# LO 79.1: Explain how different factors can influence the culture of a corporation

LO 79.1: Explain how different factors can influence the culture of a corporation in both positive and negative ways.
In the movie Wall Street (1987)1, Gordon Gekko, played by Michael Douglas, says:
The point is, ladies and gentleman, that greed, for lack of a better word, is good. Greed is right, greed works. Greed clarifies, cuts through, and captures the essence of the evolutionary spirit. Greed, in all its forms, greed for life, for money, for love, knowledge, has marked the upward surge of mankind. And greed, you mark my words, will not only save Teldar Paper, but that other malfunctioning corporation called the USA.
This monologue, based on a commencement address made by Ivan Boesky (who was convicted of insider trading 18 months later) at U.C. Berkeley in 1986, has become part of popular culture. It inspired legions of people to enter the field of finance, despite the fact that Gekko was the villain in the film and his plot was foiled by his young protege. But the
1. Wall Street, directed by Oliver Stone (20th Century Fox, 1987).
2018 Kaplan, Inc.
Page 227
Topic 79 Cross Reference to GARP Assigned Reading – Lo
Gekko effect, and the culture of greed that goes along with it, lives on in corporations and institutions. Corporate culture can instill values in employees that make financial crimes and misdemeanors more likely.
C o r po r a t e C u l t u r e f r o m t h e To p D o w n
O Reilly and Chatman (1966)2 define corporate culture as a system of shared values that define what is important and the norms that define appropriate attitudes and behaviors for organizational members. Schein (2004)3 focuses more on the learned assumptions of people in a group that help new group members think and feel in relation to the groups problems. The values of an organization, and its culture, ultimately define the group. One can think of culture more as biological, than economic, in the sense that it propagates itself. Culture also spreads, like an epidemic. Culture is spread through: Group leaders (the root source of the cultural epidemic). Group composition (the population through which the epidemic spreads). The group environment (which forms the groups response to the epidemic). Leadership, or the authority that comes from the top of an organization, shapes culture as much or more than financial incentives. Charismatic leaders, like Gekko, garner authority via a strong, forceful personality. Traditional leaders garner authority through established customs. Authority figures establish proper behaviors, both negative and positive, of those below them through social sanctions (e.g., praise or reprimand, approval or disapproval). In some cases, like the military, people subordinate themselves to the will of others out of the belief that it will assist in the achievement of the goals of the group.
One question that arises, and can be answered to some degree with academic research, is how large must the financial incentive be to entice someone to behave badly? The answer, based on research, appears to be that there must be something else in the culture, beyond financial incentive, to entice bad behavior. Two famous examples from social sciences research support this conclusion. They are:
In a study by Milgram (1963)4 26 out of 40 subjects delivered what they believed was In a study by Milgram (1963)4 26 out of 40 subjects delivered what they believed was a high voltage, potentially lethal, electric shock to victims, at the suggestion of the experimenter. All of the subjects expressed doubt and concern, three appeared to have seizures and a result of the stress induced by the situation, but they all administered the shock anyway. The financial reward was $4.00 plus carfare, which equates to approximately$50.00 today. Thus, financial incentive cannot explain the behavior.
2. Charles A. O Reilly and Jennifer A. Chatman, Culture as Social Control: Corporations, Cults, and Commitment, in Research in O rganizational Behavior, vol. 18, ed. Barry M. Staw and L.L. Cummings (Greenwich, CT: JAI Press, 1996), 157-200.
3. Edgar H. Schein, O rganizational Culture and Leadership (San Francisco, CA: Jossey-Bass, 2004). 4. Stanley Milgram, Behavioral Study of Obedience, The Journal o f Abnorm al and Social
Psychology 67, no. 4 (October 1963): 371-78.
Page 228
2018 Kaplan, Inc.
Topic 79 Cross Reference to GARP Assigned Reading – Lo
A Stanford psychology professor, Phillip Zimbardo, created a prisoners and guards
study in 1971 (Haney, Banks and Zimbardo 1973a, b)5,6. Participants were randomly assigned the roles of prisoners or guards. Zimbardo played the role of prison superintendent. Guards began treating prisoners inhumanely almost immediately. Verbal abuse, manipulated bathroom privileges and sleeping conditions, and nudity used to humiliate prisoners were all used by the guards. The experiment was terminated after six days at the urging of Zimbardo s wife, who was interviewing subjects. The study participants were paid $13.00 per day, which equates to approximately$90.00 today, again not likely a financial incentive big enough to explain the guards behavior.
One of the lessons learned from these and other studies is that financial incentives alone are not enough to explain bad behavior. In the Milgram study the subjects, despite physical and mental distress of their own, acted on the commands of the authority figure. In the Zimbardo study, subjects acted with enthusiasm, fulfilling the roles they believed were expected of them by the authority, prison superintendent (and professor) Zimbardo. In both cases the financial incentive was minimal. There is a type of moral hazard that emerges, even if (or perhaps because of) the authority has a good track record. People are taught that when experts speak, they are correct. So if, like in the cases of the Milgram and Zimbardo studies, the authority figure seems okay with the behavior, people may act, as Shiller (2005)5 6 7 puts it, from peoples past learning about the reliability of authorities.
However, just as corporate leaders may encourage bad behavior and promote goals which are immoral, unethical, and in some cases even irrational, they also can encourage employees to be more productive, increasing the competiveness of the firm.
Corporate Culture from the Bottom-Up
The people within a system (i.e., the composition) also influence the culture. Firms hire people and, during the process, filter out other qualified people. This filtering process can impact culture. For example, beginning in the 1980s, investment banks started deliberately targeting graduates from elite schools such as Harvard and Princeton. These hires brought their social values with them and as bankers retired, these values became the norm at Wall Street firms, according to a study by Ho (2009).8 The high Wall Street compensation levels were perceived as appropriate for members of the elite tolerating the personal risk of job insecurity and the potential to be let go in these investment banks.
Company managers recruit people who they believe will be useful to the organization. While choosing from a diverse pool of applicants, companies often choose people who reinforce the corporate culture that already exists. These people then succeed in the culture and a feedback loop occurs, reinforcing the companys existing culture. In the best of circumstances this leads to a strengthening of culture and stronger performance. However, companies can also benefit from a diversity of thought that results from different
5. Craig Haney, Curtis Banks, and Philip Zimbardo, Interpersonal Dynamics in a Simulated
Prison, International Journal o f Criminology and Penology 1 (1973): 69-97.
6. Craig Haney, Curtis Banks, and Philip Zimbardo, A Study of Prisoners and Guards in a
Simulated Prison, N aval Research Reviews 9 (1973): 1-17.
7. Robert J. Shiller, Irrational Exuberance, 2nd ed. (Princeton, NJ: Princeton University Press,
8. Karen Ho, Liquidated: A n Ethnography o f Wall Street (Durham, NC: Duke University Press,
2005).
2009).
2018 Kaplan, Inc.
Page 229
Topic 79 Cross Reference to GARP Assigned Reading – Lo
backgrounds, ethnicities, and so on. This can help a company avoid group think. There is an important place in modern corporations, especially in uncertain economic times, for whistle blowers, devils advocates, innovators, and for those whose thoughts and ideas run contrary to the norm (i.e., the existing corporate culture).
Culture and the Environment
Regulation, the economic climate, the competitive environment, and many other factors also affect culture. For example, consider driving fatalities in the United States. Despite significantly more drivers, more miles driven, and the same propensity for risk taking, fatalities have decreased in the last 40 years. That is due to environmental factors. Cars have become safer (material culture), the police enforce speed limits (regulatory culture), and there is a stigma associated with driving while under the influence of alcohol (social culture).
C o r po r a t e C u l t u r e a n d Fin a n c ia l Ris k M a n a g e m e n t