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Balancing governance and culture to create sustainable firm value

The revelation of widespread failings among corporate leaders over the past decade has emboldened shareholders to take actions to strengthen their rights within corporate firms. These actions, commonly referred to as shareholder governance, seek to change the explicit rules through which a firm operates to make it harder for corporate leaders to take actions that better themselves at the expense of their shareholders.

While shareholder activism may appear to be a panacea for corporate maladies, it often afflicts firms with tendencies that favor short-term returns over beneficial long-term actions. In this paper, Jillian Popadak demonstrates the importance of firms finding a balance between shareholder governance and effective corporate culture in order to ensure sustainable long-term firm value.

While most everyone that has ever worked in a corporate setting has a sense that corporate culture matters, defining what makes culture effective, measuring its value, and quantifying its effects have been a major challenge to researchers.

For this paper, Popadak constructed an innovative measure of corporate culture at the firm level by utilizing insider reviews from popular online job boards and forums, such as and Specifically, Popadak used the reviews to measure six elements of corporate culture on an annual basis: adaptability, collaboration, customer-orientation, detail-orientation, integrity, and results-orientation.

Popadak then analyzed the effect of increased shareholder governance on culture and on firm value, by examining firms that did and did not have shareholders pass a proposal to strengthen governance during their annual meeting. Her findings include:

  • Firms exhibit statistically significant increases in results-orientation but decreases in customer-orientation, integrity, and collaboration in the year following a governance change.
    • On average, the increase in results-orientation is positive in that it increases firm value by about two percent; however, the decrease in customer-orientation, integrity, and collaboration have the effect of reducing firm value by one-to-five percent. Taken together, that means firm value is reduced by one-to-three percent after governance strengthens.
    • In the short-term, firms that strengthened governance saw significant increases in sales growth, profitability, and payout while in the long-term, they saw significant declines in intangible value, customer satisfaction, and brand value.
      • The gains from the easy-to- observe performance metrics erode over time and the losses from the harder-to-measure intangible assets may even dominate by three years after the change in shareholder power.
      • Firms with initially low levels of results-orientation present the best opportunity for shareholders to create sustainable value by increasing their power.

This research clearly demonstrates that investors need to carefully consider the balance of governance and culture if the goal is sustainable long-term value creation.


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