of the organisation rather than only at the top, and that treat change as normal. The companies with these characteristics substantially outperformed those without them over the eleven years measured.
They also examined whether culture can be changed and conclude that it can but only through sustained effort led from the top over years, usually beginning with a crisis or a new leader with an outside perspective.
The study is over thirty years old and the sample is American public companies of the 1980s. The correlational design cannot establish that culture causes performance rather than the reverse, which the authors acknowledge and which remains the central objection. It is nonetheless one of the few attempts to test the claim empirically rather than assert it.
Key takeaways 7
- Strong cultures correlate only weakly with long-run performance, and a strong culture that fits a changed environment badly is worse than a weak one.
- Cultures that value customers, shareholders and employees together and that expect leadership at every level substantially outperformed those that did not.
- Adaptability rather than strength is the cultural characteristic that predicts performance, because environments change faster than cultures do.
- A culture that produced success in one period becomes the obstacle to adapting in the next, and the strength of the culture determines how large the obstacle is.
- Culture can be changed but only through sustained effort led from the top over several years.
- Culture change usually begins with a crisis or with a leader who brings an outside perspective, because insiders cannot see the culture as contingent.
- The study design is correlational and cannot establish that culture causes performance rather than performance producing culture.
Who should read it
Executives who want empirical evidence on whether and how culture affects performance rather than assertion.
Where it sits in the reference 2
Who recommended it 1 · 1 direct
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