The Death And Redemption Of Corporate Culture

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Frederic Sautet Economist, The Catholic University of America
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Adam Smith is famous for having described the private and social benefits of a “nation of shopkeepers”: the pursuit of personal self-interest while profiting the individual, unintentionally makes society better off. Many critics of capitalism don’t see it that way. Capitalism, they say, has no regard for morality since it promotes vices such as greed and deceit. Looking at the scandal Wells Fargo is currently embroiled in, it seems those critics may have a point.

Wells Fargo’s now former CEO, John Stumpf, resigned after testifying on Capitol Hill in an attempt to rescue the bank from a massive trust deficit. Lambasted for years of illegal banking practices such as the opening of millions of fraudulent deposit and credit card accounts under his watch, Stumpf defended himself: employees failed to honor the bank’s culture.

Stumpf once knew something about culture. Wells Fargo was recognized precisely for taking the actions that would send its employees the right message: culture matters. Stumpf called himself “the keeper of the culture,” an idea inherited from Carl Reichardt and Paul Hazen, whose leadership and prudent management of Wells Fargo convinced Warren Buffett to invest in the late 1980s. Reichardt’s frugal culture permeated the bank; for example, he wouldn’t pay for a Christmas tree in the executive suite or for office renovations for new top executives. Stumpf followed the same path by occupying a rather “shabby” (as he liked to point out) office using the same armchair since the day he began the job. When asked if he would ever upgrade the old Wells Fargo building in San Francisco, Stumpf replied in the negative. When named Banker of the Year in 2013, his frugality and prudence were noted: the qualities of a good banker make the qualities of a good bank.

By all accounts Wells Fargo didn’t just talk the talk, but also walked the walk. Today customers and the public at large feel betrayed. What happened? As Lou Gerstner recently commented, “People do not do what you expect but what you inspect.” If clerks could establish fake accounts and then close them later without efficient oversight, management failed in one of its most basic tasks: control. But what explains such activity on the part of what was perceived as one of the cleanest banks? In many cases employees were implicitly given carte blanche to engage in aggressive, and sometimes downright unethical, sales tactics — and were rewarded for it. Incentives, however, can be a double-edged sword. Extrinsic incentives can motivate individuals up to a certain point, but beyond that they can switch the employee’s focus from the task to the reward. Unfortunately, when performance incentives run counter to the cultural ethos, incentives generally win — especially when employees who fail to comply are heavily penalized or fired, as it happened in some cases at Wells Fargo. Culture became an issue of compliance.

Yet, culture is a common language of interpretation that gives each employee a set of glasses through which to view the world and achieve a common purpose. The most successful organizational cultures create a positive environment conducive to spontaneous cooperation: Catholic Social Teaching calls it “human ecology.” This culture respects the natural laws at work in the organization, which include the dignity of the individual, the idea of service (to one’s customers and to all employees), a mentality of stakeholder, and a respect for the common good. The organization becomes an ecological system made of explicit and tacit rules dedicated to the development of the individual and the team: it is lived, not imposed. When such culture exists, agency costs are naturally reduced and the common purpose of the organization is better achieved.

And the results speak for themselves. Studies show that companies that create a positive-contributive-service culture outclass others in several dimensions, including net income, in the long run. Companies named in Glassdoor’s “Best Places to Work” list (many of which have cultures broadly consistent with human ecology) mostly outperformed the S&P 500 over the last ten years.

By misaligning incentives and culture, Wells Fargo set itself on a wrong path. We can learn much from this experience. Economics tells us how the lower elements of human nature will react under different sets of rules, but human blossoming requires also attention to the transcendent aspect of human life: the human person finds meaning in work when she is positively transformed by it. Culture is more than the cumulative effects of corporate processes: it is the key element that helps employees find their deepest motivation to work and to belong. This is the answer to the critics of Smith’s nation of shopkeepers: self-interest rightly understood. This is achieved when incentives (i.e. economics) and culture (i.e. transcendence) are well aligned, thereby creating a virtuous cycle of personal and organizational flourishing.