Culture can be defined in several ways. It can be the formal principles that are shared across all levels of a firm, providing guidance and common language for staff to follow in their decision making. It can also be the informal values and morals of an organisation, evidenced through actions that are deemed to be acceptable and unacceptable. Whatever form it takes, the purpose of a corporate culture is to regulate behaviour.
These shared values and guiding principles could be written, but more often than not are left unwritten, instead disseminated through a top-down approach. Thus, management re-enforces core values through their actions and sets the example for others to follow. When faced with complex situations that test a company’s commitment to ethical standards, such as maximising profit but at the expense of polluting the environment, managers often make their decisions based on their organisation’s culture, trusting that it will provide guidance on the most desirable and acceptable course of action.
Having a strong corporate culture in place can have a positive influence on its members. But what happens when a poor culture steers decision makers to a bad course of action?
For example, think of Volkswagen, the German car company whose reputation will always be tarnished by the 2015 scandal that caught the media spotlight. Volkswagen was alleged by the US Environmental Protection Agency (EPA) to have manipulated the software of diesel cars. It purposely fiddled with official emissions checks to make the cars appear less polluting to meet new US emissions requirements and better appeal to customers. The claim proved to be true. Aside from the damage done to the environment, Volkswagen’s misstep resulted significant financial loss and reputational damage.
How much of Volkswagen’s decision to deceive their stakeholders was driven by a corporate culture that put profit over people and planet? And, as businesses are increasingly under scrutiny to act in more socially, environmentally conscious ways, how can businesses ensure their corporate culture won’t hinder their progress?
Influence of culture on the environment and financials
A report by The Lancet Planetary Health, shows that air, water and toxic chemical pollution causes up to nine million premature deaths every year. Air pollution causes over 6.5 million of those deaths, while lead and other toxic chemicals approximately 1.8 million.
Triggered by these numbers, in a recent study in collaboration with Dr Solomon Opare (Senior Lecturer, Massey University) we found that a strong corporate culture can improve a firm’s environmental performance, providing organisations with a powerful tool to keep them on the right track.
In the study, corporate culture score was measured by analysing the content of call transcripts (data retrieved from GitHub), and environmental performance was measured by the amount of toxic chemicals released and reported by firms on the EPA website.
Of course, one could argue that all businesses will release some level of toxic chemicals into the environment because of the inherent nature of business. Our study accepted this fact, and sought to focus on the emission of toxic chemicals that lay beyond the ‘expected’ level.
The power of ethics
In doing so, we found that firms whose corporate cultures endorsed ethical behaviours reduced both the excess and the expected levels of toxic chemical release; thereby, surpassing the base levels of their environmental obligations.
There were other benefits to be gained too. A strong and harmonised corporate culture was also found to have a positive financial gain for companies.
Why? Having such a culture in place signals to investors a firm’s commitment to sustainable environment. As a result, investors were likely to put a higher valuation on the shares of firms that could show strong corporate culture and better environmental performance. Such investors are even likely to offer capital at a lower cost.
Financial benefits of a stronger culture
Going back to the scandal of Volkswagen, it cost the company more than £25.2bn in fines, required the complex process of recalling affected cars and compensating its customers. Almost a decade after the formal accusation the former CEO of Volkswagen is on trial and if found guilty could face 10 years in prison. This scandal has reshaped not only the car industry but government policies i.e. the push towards electric vehicles and imposing pollution tax on old and diesel vehicles.
Apart from avoiding such hefty fines like Volkswagen there are several other direct and indirect financial benefits of building a stronger culture.
Engaging in unethical practices that increase environmental risk leads to heightened scrutiny from regulators and environmental agencies; and has long-term negative consequences on firms’ financial performance and overall reputation. Aside from dissuading investors, auditors too are also likely to incorporate the overall culture of client firms to assess risk and even charge a higher audit fee to firms with cultures that are only driven by profit.
On the flip side, firms which can build a strong brand image through persistent environmental actions will gain a higher market share through increasing the number of customers who are becoming increasingly environmentally conscious. So culture accounts for more than keeping workplaces friendly. But how can senior leaders act to ensure their cultures share the right attitudes and actions?
How to achieve a strong culture
Corporate culture consists of several components; integrity, teamwork, respect, innovation and quality to name a few. Typically, companies tend to focus on one of these components to define their culture. However, top management should attempt to harmonise and prioritise all of these dimensions.
More importantly, ethics will need to at the core of each of these components in order for an organisation to reap the benefits.
For instance, heavily investing to develop a cutting-edge product that might be environmentally friendly is positive, but when this compromises working conditions such decisions should still be considered unacceptable. Prioritising one component of culture by compromising another will not produce positive results.
Culture can also not be developed in silos. As a starting point, managers can empower employees by involving them in the decision-making process, and encouraging open dialogue about strategies aimed towards ensuring sustainable and ethical operations. A culture that discourages such transparency and inclusion allows unethical behaviours to fester.
By developing a corporate culture that considers all, prioritises engagement and balances social, environmental and financial motives, not only will see their companies become more accountable and responsible, they might also see their financial fortunes change for the better.
