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Competition Can Make Corporate Cultures More Socially Progressive

Cultural change at firms may be motivated by a variety of factors, such as government legislation or public outcry. But can market forces alone drive a company to adopt a more socially progressive corporate culture? A study by Yale SOM’s Alexander Zentefis and Gary Gorton suggests a progressive competitor can push a company to change under the right circumstances.

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The #MeToo movement has forced a variety of companies to confront sexist and abusive cultures. Last year, for example, a group of women employees at Nike gathered reports of a “toxic” atmosphere, with discussions of strip clubs, sexual comments by supervisors, and women’s advancement being stymied. About a dozen high-level managers left the company, and Nike began overhauling its human resources department and reporting processes.

Alexander Zentefis, an assistant professor of finance at Yale SOM, wondered how such shifts in corporate culture take place. In particular, might market competition with more progressive firms prompt a “traditional” company to change its ways?

“The question is: Can market forces like competition drive out an outdated culture?” he asks.

To find out, Zentefis and Gary Gorton, a professor of finance at Yale SOM, developed a mathematical model of corporate cultures and identified conditions under which competition could lead to social change. The model suggests that a progressive competitor can spark change under the right circumstances. For example, a large wage gap between majority and minority employees—such as male and female workers—makes cultural change more likely.

“If there are not large differences in pay between the two groups at the firm, there is no way for the market to adopt the social progress on its own,” the researchers write. “The prevailing, but outdated corporate culture would persist unless some external authority mandated change.”

Another critical factor is the inertia that keeps workers at the traditional firm—for instance, hesitance to take the risk of switching to an unfamiliar environment. Perhaps counterintuitively, stronger inertia made cultural change more likely, by motivating progressive firms to compete more aggressively for these employees and lure more workers away, putting pressure on the outdated firm to modify its culture. “It surprisingly can lead to more likely change and larger change,” Zentefis says.

Corporate cultures have shifted over time, but it’s not clear how big a role market forces play. During the Civil Rights Movement, some firms embraced desegregation while others resisted; ultimately, the Civil Rights Act of 1964 made discrimination illegal. Scholars can’t say for sure whether, in the absence of such legislation, competition would have eventually driven resistant companies to change, Zentefis says. Similarly, the #MeToo movement has prompted many firms to re-examine sexual harassment, but it’s unclear how much of this reflection is driven by market forces.

The model suggested that if the majority earns substantially more than the minority, a progressive entrant can attract more minority workers away by offering fairer wages.

In their model, Zentefis and Gorton represented corporate culture as a set of weighted components. These components could include everything from the importance of celebrating workers’ birthdays to commitment to supporting LGBTQ employees.

Each firm includes a majority and minority group. To maximize profits, the company must balance diversity (which leads to greater creativity and innovation) with cohesion (which means less workplace conflict). The model assumes that all employees undergo a socialization process that promotes the majority group’s culture, such as orientations, codes of conduct, oft-told anecdotes, and typical behavior in meetings. In the model, this socialization is unpleasant for minority workers.

The researchers considered a scenario with two firms: an “incumbent” with an outdated corporate culture and a progressive “entrant” with a less painful socialization process. Employees can leave the incumbent for the entrant, but they have to overcome various pressures to stay—such as moving expenses or uncertainty about the entrant.

The team then examined conditions under which the entrant’s profits exceeded the incumbent’s, thus motivating the incumbent to change its culture. The model suggested that if the majority earns substantially more than the minority, the entrant can attract more minority workers away by offering fairer wages. Conversely, if the wage gap at the incumbent is small, social change is harder because employees aren’t as dissatisfied in their current positions. “There’s not a strong enough reason to leave,” Zentefis says.

Zentefis acknowledges that the model simplifies reality. “That’s not all aspects of culture by far,” he says. “What we try to do is take a few aspects that we think are important.”

And he notes that social progress is imperfect. Firms may take steps forward and then slide back into their old ways. “Progress is not always complete,” he says. “It’s in fits and starts.”

The research suggests that “corporate culture is extremely sticky and persistent, and indeed, quite difficult to change,” Zentefis says. So, entrepreneurs and managers who are starting new companies or divisions should carefully consider the culture they establish from the beginning. “That initial collection of values and norms will have an enormous impact on the course of the firm and its culture for quite some time, even after the original employees are long gone,” he says.

Department: Research