Why do Companies care about 'Culture'?

Imagine a company with open borders—not the chaotic kind where anyone can waltz in and loot the corporate treasury, but the libertarian version: Any manager can hire whoever they want, as long as it fits their budget. No centralized culture screens, no founder veto. The only questions asked: “Will this person help me hit my goals?” and “Can I afford them?”

This thought experiment is useful precisely because it feels so intuitively wrong to most founders—and rightly so. For example, Brian Chesky famously interviewed the first 300 employees at Airbnb himself.

We tend to casually think of a firm as just a bundle of agents performing tasks in exchange for money. But that frame is worse than just incomplete. The average white collar worker is at least as much an externality on his colleagues as he is an input into production.

The sign of this externality is the target for what management books talk about endlessly without ever quite defining: Culture

Why does the firm exist?

Why do we have these strange abstract entities where people show up at the same place, take orders from someone, and get paid the same amount regardless of what they produce?

The economist Ronald Coase answered this question in his seminal paper, The Nature of the Firm. Hierarchies and the firm emerge when transaction costs of contracting external parties exceed the benefits of price competition between these external parties.

The act of hiring a full-time employee is usually an admission of at least one of the following, often both:

(1) the employee needs context to create value for the organization, but this context either cannot or is too expensive to be shared with external parties

(2) Output and inputs don’t have a straightforward one to one mapping such that the value of the output can’t be straightforwardly attributed to specific inputs/workers.

As a result, the company’s preference is to monitor the inputs more closely. The worker commits time and attention to the firm. In return, the company absorbs the variability/volatility of outputs. In other words, the employee gets paid the same so long as they show and do things that need to be done to not get fired.

Firms create the problem of “shirking”

When outputs can't be properly attributed, the rewards for good work are capped, and punishments for laziness attenuated, we should generally expect everyone to do less. The COVID-19 remote work era served as a kind of Reductio ad absurdum of this dynamic—job-stacking, mouse-jiggling devices to fake presence, and naps that would embarrass even a Sunday afternoon. But shirking, if in less brazen forms, has always been a feature of corporate life. It is a predictable consequence of the interaction between human nature and the firm's raison d'être.

Shirking is a specific manifestation of a broader problem: a self-interested agent internalizing benefits (working less, collecting a paycheck) while externalizing harms.

So if you can’t get the image of a disgruntled, lazy employee out of your head, think about the manager that overworks his team, gets promoted himself but increases attrition in the medium term, which is no longer easily attributed to him. It’s the sales guy who overpromises the customer to close a sale, while degrading the credibility of the brand. The harm is usually diffused - no one is palpably worse off in the short term but it’s catastrophic for collective future output. In other words, it’s the corporate equivalent of the guy that plays music on a speakerphone on the A train.

The limiting case

Consider the limiting case — the CEO. Executive compensation is designed to solve exactly this problem: equity dwarfs salary, vesting schedules extend over years, the goal is to make the CEO's payoff approximate a long-term shareholder's.

But it’s possible to imagine a CEO making a decision that boosts shareholder value in the near to medium term but slightly erodes something harder to measure — reputation, innovation capacity, employee trust. If markets aren’t perfectly efficient and there exists some information asymmetry between management and long term/future shareholders, incentives aren’t perfectly aligned.

As one gets further away from the feedback loop with markets - deeper down the hierarchy of the organization, we should expect to find more misalignment, not less. So what does perfect alignment actually look like?

It probably looks like the interests of a perpetual shareholder with a very, very long, almost infinite time horizon - perhaps one that doesn’t exist but can be approximated. In other words, someone who is almost intrinsically interested in the long-term survival and flourishing of the firm.

Enter organizational culture

Culture has to step in to resolve the fundamental dichotomy in the firm: between intrinsic valuing and instrumental pursuit. If everyone relentlessly optimizes for personal financial gain, the collective suffers, unless incentives are perfectly aligned, which they never are. Yet the firm cannot reject optimization altogether; in a competitive market, consistent profitability is non-negotiable. Without it, the entity dies, and all talk of higher purpose becomes moot.

The challenge for culture, then, is not to eliminate instrumentality but to flip it: to make profit-seeking the critical means to a greater, metaphysical end—which can be some greater virtue or an interest in perpetuation of this particular organization and what it stands for as something worth existing beyond any individual’s tenure or payout.

This is why founder-led companies so often develop strong cultures: founders are uniquely positioned to embody and transmit this narrative. Legacy and posterity are psychologically potent motivators that tap into deep human desires for transcendence and immortality. When a founder genuinely believes and lives this, they can model the intrinsic valuing in a way that doesn’t seem performative.

Cultures can also be built on ideals/virtues/traits instead of narratives. Bridgewater was clearly a founder-led company for a long time but the emphasis was not necessarily on Ray or the impact of the company on the world but on truth-seeking as a virtue/ideal.

But narratives and virtues both fade unless reinforced through rigorous selection. Which means they need to be specific and demanding enough to serve as costly-to-fake signals. Mild, universally agreeable platitudes (“excellence, teamwork, collaboration”) offer no real identity, no tribe worth sacrificing for, and are easily gamed by pretenders and free-riders. Over time, they hollow out into the mocked handbook slogans we all know.

Culture endures through strong mutual loyalty. Narratives and ideals draw people in. But loyalty's fuel is the lived reinforcement: leaders repeatedly demonstrating willingness to leave money on the table in service of that ideal—refusing the easy hire, walking away from a lucrative deal, protecting an employee when it's costly to do so.

This creates a reciprocity loop: employees who witness sacrifice feel obligated to sacrifice in turn. Peer enforcement emerges organically: those who've sacrificed resent those who free-ride, and push them out. The culture becomes self-policing, no longer dependent on founder vigilance alone.