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Measuring Corporate Culture, a Key to the Bottom Line

A successful corporate culture can lead to better operational performance and can handle strategic change better. But how can investors analyze the unquantifiable?

Are there flexible working hours? How much is volunteering encouraged?  And are all of the company's values displayed for employees and outsiders to see? Investors consider these marks of a corporation's culture.

But with research showing that a successful corporate culture can lead to better operational performance, the key is to assess culture in light of a company's strategic goals, not as a standalone entity.

With the business landscape in many industries evolving via further globalization and digitalization, the organizations that know their culture the best will adapt more effectively, according to a new report from Morgan Stanley's Sustainable + Responsible Investing research team.

“A successful corporate culture can boost customer satisfaction and loyalty, improve employee engagement and productivity, and reinforce internal discipline, minimizing the likelihood of misconduct and related financial penalties,” says Managing Director Jessica Alsford, who heads up the S+RI research group.

The Importance of Culture

Recent studies connect strong corporate culture and improved bottom-line results. One eight-year study of 95 U.S. auto dealerships “identified a consistent causal link between strong department culture and subsequent higher customer satisfaction ratings and vehicle sales,” says Alsford.

Additionally, a company's culture will allow it to withstand and adapt to a changing business climate. For example, the automobile industry faces a future of shared, electric and autonomous vehicles. Manufacturers with cultures that embrace change and innovation likely will have a leg up. Cultures that embrace cost control likely will have an advantage, as the shared, electric and autonomous trend could negatively impact profitability.

Measuring the Unquantifiable

Culture can't be numerically measured. Nevertheless, there are several models that identify cultural aspects.

One labels a company's culture as hierarchical, clannish or “adhocracy.” Another determines whether a company's culture is project-, fulfillment-, person- or role-oriented. Most models incorporate factors like management integrity, employment structure and public relations to generate a cultural assessment. No culture is better than another; the needs, strategy and business environment will dictate the best fit.

Morgan Stanley's report includes questions for a company's management to help investors assess its corporate culture. Executives should be able to address such questions about their company's governance and strategy, its organizational structure, its philosophies on employee recruitment and retention, its training programs, its compensation systems and its internal and external communication.

Studying management's approach to those six areas will help investors judge the company's culture and also how its beliefs and values are fully embraced throughout the organization and in relationships with external stakeholders, according to Dembele.

For Morgan Stanley Research on the assessment of corporate culture, ask your Morgan Stanley representative or Financial Advisor for the full report, “Corporate Culture as a Differentiator,” (Jan. 31, 2017) Plus, more Ideas.