On the Origin of Shared Beliefs (and Corporate Culture) Preliminary and Incomplete

Since organizational homogeneity may reduce or eliminate agency problems, understanding its sources is important for organization design and for the trade-off between firms and markets. This paper shows that organizational homogeneity may develop because people prefer to hire others with similar beliefs, since they will take the ‘right’ decisions, and because these employees subsequently develop even more homogenous beliefs through shared experiences. The degree of homogeneity will be higher for firms with a longer history, for firms with more employee involvement in decision-making, with recent high performance, but also for firms that have experienced some big failures in the past. The homogeneity will be highest among the most important employees of the firm. From an outside perspective, older firms that are faced with many different potential courses of action will typically be too homogenous. I then relate this to the notion of corporate culture as shared assumptions and beliefs. The model confirms a pattern of ‘facts’ that has been informally suggested by the management literature. Similar organizations may develop very different cultures, which can persist even when all the original members are gone and even when the culture is almost surely suboptimal. The organization’s culture is heavily influenced by the founder’s beliefs and by early experiences, and is more likely to change under an outsider-successor to the CEO than under an insider. The paper also studies the impact of the rate of learning and questions the received interpretation of the correlation between culture and performance.