By Stephen W. Hiemstra
Up to this point, most of our discussion has focused on individual behavior and learning, but no one is an island—even Robinson Crusoe was never truly alone even before he met Friday.1 We live and participate in the cultures of our families, workplace, and society that influence our thinking and behavior directly through rules, regulations, and law and indirectly by structuring the presuppositions that we use in all our decisions.
What is Culture?
Culture is term taken from sociology that is often described as the sum of a society’s traditions, especially as they pertain to literature, the arts, language, and music. A more helpful framework, however, can be built based on decision requirements in a corporate context. Far from irrelevant to spiritual formation, the culture context of work plays a key role in secular formation. The same framework for culture can by analogy help interpret personality.
Nobel laureate economist Herbert Simon defined rationality as making a choice among all possible alternatives. Economists more generally hypothesize that the firm strives to maximize its net present value assuming perfect knowledge of all future cash flows. If all decisions are rational and predictable given knowledge about technology and market prices, this theory implies that a firm has no culture (or no cultural effect) because given a set of circumstances every managers would reach the same decision.
In practice, we observe that decisions are costly, resources are limited, and decisions are frequently made based on rules of thumb and habit. For these reasons, in part, Simon extended the theory of the firm to limit rational behavior—his theory of bounded rationality (Simon 1997, 88). Culture arises because highly rational decisions are costly. Managers ration their time by applying rules of thumb based on previous decisions and known costs and benefits, not perfect information. These rules of thumb plus manager training and experience determine a firm’s decision culture. Interestingly, the more costly rational decisions are, the stronger the cultural effect.
The existence of culture implies that a firm’s history is interesting. The time sequence of decisions and their consequences predisposes the organization toward some growth paths and away from others, a concept sometimes described as path-dependence. The personal histories of leaders are important in understanding attitudes about alternatives and the speed at which decisions are made.
Cultural Personality Types
The existence of culture suggests why organizations develop classifiable personalities. Several widely observed types can be described. Criteria describing these types include preferred decision style, key values, primary mode for training, nature of control process, and default transaction-opportunity cost trade-off. A culture articulates key values in terms of where decisions ideally take place.
Three cultural archetypes stand out in society today that compete for dominance: a traditional culture, a modern culture, and a postmodern culture. A fourth type, a dying culture (or culture under stress) is more of a transition phase than a stable culture. At any time, subcultures within society may favor any one of these types. Competition among these types is influenced by the resources available and other circumstances in the environment beyond immediate control. This suggests that one or the other subculture can rise in dominance and dominance can also pass back and forth. Progress from one to another is neither inevitable or expected because circumstances external to the firm dictate the ideal culture.
A modern culture delegates authority to line managers, whose leadership role is often earned through technical competence, because good decisions require the objective information they produce. A postmodern culture shares decision authority to assure that decisions are equitable. A traditional culture centralizes many decisions to adhere to senior management preferences. Training and control processes reinforce these cultural preferences.
A dying organization is an organization in crisis. A dying organization may start with any cultural affinity but evolves toward traditional culture. This is because crises consist of a rapid series of nonstandard problems that exceed delegations and require senior management input. Cutbacks likewise strengthen the position of senior managers.
The mix of transaction costs and opportunity costs also reflects cultural affinities. Transaction costs rise with the number of people participating in decisions, while opportunity costs (the cost of no choosing the next best alternative) rise as decision alternatives are excluded. The traditional culture has the lowest transaction costs because it considers the fewest options—only senior manager preferences are consulted. The postmodern culture consults the most people, but it is not particularly reflective—only options actively advocated are considered. Transaction costs in the modern culture fall between these two extremes, but the modern culture prefers a review of all options.
Williamson (1981, 1564) sees both organizational costs constrained by market prices. The implication is that cultures evolve to reflect competitive conditions in the markets that firms serve. The dominant culture type may evolve with both market pressures and leadership changes, which may over time lead to overlapping cultural attributes. An office evolving from a modern to a postmodern type, for example, may begin to exhibit more group decision making, place less emphasis on academic credentials in assignments and promotions and rely less on peer review of work products. As Alchian (1950) argues learning process is likely a combination of trial and error, imitation of successful firms, and deliberative planning because uncertainty makes it unlikely that future market conditions can be fully anticipated.
Behavioral Weaknesses Impede Learning
Cultural types describe attributes at a point in time. Changing circumstances, however, force organizations to learn and adapt. Learning behavior is therefore a key measure of risk management performance. We observe behavior problems when incentive structures disrupt normal learning processes, create logical traps or exacerbate normal organizational inertia.3
An organizational culture mirrors its environment because decisions and rules evolve over time to deal with environmental challenges. Rewards of money, power and status within an organization accrue to leaders that facilitate this evolution. When prior decisions and rules need to change, a conflict arises because those changes may threaten the social position of those leaders.
Consider the case of a firm in a growing business. Suppose the firm starts out as a specialized firm in a competitive market. As it grows and acquires competitors, it takes market prices as given. As market share grows, however, it eventually becomes the market and can set price. Further growth requires that it diversify into new markets. At each stage in the firm’s growth, the rules for success and risks change (Porter 1980, 191-295). If the organizational culture adapts with a lag and a threat grows quickly enough, firm solvency could be threatened before adaptation is complete.
Although the Christian faith encourages rational decisions, Christian culture should not be confused with any of the cultural types outlined above. Christian culture differs from these types because the objective of Christian culture is conformity to Christ rather than conformity to the rational model. Still, the above cultural types are also evident in a Christian context, as when dominations employ different polities.
The term, polity, refers to how a denomination or church is governed. A denomination managed by bishops is likely organized with a traditional culture while a church managed through direct voting by the congregation likely has a postmodern culture. Meanwhile, a church managed by elders and professionally trained clergy likely has a modern culture. Each of these polities can operate differently in practice, but the formal structure of the polity clearly shapes the culture of churches and denominations.
Just like no perfectly rational firms exist, Christians cannot obtain perfection in this life but Christ is the standard, our sacred North Pole, and the Holy Spirit to guide us. With our compass set on north, we are not easily led into darkness, but focus on the light. Through the inspiration of the Holy Spirit, we normally avoid logical traps and quickly repent when we fall into one. The basic ideal is that in Christ we have the perfect guidance system even when our lives are not perfect.
1 The name of a characters in a novel (DeFoe 1719).
2 Adapted from (Hiemstra 2009).
3 Inertia is the physical property expressed in Sir Isaac Newton’s first law of motion: a body at rest tends to stay at rest, and a body in motion tends to stay in motion. Inertia leads organizations to resist change and discount low-probability events.
Defoe, Daniel. 1719. The Life and Strange Surprising Adventures of Robinson Crusoe. United Kingdom: William Taylor.
Hiemstra, Stephen W. 2009. “Can Bad Culture Kill a Firm?” pp 51-54 of Risk Management. Society of Actuaries. Issue 16. June.
Porter, Michael E. 1980. Competitive Strategy: Techniques for Analyzing Industries and Competitors. New York: Free Press.
Simon, Herbert A. 1997. Administrative Behavior: A Study of Decision-Making Processes in Administrative Organizations (Orig pub 1945). New York: Free Press.
Williamson, Oliver. 1981. “The Modern Corporation: Origin, Evolution, Attributes.” pp. 1537-1568 in Journal of Economic Literature. December.
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