Study shows that a firm’s integrity affects its profitability, but employee perception of management – not external communication – is responsible.

Prof Zingales
Prof Zingales

Eighty-five percent of S&P 500 companies promote a set of principles and values on their corporate websites that inform the behavior of all its employees. But when a team of economists tried to correlate the frequency and prominence of these values to measures of short and long term performance, they did not find any significant correlation.

Instead, Luigi Zingales, a professor of finance at the University of Chicago Booth School of Business, and colleagues Luigi Guiso of the Einaudi Institute for Economics and Finance, and Paola Sapienza of the Kellogg School of Management, found that it is companies which are perceived by their own employees to value ethics – but not necessarily those that advertise their ethical culture to outsiders – that showed higher profits and other indicators of strong performance.

In their study “The Value of Corporate Culture,” the research team looked at two dimensions of “culture” that a majority of companies in the S&P 500 described as important on their websites: integrity and ethics. The researchers also used responses to surveys conducted by the Great Place To Work Institute, which publishes an annual list of the “100 Best Companies to Work For.” The data included responses from employees at 1000 public and private firms between 2007 and 2011.

“We find that high levels of perceived integrity are positively correlated with good outcomes, in terms of higher productivity, profitability, better industrial relations, and higher level of attractiveness to prospective job applicants,” said Zingales.


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The researchers then asked an obvious question: if a culture of integrity is valuable, why do some firms end up losing it?

To answer this, the team looked at how different governance structures impact the ability to sustain integrity as a corporate value.

“Previous research has found that companies included in the 100 Best Companies to Work For list tend to over perform the market. We can interpret this result as saying that the market initially underestimates the value of the integrity capital, which plays a big role in the 100 Best Companies to Work For index.  Only as the profits come in – the market appreciates the value of integrity,” said Zingales. “If this is true,   publicly traded firms will tend to under-invest in integrity capita, at least in the short term.”

To test this hypothesis, the study compares the level of integrity of otherwise similar publicly traded and privately held firms. Even after controlling for industry, geography, size, and labour force composition, publicly traded firms were found to be less able to sustain integrity.

“Besides being listed, we find that the only statistically significant corporate governance characteristic is the presence of a large shareholder (at least 5% ownership share), which has a negative correlation with the level of integrity. Thus, it looks like an excessive focus towards shareholder value maximization might undermine the ability of a company to sustain a high level of integrity capital,” said Zingales.