Does organisational culture increase a company’s profit? What research and business practice say
The hypothesis to be tested is: “A strong organisational culture based on conscious leadership produces better business results.”
It is worth breaking this claim down into four parts: “a strong organisational culture”, “conscious leadership”, “better business results” and the causal link between them. The last of these is the hardest to prove.
Or perhaps it is the other way round. Companies that make high profits have more money to develop their people, can invest in their leaders and can fund programmes to develop their culture. In that scenario it is results that provide the means to build the culture, rather than the culture that shapes the results. Many studies show a link between culture and results, but demonstrating the direction of the influence is very difficult.
Business history knows many organisations that were very demanding, based on fear, with high staff turnover and little concern for people’s wellbeing, and that for many years generated above-average returns for their owners.
The very existence of such cases undermines the claim in its absolute form: that a good culture always produces better results.
The facts about the impact of organisational culture on results
The Chartered Institute of Personnel and Development, the British professional body for HR and organisational development, regarded as one of the most influential organisations in the world in the field of people management, leadership and organisational culture, states that there is a noticeable link between organisational culture and organisational performance, but that the strength of that link depends on the context and on how it is measured.
A study by the Stanford Graduate School of Business, carried out on 309 large companies, found relationships between particular cultural archetypes and companies’ objective results. At the same time, the authors stress that earlier evidence was inconclusive because of problems of definition and measurement.
A review of 60 studies of leadership and company performance found that leadership is associated with improved company results, and that organisational culture is one of the factors most often found to support that link.
In many studies, transformational leadership has a positive effect on organisational culture and, in turn, on employee engagement and performance.
In my view, the data make it possible to defend the following, modified claim:
Conscious leadership and a healthy organisational culture increase the likelihood of achieving above-average business results.
Unfortunately, the exceptions to this claim are numerous: a monopoly, a technological advantage, legal regulation or a strong brand, for example, can compensate for a weak culture for a long time.
An innovative culture, typical of Silicon Valley, helps a technology company, but it by no means has to go hand in hand with the wellbeing of the people who work there – unless, for someone, work is everything.
A modified claim about the correlation between a strong organisational culture and better company results
Having analysed the evidence, I would judge the claim of this article not as true or false, but as too strongly worded.
A version that is better supported empirically is:
“Conscious leadership increases the chance of creating an organisational culture that fosters engagement, cooperation, innovation and the delivery of strategy, and these factors often translate into better business results.”
This finds much stronger support in the literature than the simple assertion:
“good culture = better results”.
If this assessment is wrong and, in reality, a strong culture based on conscious leadership has no significant effect on business results, then you, as a business owner, could invest considerable sums in developing the culture with the help of HR without getting a return on the investment. The earliest warning sign will be no improvement in productivity, staff turnover, engagement and customer results despite 12–24 months of consistent work on the culture.
Personally, I believe – and I have tested this in the companies I have run – that results can be combined with managing people “humanely”. Helping my clients to do exactly that is what I specialise in.