Issue link: https://digital.shearman.com/i/1162884
Shearman & Sterling LLP Internal and External Forces — The Rising Importance of Corporate Culture Review | 41 INTERNAL AND EXTERNAL FORCES — THE RISING IMPORTANCE OF CORPORATE CULTURE REVIEW Gillian Emmett Moldowan, Annie P. Anderson,* Jai Garg and Arielle L. Katzman INSIGHTS Corporate boards and executives continuously strive to identify and manage the key drivers of corporate performance. Corporate culture, which until recently was rarely identified as one of these drivers, is now viewed as an essential area to monitor. In particular, in light of a spate of corporate scandals generated by executive misconduct and systemic risk-taking that negatively impacted company performance, pressure has been mounting on boards and management to conduct a closer review of cultural indicators. Change comes with inherent challenges — culture may define a company's identity, but it is not as tangible or easily quantified as the metrics traditionally used to measure corporate performance. And, because corporate culture is still a relatively new consideration, there is no singular or market method for evaluating "culture." Furthermore, a direct peer comparison, which is a common tool used to determine corporate achievement, is difficult to ascertain in light of limited disclosure on the topic, and even if available, would likely be of little use due to the company-specific nature of what is being measured. Due to these challenges, companies may still find resistance to placing a corporate culture review on the board agenda. If the rising "activism" of employees calling on their corporate employers to take a stand on * Pending Admission (New York). 1 See Ernst & Young, "Is Everything That Counts Being Counted?" (2018). 2 See Andrew Chamberlain et al., "Measuring Culture in Leading Companies," MIT Sloan Management Review (June 24, 2019); see also JUST Capital, "The Win-Win of JUST Jobs" (April 2019). certain social issues and the louder voices of institutional investors like BlackRock and State Street have not generated the spark needed to move a company's board toward a consideration of this topic, companies should think about the following: notwithstanding the abstract nature of any company's culture, corporate culture can affect the bottom line. CULTURE MATTERS A 2018 study by Ernst & Young shows that intangible corporate assets average 52% of an organization's market value. 1 CEOs and CFOs commonly recognize culture as one of the main forces behind a company's valuation, as an increasing number of economic studies are showing a connection between good corporate culture and higher profitability/returns to shareholders. 2 Transparency of corporate culture is also important as employees and investors seek to hold companies accountable for their behaviors. Negative corporate culture is now associated with dissatisfied employees and poor performance. ASSESSMENT IS POSSIBLE Companies can start assessing culture with data that, in many cases, they already have on hand. In recognizing how corporate culture can ultimately affect corporate performance, boards and executives should take a comprehensive approach to reviewing and understanding their culture so that they can craft the culture they want to disseminate and model through a tone from the top. A comprehensive evaluation requires consideration of how culture is perceived both internally and externally. From an internal standpoint, corporate culture ultimately can impact the bottom line through employee engagement, performance and retention. From an external standpoint, corporate culture influences investor decision- making and business relationships with current and prospective clients.