Culture defines the rules of the game. First, it has a boundary-defining role: It creates distinctions between organizations. Second, it conveys a sense of identity for organization members. Third, culture facilitates commitment to something larger than individual self-interest. Fourth, it enhances the stability of the social system. Culture is the social glue that helps hold the organization together by providing standards for what employees should say and do. Finally, it is a sense-making and control mechanism that guides and shapes employees’ attitudes and behavior. This last function is of particular interest to us in the study of OB.10

A strong culture supported by formal rules and regulations ensures employees will act in a relatively uniform and predictable way. Today’s trend toward decentralized organizations makes culture more important than ever, but ironically, it also makes establishing a strong culture more difficult. When formal authority and control systems are reduced through decentralization, culture’s shared meaning can point everyone in the same direction. However, employees organized in a team may show greater allegiance to their team and its values than to the organization as a whole. Furthermore, in virtual organizations, the lack of frequent face-to-face contact makes establishing a common set of norms very difficult. Strong leadership that fosters a strong culture by communicating frequently about common goals and priorities is especially important for innovative organizations.11

Individual–organization “fit”—that is, whether the applicant’s or employee’s attitudes and behavior are compatible with the culture—strongly influences who gets a job offer, a favorable performance review, or a promotion. It’s no coincidence that Disney theme park employees appear almost universally attractive, clean, and wholesome with bright smiles. The company selects employees who will maintain that image.

If you’ve worked with someone whose positive attitude inspired you to do your best, or with a lackluster team that drained your motivation, you’ve experienced the effects of climate. Organizational climate refers to the shared perceptions organizational members have about their organization and work environment.12 This aspect of culture is like team spirit at the organizational level. When everyone has the same general feelings about what’s important or how well things are working, the effect of these attitudes will be more than the sum of the individual parts. One meta-analysis found that across dozens of different samples, psychological climate was strongly related to individuals’ levels of job satisfaction, involvement, commitment, and motivation.13 A positive workplace climate has been linked to higher customer satisfaction and organizational financial performance as well.14

Dozens of dimensions of climate have been studied, including innovation, creativity, communication, warmth and support, involvement, safety, justice, diversity, and customer service.15 There are a number of findings managers can use to improve their plans for organizational design and team building. For example, someone who encounters a diversity climate will feel more comfortable collaborating with coworkers regardless of their demographic backgrounds. Climates can interact with one another to produce behavior. For example, a climate of worker empowerment can lead to higher levels of performance in organizations that also have a climate of personal accountability.16 Climate also influences the habits people adopt. If there is a climate of safety, everyone wears safety gear and follows safety procedures even if individually they wouldn’t normally think very often about being safe—indeed, many studies have shown that a safety climate decreases the number of documented injuries on the job.17

Organizational cultures are not neutral in their ethical orientation, even when they are not openly pursuing ethical goals. Over time, an ethical work climate (EWC), which is the shared concept of right and wrong behavior, develops as part of the organizational climate. EWC reflects the true values of the organization and shapes the ethical decision making of its members.

Researchers have developed ethical climate theory (ECT) and the ethical climate index (ECI) to categorize and measure the ethical dimensions of organizational cultures.18 Of the nine identified ECT climate categories, five are most prevalent in organizations: instrumental, caring, independence, law and code, and rules. Each explains the general mind-set, expectations, and values of managers and employees in relationship to their organizations. For instance, in an instrumental ethical climate, managers may frame their decision making around the assumption that employees (and companies) are motivated by self-interest (egoistic). In a caring climate, conversely, managers may operate under the expectation that their decisions will positively affect the greatest number of stakeholders (employees, customers, suppliers) possible.

Ethical climates of independence rely on each individual’s personal moral ideas to dictate his or her workplace behavior. Law and code climates require managers and employees to use an external standardized moral compass such as a professional code of conduct for norms, while rules climates tend to operate by internal standardized expectations from, perhaps, an organizational policy manual. Organizations often progress through different categories as they move through their business life cycle.

An organization’s ethical climate powerfully influences the way its individual members feel they should behave, so much so that researchers have been able to predict organizational outcomes from the climate categories.19 For example, instrumental climates are negatively associated with employee job satisfaction and organizational commitment, even though those climates appeal to self-interest (of the employee and the company). They are positively associated with turnover intentions, workplace bullying, and deviant behavior. Caring and rules climates may bring greater job satisfaction. Caring, independence, rules, and law and code climates reduce employee turnover intentions, workplace bullying, and dysfunctional behavior. Research indicates that ethical cultures take a long-term perspective and balance the rights of multiple stakeholders including employees, stockholders, and the community. Managers are supported for taking risks and innovating, discouraged from engaging in unbridled competition, and guided to heed not just what goals are achieved but how they are achieved.

As the name implies, sustainability refers to practices that can be maintained over very long periods of time20 because the tools or structures that support the practices are not damaged by the processes. One survey found that a great majority of executives saw sustainability as an important part of future success.21 Concepts of sustainable management have their origins in the environmental movement, so processes that are in harmony with the natural environment are encouraged. Social sustainability practices address the ways social systems are affected by an organization’s actions over time, and in turn, how changing social systems may affect the organization.

For example, farmers in Australia have been working collectively to increase water use efficiency, minimize soil erosion, and implement tilling and harvesting methods that ensure long-term viability for their farm businesses.22 In a very different context, 3M has an innovative pollution-prevention program rooted in cultural principles of conserving resources, creating products that have minimal effects on the environment, and collaborating with regulatory agencies to improve environmental effects.23

To create a truly sustainable business, an organization must develop a long-term culture and put its values into practice.24 In other words, there needs to be a sustainable system for creating sustainability! In one workplace study, a company seeking to reduce energy consumption found that soliciting group feedback reduced energy use significantly more than simply issuing reading materials about the importance of conservation.25 In other words, talking about energy conservation and building the value into the organizational culture resulted in positive employee behavioral changes. Like other cultural practices we’ve discussed, sustainability needs time and nurturing to grow.

The most innovative companies are often characterized by their open, unconventional, collaborative, vision-driven, and accelerating cultures.26 Start-up firms often have innovative cultures by definition because they are usually small, agile, and focused on solving problems in order to survive and grow. Consider digital music leader Echo Nest, recently bought by Spotify. As a start-up, Echo Nest was an unconventional, flexible, and open company; they would even host music app “hack” days for users, fostered a music culture within their organization.27 All these are hallmarks of Spotify’s culture, too, making the fit rather seamless.28 Because of the similar organizational cultures, Echo Nest and Spotify may be able to continue their start-up level of innovation.

At the other end of the start-up spectrum, consider 30-year-old Intuit, one of the World’s 100 Most Innovative Companies according to Forbes. Intuit employees attend workshops to teach them how to think creatively... and unconventionally. Sessions have led to managers talking through puppets and holding bake sales to sell prototype apps with their cupcakes. The culture stresses open accountability. “I saw one senior guy whose idea they’d been working on for nine months get disproved in a day because someone had a better way. He got up in front of everyone and said, ‘This is my bad. I should have checked my hypothesis earlier,’ ” said Eric Ries, author of The Lean Startup. As a consultant for entrepreneurs, Ries considers the older software company equally innovative to start-ups because of its culture.29

Alexion Pharmaceuticals is also one of Forbes’ Most Innovative and, like Intuit, it has been in operation long past the usual innovation life-cycle stage. Unlike Intuit, though, this maker of life-saving medicines is not known for management shenanigans. The key to Alexion’s continuing innovation is a culture of caring, which drives it to develop medicines that save victims of rare diseases even when the patients affected are few, the cost of development is prohibitively high, and the probability of success is low.30

As we have discussed, organizational culture can provide a positive ethical environment and foster innovation. Culture can also significantly contribute to an organization’s bottom line in many ways.

One strong example can be found in the case of ChildNet. ChildNet is a nonprofit child welfare agency in Florida whose organizational culture was described as “grim” from 2000 (when one of its foster children disappeared) through 2007 (when the CEO was fired amid FBI allegations of fraud and forgery). “We didn’t know if we would have jobs or who would take over,” employee Maggie Tilelli said. However, after intense turnaround efforts aimed at changing the organizational culture, ChildNet became Florida’s top-ranked agency within four years and Workforce Management’s Optima award winner for General Excellence in 2012. While ChildNet demonstrates how an organizational culture can positively affect outcomes, Dish Network illustrates the elusiveness of matching a particular culture to an industry or organization. By every measure, Dish Network is a business success story—it is the second-largest U.S. satellite TV provider and it has made founder Charlie Ergen one of the richest men in the world. Yet Dish was recently ranked as the worst U.S. company to work for, and employees say that this is due to the micromanaging culture Ergen created and enforces. Employees recounted arduous mandatory overtime, fingerprint scanners to record work hours to the minute, public berating (most notably from Ergen), management condescension and distrust, quarterly “bloodbath” layoffs, and no working from home. One employee advised another online, “You’re part of a poisonous environment . . . go find a job where you can use your talents for good rather than evil.”

Culture can enhance organizational commitment and increase the consistency of employee behavior, which clearly benefits an organization. Culture is valuable to employees too, because it spells out how things are done and what’s important. But we shouldn’t ignore the potentially dysfunctional aspects of culture, especially a strong one, on an organization’s effectiveness. Hewlett-Packard, once known as a premier computer manufacturer, rapidly lost market share and profits as dysfunction in its top management team trickled down, leaving employees disengaged, uncreative, unappreciated, and polarized.31 Let’s unpack some of the major factors that signal a negative organizational culture, beginning with institutionalization.