Organizational culture, properly constructed, isn’t merely aspirational: it must recognize and restrain unproductive inclinations.

A few months ago, This American Life hosted a program that illustrates how broken the Federal Reserve Bank in New York was. Centered on Carmen Segarra, a sharp, confident lawyer who joined the Fed’s ranks after the financial crisis to help regulate other banks, the program proceeds to detail how she was effectively silenced by senior officials and otherwise rendered incapable of regulating Goldman Sachs. Carmen’s story compellingly corroborated findings from an internal report that the Bank commissioned post-crisis, in an attempt to understand why their oversight had failed:

As Beim and his team spoke to Fed employees about what went wrong leading up to the financial crisis, one problem in particular arose again and again. And that problem was the Fed’s culture. That’s the epiphany of Beim’s report. It was that basic. Culture.

Collated from numerous interviews, the report explains a set of systemic deficiencies by delving into the predilections of employees. One example, on the topic of deference:

A number of people believe that supervisors paid excessive deference to banks and as a result they were less aggressive in finding issues or in following up on them in a forceful way. Information asymmetry subtly influences the relationship between supervisors and the supervised. Banks have superior information about their business and are the primary gateway to information the supervisor needs. Banks inherently have an information advantage over the supervisors. To understand a bank’s exposures and risks the supervisor must request information and often explanations of what the information means. Getting good, timely information is therefore dependent on the willingness and enthusiasm of bank staff in providing that information. Supervisors need good working relationships with their firm, and they believe that a non-confrontational style will enhance that process.

Supervisors are commonly embedded within the banks they regulate; they work out of desks within the bank and a majority of their professional interactions and relationships on a day-to-day basis are with the bank’s employees. Though this may be operationally necessary, one can easily see how regulatory capture can take over. The last sentence in the above passage highlights exactly why a supervisor might justify deference to the bank; though as an observer, it may seem ridiculous¹, given the context, it’s all too understandable. This degree of analysis is key to cultural change.

In his study of the social sciences, Max Weber developed the concept of methodological individualism, or the idea that organizations should be considered solely as the “resultants and modes of organization of the particular acts of individual persons, since these alone can be treated as agents in a course of subjectively understandable action.”² This is precisely the way building organizational culture should be construed: culture is the set of principles and actions necessary to optimize individual behavior within the organization. Without a strong understanding of the behavior to be shaped, any attempt at building the edifice of a relevant and effective culture will fail. Far too often, (typically larger) companies will attempt to redefine their culture without recognizing the psychology behind individual behavior, and as a result, they end up with grand campaigns talking about how much the company embraces X without any real change.

At one point, the Fed’s report cites academic culture as an exemplar:

Consider how other organizational cultures encourage the best ideas to rise to the surface. Academic cultures, for example, value strong criticism because it will make everyone’s work better; such criticism is not dependent on organizational rank but is a function of intelligence and insight, which can occur at any level of seniority.

This may be an idyllic view of what academia actually is like, but nevertheless, it’s a good point of reference. Even though research groups and universities differ across many dimensions, one component is reasonably shared across all of academia: a desire to expand the realm of knowledge. The pursuit of truth leads to a second key characteristic of academic culture: a shared foundation on which discourse can take place. Opinions and ungrounded assertions are bounded within the confines of reason, and academics generally engage within commonly understood frameworks. These two aspects, a common goal and a common framework, essentially come for free with the self-selection that takes place when someone chooses to participate in academia.

Most organizations aren’t so lucky. Not only are individual motivations wildly varied, but people interact and decide on courses of action through highly heterogeneous means. One employee might solely wish to collect a paycheck, while another might solely wish to rise through organizational ranks. One employee might retain a strong ego and feel their opinions are world-class, while another might tackle business problems through a dispassionate, logical fashion. Small organizations can typically get away with not meaningfully constructing their culture, if only because they can (1) capably screen entrants for cultural fit and (2) spend enough time with each other to automatically shape the way each member operates. However, at scale, this begins to break down, and if left unchecked, one ends up with a culture like the New York Fed’s.

In order to properly construct an organizational culture, one principle stands out: identify behavioral weaknesses and buttress against them. Unlike the traditional, aspirational way of thinking about culture, identifying weakness actually helps ensure that cultural design is grounded, that it appropriately recognizes the intrinsic behaviors it seeks to modulate. For example, one might wish to have an organization steeped in rich communication. One approach could be to have everyone give PowerPoint presentations every week on what they’re doing. But, recognizing the cost of engendering self-promotional behavior and elevating charisma above reason, a culture of PowerPoints could actually serve to undermine the ideal of rich communication.³

Likewise, if an organization seeks to encourage open, constructive critique, it would be apt to closely examine current forums for critique (do they exist? how do they operate?) and existing behaviors (does anyone critique what senior leaders say? how do they do so and what kind of response do they receive?). Leaders frequently fail to realize that their position alone adds a degree of weight to their communication, so offering an opinion without setting the right context can silence critique.⁴ Acknowledging the power of the reporting structure, leaders would correctly scrutinize how they receive and engage with critique, as well as the degree to which that encourages others to speak up.

In the case of the Fed, its leaders should have known that regulatory capture, by virtue of how supervisors operated, was a clear and present weakness. As the report recommends, the Fed’s senior management must redefine the culture to specifically counteract this: by strongly encouraging “dissent", “individual initiative”, and “robust inquiry.”

An organization’s mission and values can serve as the aspirational goals that a culture can rally around, but to actually make that culture a reality, it’s critical to examine behavioral weakness and disproportionately defend against it. Akin to how the Supreme Court has identified suspect classifications and maintains specific approaches to protecting those groups, so too should an organization identify the weaknesses it most wishes to resolve and ensure that its culture is set up to assist.

Ben Horowitz has a succinct way of conceptualizing the impact of a strong organizational culture: “a small number of cultural design points…will influence a large number of behaviors over a long period of time.”⁵ Culture done right means less bureaucracy.⁶ Besides, no one likes bureaucracy.