Conflicting Cultures

Greetings from Brussels!

Welcome back to the ECGI In Focus newsletter after an extended summer break. It has been a busy time for ECGI, with the ECGI Responsible Capitalism Summit in September and the annual conference in Brussels early this month.

At the annual conference, I had the privilege of moderating a panel on corporate culture, featuring Fredré Ferreira from EFRAG, Kristof Macours from Euroclear, and Laetitia Boucquey from BlackRock.

The panel discussion focused on the intersection between corporate culture and corporate governance under the new European Sustainability Reporting Standards (ESRS). 

Whether from the perspective of drafting these norms, applying them or observing their application in a vast number of companies, the panelists seemed to agree that good corporate culture is essential, but identifying what makes culture ‘good’ is challenging. Our discussion led me to further explore what corporate culture is and how it can be improved.

What is corporate culture?

Corporate culture, purpose and values are all somewhat elusive and intertwined concepts. The way I see it, corporate purpose defines a company’s reason for existence. Corporate values serve as official guiding principles for decision-making, providing a moral compass. Culture is the invisible thread that weaves together the behaviors, attitudes and decisions made in a company. It is more subtle and has developed over time and in the context in which the company operates. Corporate values and corporate purpose might serve as the North Star, guiding the company’s direction, while culture acts as the current that either supports or undermines that course. 

The North star guiding me in my exploration of this topic has been Licht’s in-depth discussion of different concepts and theories on corporate culture. 

Various scholars have identified cultural dimensions that shape an organization’s behavior. Such dimensions include individualism versus collectivism, embeddedness versus autonomy, hierarchy versus egalitarianism, or mastery versus harmony. For example, in East Asia, a hierarchical and Confucian-influenced culture might prioritise stability and respect for authority, whereas in more individualistic Western cultures, innovation and personal autonomy may take precedence. 

Culture is multi-faceted, and what may be a success in one company could be a disaster in another. Still, most would agree on one point: culture is important and can have very real and measurable effects. A creative corporate culture can improve innovation, while flawed culture can cause significant harm to society.  

Culture matters. But what is the way forward?

Many useful observations on corporate culture have been made, yet they often fall short of advising policymakers on how to effectively incorporate corporate culture. 

This challenge is reflected in the ESRS, where the concept of corporate culture is deliberately broad and flexible, stating that ‘corporate culture expresses goals through values and beliefs. It guides the undertaking’s activities through shared assumptions and group norms such as values or mission statements or a code of conduct.’

The ESRS does offer concrete guidelines for business conduct matters, including anti-corruption policies, whistle-blower protections, and mechanisms for investigating unlawful behavior. These policies help ensure that companies are held accountable for upholding ethical standards and thereby to some degree prevent a ‘bad’ culture. 

Concerning the corporate culture itself, companies should disclose how they establish, develop, promote and evaluate their corporate culture. Unlike the UK Corporate Governance Code, which suggests that culture should promote ‘integrity and openness and value diversity’, the ESRS leaves it up to the companies to decide which cultural dimensions shape their organisation. 

Our panel generally agreed that the EU’s open definition leaves room for cultural differences and allows for innovation, yet there were also concerns raised that this reporting requirement could lead to ‘culture washing’. 

Making culture practical 

Rather than searching for one all-encompassing definition, we might be better served by exploring some concrete examples. 

Many large corporations, especially in the US, share insights into their corporate culture with the public. Reading some in research for this newsletter I was often left with a comforting impression, but rarely ever with a concrete understanding of how the culture works in practice or how employees truly experience it.

Meyer suggests that instead of emphasizing abstract positives like ‘integrity’ or ‘trust’, companies should focus on real-world applications and develop cultural principles that guide employees through everyday decisions. A strong corporate culture should offer a clear framework for decision-making, allowing employees to act in the company’s best interests, even in complex or ambiguous situations.

In a corporate culture that values stability, managers may decide to shield their team from potentially unsettling news, while a culture that focuses on transparency would encourage them to share the unpleasant and possibly distracting information. 

In a more creative work environment employees may be encouraged to explore and take risks, even if it regularly leads to mistakes. In other sectors, for example in banking, such a risk culture is less desirable. 

In conclusion, while defining or even measuring corporate culture is difficult, it is clear that a strong, positive culture can have significant benefits for organizations and society at large. By providing employees with a clear framework for decision-making, companies can cultivate a culture that aligns with their values and supports their long-term goals. Reporting on culture in accordance with the ESRS should ideally lead to a collection of best practices and serve as inspiration for companies developing their culture or attempting to change it. 

What is your stance on a reporting requirement on corporate culture? Let me know in the poll below.

Cordially yours, 

Marleen