What Type of Company Are We? How “Cultural Agreement” Affects Your Business Performance

Getting a company’s culture right is a delicate balance. On one hand, companies would like to create “cultural agreement” — a homogeneous culture to help unite employees toward a common goal. Getting employees on the same page about a company’s culture can make it easier for teams to work together, can improve operational efficiency, and help focus employees on the company’s core mission and vision.

On the other hand, a company with too much cultural homogeneity can end up with a rigid culture that lacks diversity of ideas. A lack of cultural diversity in the workplace can hurt creativity and innovation, can make it harder for companies to spot new business opportunities, and can hurt a company’s ability to attract and retain talent with diverse backgrounds.

What’s the right way to balance cultural agreement and diversity in company culture? And how does it impact the actual business performance of companies?

That’s the subject of a new academic study from researchers Matthew Corritore and Amir Goldberg of the Stanford Graduate School of Business and Sameer B. Srivastava of the Haas School of Business at the University of California, Berkeley.

The study is titled “Duality in Diversity: Cultural Heterogeneity, Language, and Firm Performance.” It uses data from Glassdoor employee reviews to classify the cultural agreement or disagreement of companies in the Standard and Poor’s 500 index, and tracks how cultural diversity at work is linked to real-world innovation and business performance.

Bottom Line: Cultural Diversity Matters for Performance

The study looked at two types of workplace cultural diversity. First is “compositional” diversity. That’s when employees disagree with each other about what makes up a company’s culture. The second type is “content-based” diversity. That’s when company culture is made up of a broad and diverse set of topics.

How do these different kinds of diversity affect business performance?

First, the authors found that more compositional diversity — when employees disagree with each other about their company’s culture — predict declines in profitability. They found a divided company culture is statistically associated with a lower return on assets. Why? Because internal conflicts caused by cultural disagreement often hurt efficiency, and hamper a company’s ability to generate profits.

On the other hand, the authors found a very different impact on business performance of content-based diversity — when company culture is made up of a broad and diverse set of topics. They found that having a diverse set of cultural values is statistically associated with a commonly used measure of expected future company growth (known as “Tobins Q”). That suggests that having a unified but diverse company culture is linked to company innovation, and helps companies generate new ideas that help drive future growth.

Using Glassdoor Reviews to Measure Cultural Diversity

For this study, the researchers analyzed more than 500,000 Glassdoor reviews covering 492 companies between 2008 and 2015. The researchers combed through the text of Glassdoor reviews to identify words for different cultural concepts. They then used a statistical model to analyze how often employees used those terms when talking about their job and company.

The researchers classified a company’s culture as divided if its reviewers mentioned separate cultural topics, with little overlap between different reviews — what the authors call “compositional heterogeneity”. Similarly, they classified a company’s culture as having diverse cultural topics if its reviews mentioned a wide range of common cultural topics, rather than focusing on a small number of concepts — what the authors call “content heterogeneity”.

An Example: What Type of Culture Do You Have?

How should executives think about the two kinds of cultural diversity examined in this study? One way to see the difference between compositional and content-based cultural diversity is through a simple example.

First, imagine a company with only three internal departments: an administrative department, a customer service department, and a product department. Suppose each department has a single cultural focus of their own:

  • The administrative department focuses on profits above everything else;
  • The customer service department cares exclusively about customer satisfaction; and
  • The product department focuses on technical progress.

In this hypothetical company, each individual department’s culture conflicts with the other departments’ at times. If no department is willing to compromise, this company’s operational efficiency may be hampered by this type of cultural disagreement. This is how a diverse, but divided, company culture can hurt performance.

As a different example, now instead imagine a company with three departments and three cultural themes they all focus on rather than just one each — profits, customer satisfaction, and technical progress. Imagine that all three of these cultural themes are shared equally by every department. This time, members of the product department care about technical progress, but they also pay attention to customers’ needs and to the company’s profits. And they can shift their focus to any one of these cultural priorities in different situations. In this case, the company’s culture is also diverse, but it is not divided — employees share different cultural viewpoints that can make them more flexible and innovative.

What Should Companies Do?

This study’s findings offer powerful clues about how companies can become more profitable and innovative by paying attention to how divided or diverse their workplace culture is.

In some cases, more workplace cultural diversity makes companies stronger, more innovative, and more flexible. But in other cases, workplace cultural diversity can lead to a divided and unproductive workforce. The key is understanding which types of cultural diversity are most helpful — or harmful —  for business performance.

According to the study, research suggests that articulating multiple cultural values across an entire organization, so that all employees can apply these ideas, is important for harnessing workplace cultural diversity toward improved business performance. Similarly, the research suggest that employers should encourage different departments within companies to exchange cultural ideas, to help prevent internal conflicts and create a shared — and diverse — workplace culture that works.