Organizational Culture

What is Organizational Culture? Everything You Need to Know

Michael Volkov

Merriam-Webster defines “culture,” the noun, as “the set of shared attitudes, values, goals, and practices that characterizes an institution or organization.” It provides as an example “a corporate culture focused on the bottom line.” But compliance professionals and business leaders would be well-advised to focus on the definition of the verb, “culture,” which means “cultivate” or “to grow in a prepared medium,” like the nutrients contained in a petri dish in a lab. Fostering organizational culture is actually quite similar.

What is Organizational Culture?

In the ethics and compliance world, the verb form of “culture” is key, because verbs signify action. In this sense, “culture” indicates that with the right ‘prepared medium,’ i.e., a robust compliance program, internal controls, and senior management commitment, organizations can “cultivate” or grow a business that encourages honesty, transparency, ethical conduct, and a commitment to compliance. With resources and attention, organizations can actively create a culture of integrity. 

Why is an Organizational Culture Important?

Strong Organizational Culture Can Prevent Misconduct

The Benjamin Franklin axiom that “an ounce of prevention is worth a pound of cure,” rings true. Organizational culture mitigates risk. It is far preferable to prevent unlawful and unethical behavior in the first place than to it is to deal with the aftermath. 

Companies that have conducted internal investigations into alleged wrongdoing or faced government enforcement actions will attest to this fact. Not even accounting for the costs of business disruption and loss of productivity during investigations, the legal and reputational costs of corporate misconduct can be devastating. Walmart, for example, spent approximately $900 million on investigations and compliance program enhancements in response to Foreign Corrupt Practices Act (FCPA) allegations, which actually dwarfed the $282 million Walmart ultimately paid to resolve the allegations with the U.S. Department of Justice (DOJ) and the Securities and Exchange Commission (SEC). 

The government (through enforcement) and society (through litigation or pressure) can punish bad corporate behavior, but only the organization itself has the power to effectively prevent it. Perhaps that is why corporate culture seems to be the main area of focus for prosecutors and regulators when deciding whether to charge corporations for criminal or civil violations and when determining appropriate penalties.

See, e.g., U.S.S.G. § 8B2.1(a) (An effective compliance program will “promote an organizational culture that encourages ethical conduct and a commitment to compliance with the law”). The DOJ Criminal Division, Evaluation of Corporate Compliance Programs (updated June 2020) uses the word “culture,” eight (8) times (e.g., “Beyond compliance structures, policies, and procedures, it is important for a company to create and foster a culture of ethics and compliance with the law at all levels of the company”). The DOJ’s Antitrust Division, Evaluation of Corporate Compliance Programs in Criminal Antitrust Investigations (July 2019) similarly refers to organizational culture nine (9) times. Indeed, “the culture of compliance within the company” is the second of nine “factors” that the DOJ will consider when evaluating the effectiveness of an antitrust compliance program.

Strong Organizational Culture Leads to Greater Profits

Simply put, ethical business is good business. Studies repeatedly show that ethical companies are more profitable companies. Shareholders want to invest in companies they trust, consumers want to purchase from ethical, reliable companies, vendors and suppliers prefer to deal with companies that are perceived as ethical. Additionally, employees want to take pride in their company and work in ethical environments where morale is high, ethical companies attract and retain the most talented employees.

In fact, stakeholders are increasingly demanding even more than integrity from corporations: Investors and employees want businesses to be socially responsible. Consumers and activist shareholders today use a variety of tactics to influence organizational culture. Media pressure, boycotts, and litigation threats, for example, are used to change corporate attitudes towards environmental concerns, diversity, and other social and human rights issues like child and forced labor. Savvy business leaders today know that strong Environmental, Social and Governance (ESG) and Corporate Social Responsibility (CSR) programs contribute to a company’s financial success. 

What are the Elements of Organizational Culture?

Essentially, an organization’s “culture” describes the group’s shared beliefs and values. It defines the appropriate way to behave within the organization. Culture is then communicated and reinforced through various methods to socialize or mold employees into behaving in line with the organization’s values.

An organization’s mission statement, motto, and slogan generally establish the company’s aspirations, including the culture the company strives to obtain and maintain. It sets the direction toward a common goal. 

Company policies, including a code of conduct, along with communication and training are essential to constantly reinforce the desired culture. Policies should clearly define expectations and describe how to meet those expectations. Policies also should clearly define employee roles and responsibilities so that individual employees are accountable for their behavior that contributes to the collective corporate culture. 

Leadership, and tone from the top and the middle, are also essential to establish and reinforce desired group beliefs and values. Business leaders should model and incentivize ethical conduct. 

Disincentives such as employee discipline and termination are necessary to discourage, penalize and deter behavior that does not conform to the expected organizational culture.  

Internal controls are necessary to limit the opportunity for misconduct and to prevent deviation from expected norms of behavior. Similarly, monitoring, testing, and auditing are essential to measure corporate culture and make sure the organization is staying on the right course (trust but verify). 

Finally, organizations that truly desire to maintain strong corporate culture will encourage openness and transparency. They will provide reporting mechanisms and prohibit retaliation for good faith reporting. The ability to question anticipated conduct without fear of repercussion may prevent misconduct from occurring. If not, the ability to report misconduct early enables companies to react quickly and perform damage control.

What is an Organizational Culture Example?

Sadly, it’s the examples of poor corporate culture that teach us the most, and we are living through an example of poor corporate culture in the form of the nation’s opioid epidemic. The pharmaceutical companies became pressure cookers where it was commonplace to provide kickbacks to doctors and engage in deceptive marketing techniques to increase sales and profits. Opioid manufacturers made parody rap music videos extolling aggressive sales tactics. At Purdue Pharma, internal memos reportedly called sales staff “knights” and “crusaders,” supporting top executives referred to as the “Royal Court of OxyContin.” This was not ‘a few bad actors,’ the whole ‘kingdom’ was rotten. 

The costs of this behavior, in lives lost or destroyed due to opioid addiction, are immeasurable. Some of the financial costs to the companies involved, however, are measured in the billions.  Purdue Pharma, for example, filed for bankruptcy and will be converted to a public benefit company. In November 2020, a federal bankruptcy judge approved an $8.3 billion settlement between Purdue Pharma and the DOJ. In June 2019, Insys Therapeutics paid $225 million to resolve criminal and civil charges stemming from its contribution to the opioid crisis. Johnson & Johnson, McKesson, Cardinal Health, and AmerisourceBergen recently reached a tentative $26 billion settlement with counties and cities that sued them for damages. 

Pharmaceutical companies are not alone in this respect. Corporate scandals from Enron and Arthur Anderson in the early 2000s to the more recent example at Wells Fargo demonstrate that the misconduct results from defective corporate culture. At some point, the corporate culture went completely off-track at those organizations, and employees were pressured to act unethically and rationalize their actions ‘for the good of the company.’ Employees and oftentimes outside advisors alike turned a blind eye to misconduct, ignored red flags, and/or made little or no effort to investigate and ensure compliance. Reportedly, Wells Fargo employees stated that intense pressure led employees to break the rules; employees feared retaliation if they complained or resisted; “everyone was aware” of unethical conduct; and it was a “normal business practice” to use false identification on accounts, to change customers’ names, and open new accounts.

The scandal was costly for Wells Fargo. In 2018, the Consumer Financial Protection Bureau and the Office of the Comptroller of the Currency fined Wells Fargo $1 billion, and the Federal Reserve Board restricted the growth of the bank until it improved its governance and controls, i.e., its culture. In 2020 the bank paid more than $3 billion in penalties to resolve criminal and civil investigations. Wells Fargo also paid more than half of a billion dollars to resolve civil lawsuits initiated by customers and shareholders. 

Wells Fargo CEO Charlie Scharf, who joined the company after the scandal, directly attributed the misconduct to “the past culture that gave rise to it,” which he called “reprehensible and wholly inconsistent with the values on which Wells Fargo was built.” 

Using Compliance Management Software to Promote Organizational Culture

Returning to the definition of the verb “culture” mentioned at the outset of this article, compliance software is part of the ‘growth medium’ that cultivates an optimal organizational culture. Our integrated compliance management (ICM) platform is about embedding compliance in every operation, every employee, and third party within your business. Integrating compliance processes means systematizing the way in which every single employee approaches risky situations in their job and empowering everyone working for and on behalf of your business to know when and how to meet compliance requirements to help ensure a consistent corporate culture. In short: the right software solution can help compliance teams scale ethical culture.