It pays for a company to keep its word. Research suggests that companies with strong corporate culture have higher long-term returns.

Professor Luigi Zingales, along with Luigi Guiso of the Einaudi Institute for Economics and Finance and Paola Sapienza of Northwestern University, looks at the twin questions of how corporate culture affects companies and how all kinds of financial decisions at those companies affect the ongoing culture. The researchers use a dataset created by the Great Place to Work (GPTW) Institute, which conducts extensive surveys of employees at more than 1,000 US firms.

Because a firm’s stated values may differ from the reality, the survey measures how values are perceived by employees. It focuses on two distinct statements: “Management’s actions match its words” and “Management is honest and ethical in its business practices.” The team used survey data from 2007 to 2011.

The researchers also inspected the web pages of Standard and Poor’s 500 companies to see how those companies presented their corporate cultures. They find that 85% of these firms have a page or two on their websites dedicated to what they describe as corporate culture, or the principles and values that should inform the behavior of everyone who works there. The most commonly advertised value is innovation, mentioned by 80% of the companies, followed by integrity, respect, and teamwork.

The researchers find little evidence that advertised values are correlated with performance. In fact, they find no correlation between these values and firm profitability.

But the researchers find that a real culture of integrity—as perceived by employees—adds value to a company. When top management keeps its word, it validates this behavior as the company norm, facilitating social enforcement of integrity among employees, the researchers surmise. Also, knowing that a breach of trust will lead to a collapse of the corporate culture of integrity makes top management reluctant to behave badly.

Even if a culture of integrity adds value, it might have short-term costs. Businesses that maintain integrity and corporate ideals are not willing to sacrifice customers’ satisfaction, the researchers write, and this might impact the firms’ short-term profits. Thus maintaining a culture of integrity is an example of a trade-off between short-term profits and long-term value.

Publicly traded companies generally seek to solve this problem by focusing on stock prices. If a firm’s stock price fully reflects its future profitability, the trade-off should disappear. Yet this happy solution depends on the market’s ability to appreciate all the determinants of future profitability, and previous research suggests this does not always happen.

Case in point: when a firm first appears on the GPTW’s 100 Best Companies to Work For Index, which is published annually in Fortune, its stock price does not jump immediately, but instead rises slowly over subsequent years. This is evidence that investors are slow to appreciate the value of a culture of integrity, according to the researchers.

A logical conclusion, they say, is that publicly traded companies that want to maximize their stock prices will underinvest in integrity. Faced with the trade-off between keeping their word and maximizing short-term profits, they will tilt in favor of the latter, since the market values profits more than corporate culture. Zingales, Guiso, and Sapienza test this hypothesis and find that, everything else being equal, integrity is higher in privately held companies.

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