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Insights at UBC Sauder

Culture Shock: Why businesses with strong corporate culture do better in bad times

A boardroom with people wearing masks.
Posted 2020-09-23
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New study shows the businesses doing the best during COVID-19 emphasize integrity, respect and innovation.

Since COVID-19 hit, businesses around the globe have been struggling to adapt and survive.

From airlines to clothing retailers to grocery chains, businesses have had to innovate — and fast — or face going under.  But why are some businesses flourishing while others flounder?

According to an expansive new study from the UBC Sauder School of Business, corporate culture has a big part to play in companies’ responses to COVID-19.

Study co-author and UBC Sauder Professor Kai Li talks about the tech-fuelled research, the link between COVID and culture, and why businesses with strong culture can better weather tough times.

What inspired you to look at this area?

We have all experienced COVID at the same time, and economists, scientists and researchers are all stuck at home. For myself as a financial economist, my immediate thought was, “What are the implications of the pandemic to companies, to their employees, their customers, their suppliers, their stakeholders, their community, and ultimately, to their bottom line?” 

What do you mean by corporate culture?

Organizational culture is a set of shared beliefs and values among members of the organization. For example, I’ve been at UBC Sauder for many years, and every day the culture is one of collegiality. Being a good colleague is an unwritten rule of how UBC Sauder functions, so that’s part of the organizational culture. 

How did you measure culture?

Business leaders can talk the talk without walking the walk, and advertising can be misleading, but if the manager is totally embedded in the company’s culture, she will speak and act consistently with the defined beliefs and values of the organization. 

The breakthrough we had was to track word usage in conference calls when managers were speaking with financial analysts about firm performance and business operations. 

So we employed a measure based on five values: integrity, teamwork and respect were the people-centric values, and the other two were innovation and quality. 

We tracked synonyms of those five value words using very elaborate machine learning algorithms. Then we counted the synonyms in the transcripts of conference calls. 

What role did technology play in the study?

To measure a firm’s exposure and response to COVID-19, we first took a similar approach to develop a key word list as we did to score corporate culture. We started with the word “COVID-19” and developed a list of synonyms to the word using machine learning algorithms. We then identified 80,000 paragraphs that contained COVID-19 key words from over 11,000 conference calls. Of course, manually reading those 80,000 paragraphs would have been impossible, but we used a textual analysis algorithm (topic modelling) to arrive at 30 distinct topics from those paragraphs. Based on sample paragraphs and most common words used for those 30 topics, we were able to group them into firms’ different exposures and responses to the pandemic.

Can you share an example of one of these paragraphs?

Here is one from Nike’s president, CEO and director John J. Donahoe in late March: “We have prioritized the health and safety of our teammates, and we have closed our stores. Over the weekend, we drove a strong digital marketing campaign to engage consumers across Europe and across the U.S. to stay healthy and connected while they're at home. And our digital commerce remains open and in growth mode, supported by our teammates in our distribution centers.”

So Nike is a good example, because they switched from bricks and mortar to online.

What were the bigger trends you saw?

We found the pandemic has hit firms very differently depending on which industry they are in. Firms worried most about the drastic drop in the demand for their services or products — businesses like airlines or cruise lines. The second biggest hit to firms’ operations was the supply chain, so companies like Tesla and iPhone where the supply chain is in China. Number three was the safety and welfare of employees.

What stood out about firms that had a strong culture?

In firms with a strong culture, management didn’t care as much about the bottom line and profitability, and cared more about giving back to their community. For example, 3M and some car manufacturers retooled their machinery to produce masks and other personal protective equipment that is helping people get through the pandemic. 

The other thing strong culture firms do well is they act fast. Firms strong in innovation are more adaptable, so when there’s a negative shock like a pandemic, they can switch from a physical presence, which gets totally shut down, to an online one. That helps them outperform.

What effect does culture have on employees?

Culture makes employees better motivated, and our research shows two things: one is productivity, which is measured by sales per employee. We found that firms with strong culture enable their employees to be more productive than firms without a strong culture.

Secondly, we show that with a strong culture, employees work diligently and are mindful about their costs, so costs are also reduced. So, your revenue is increasing and your costs are decreasing, which improves your profit margin and leads to stock market outperformance. 

What can businesses learn from these findings?

In this study and a prior study, we were able to measure culture; then in this setting of a pandemic, we were able to see how firms with strong cultures benefit from that strong culture. So it becomes a virtuous cycle.

This study will be very useful to companies and to executives, because it shows that having a strong culture is important, that treating employees with respect and acting with integrity is important, and that emphasizing innovation and quality are important. It pays when there's a negative shock. You outperform. You survive.

What happens to businesses that don’t have a strong culture?

If you don’t have strong culture, you have to pay to lure and to incentivize people with bonuses and compensation to make them work harder or to work better. But in tough times like today, you cannot pay your employees or management truckloads of money to help you get through. So that's why culture is a better solution.

What advice would you give to business leaders looking to improve their culture?

There’s no free lunch. If you want to achieve excellence in innovation and quality, for example, it takes time to develop and it takes up valuable resources. So, for culture, it comes down to short-term pain, long-term gain. You also have to walk the talk: culture comes from the top.

 

The Role of Corporate Culture in Bad Times: Evidence from the COVID-19 Pandemic was co-authored by Kai Li and Xing Liu from the UBC Sauder School of Business, along with Feng Mai from the Stevens Institute of Technology and Tengfei Zhang from Louisiana State University, Baton Rouge.