Why is changing a company's culture hard?
The interpretation gap between what leaders intend and what employees experience.
LLMs are tearing through the zeitgeist. CEOs are under tremendous pressure to deliver AI-driven results. Your company’s board wants growth. Your competitors seem to have gotten their shit together with AI. In the background, the models keep improving rapidly and there’s endless noise everywhere on social media. Your company needs to demonstrate lots of value now, not in two years.
So you respond by pulling all the levers you know. Reorgs, new OKRs, AI adoption metrics and re-leveling compensation to light a fire under people’s asses. Yet six months later, the company’s aggregate outcomes haven’t changed in any meaningful way. It’s like your interventions got absorbed by something you can’t quite pin down.
“Culture” typically gets blamed when such transformations fail. But it’s a big word and there’s too much fuzziness in how that word gets used. Moreover, it’s hard to prioritize something you can’t define when there’s substantial pressure to improve profit.
Each leader responds to this pressure in one of two ways. Each example has been deliberately exaggerated and caricatured to make the broader point.
Mechanistic view: You create new roles, reporting lines and compensation tied to extremely crisp AI outcomes and light a fire under everyone’s ass. A year later, people thoroughly gamed and Goodhart’ed the metrics in unforeseen ways leaving the company just as politically stuck as before. In the mechanistic view, culture is an aggregation of incentive structure designed to drive specific outcomes.
Mystical view: You feel it’s authoritarian to dictate what people should value in a top-down fashion. You want everyone to feel “included”. So you organize lots of annual company gatherings, listening tours, etc. that are full of deeply moving rituals and ceremonies. A year later, your most politically astute and rapacious VP has filled the power vacuum, your best people are leaving and nothing is getting done. The mystical view sees culture as an ineffable and intangible thing that emerges organically and can only be participated in but never directed.
Each view is tempting for leaders because each contains a kernel of truth. Culture indeed involves stated values, incentive structures and emergent properties. But none explains why interventions keep landing differently than intended. You know that culture matters, but you also need results now. You’re torn because you feel that investing in one means neglecting the other. In the meantime, your AI pilots keep failing and the company keeps chugging along exactly as it did. Your stress levels rise in tandem as a result.
Getting unstuck from this pattern requires understanding what culture actually is and how it’s causally connected to your company’s value chain.
What is a company’s culture?
Companies attempt to organize employee behavior via constraints (e.g. rewards, punishments, rights and responsibilities, rituals, physical spaces, etc.) to maximize profit. These constraints can be intentionally designed or unintentionally emergent.
But constraints are only half the story. What people do based on such constraints depends on how they interpret them. For example, the same incentive can be read by one employee as genuine commitment toward growth, and by another as cynical manipulation. The same feedback ritual can feel like development or repressive micromanagement. The same promotion can signal “we value excellence and meritocracy” or “we reward political ambition.”
The constraints themselves (e.g. rewards, punishments, rights, responsibilities, etc) are tangible and clearly patterned and live in objective reality. The interpretations of these constraints are nebulous subjective experiences living inside each participant’s mind, either consciously or unconsciously. Having said this, there are limitations on not just the physical constraints that are possible within a given context, but also their corresponding set of subjective interpretations. For example, you can’t offer rewards with money you don’t have. Similarly, few employees in the US would interpret a public flogging and shaming as a reward.
Constraints and their interpretations might seem like separate things, but they’re actually inseparable. Neither constraints nor their interpretations are causally primary, and are in a feedback loop with each other. For example, as a leader you may decide to impose specific constraints based on shifting organizational objectives. You can’t read people’s minds and you’re not omniscient. Therefore, you’ll need to make some implicit assumptions about how your constraints will be interpreted and therefore how behavior will change. But given that you’re not omniscient, you’ll at least somewhat miss the mark. There will necessarily be a gap between how you expect the constraint to be interpreted and how it’s actually interpreted. This interpretation gap lies at the heart of most cultural difficulties.
Culture is the ongoing feedback loop between the interventions a group makes on itself and the interpretations those interventions produce.
This feedback loop is inevitable. It emerges whenever multiple people engage in organized, committed relationships of value creation across time. A company’s cultural health is a function of the robustness with which its overall interpretation gaps are identified and navigated towards the pursuit of creating value. This is easier said than done.
The difficulty in closing this interpretation gap explains why acting narrowly from the mechanistic or mystical views fails in practice. The mechanistic view focuses on constraints and incorrectly assumes that interpretation of them is uniform within the company. The mystical view focuses on interpretation and incorrectly assumes that any sort of constraints are tyrannical. Each view misses that culture is the feedback loop itself.
Why is this interpretation gap so hard to close?
Closing the interpretation gap requires seeing how your perception of reality contrasts with the feedback you receive from it. But your ability to navigate the nebulosity of such conflicting information is limited by your own psychological development. Therefore, companies that prioritize closing their overall interpretation gaps must prioritize the development of their employees, which is hard.
Why is psychological development hard?
Jean Piaget was a developmental psychologist. He was intrigued by the fact that children of different ages made different kinds of mistakes. These weren’t random errors or less accurate versions of adult thinking. They were systematic errors downstream of sophisticated reasoning limited by the child’s cognitive stage.
For example, Piaget studied children under the conservation of number task. It involves showing a child two rows of tokens in one-to-one correspondence. After the child confirms they’re equal, the tokens are spread apart and the child is asked again if they’re equal. Children below the age of seven reliably say the longer row has more tokens, even though nothing was added and removed. This isn’t carelessness. It’s a coherent but flawed reasoning strategy. The child focuses on one visual dimension (i.e. length of the row), while ignoring another (i.e. how bunched up the tokens are). The meaning-making system within children at this stage of development engages in systematic errors that aren’t present in older children. Moreover, each stage of development in both children and adults is characterized by different families of systematic errors.
Both children and adults experience internal cognitive conflict when our existing mental maps encounter experiences they can’t adequately assimilate. This mismatch can often be deeply uncomfortable, especially if it’s large. On the other hand, it motivates accommodation and drives psychological growth.
Development isn’t about acquiring more knowledge. It’s about overcoming systematic errors in how you make meaning.
The Kegan stages of development articulate how adults grow capacity to navigate increasingly complex spaces of possibility. Each stage can be viewed more crisply in terms of the systematic errors it makes:
Stage 3 (Socialized Mind): You get stuck when different social groups want mutually exclusive things. For example, if your team wants one thing but your boss wants another. So at this stage, you’ll struggle to notice interpretation gaps that require holding conflicting social expectations simultaneously. Especially if each expectation seems legitimate.
Stage 4 (Self-Authoring Mind): You can overcome these competing values by constructing your own self-authored values. You can say “I hear what both groups want, but here’s what I believe is right”. But this self-authoring makes you vulnerable to rigidity since it can be the answer to everything. Even when the situation calls for something entirely different. For example, if you deeply value “radical transparency” and your new performance management system lands as surveillance, your framework may not let you easily see this.
Stage 5 (Self-Transforming Mind): You can overcome this rigidity by participating within multiple perspectives simultaneously. You relate to competing values as an opportunity for collective growth and value creation, rather than something to be neatly solved. You can simultaneously optimize for these competing values without losing overall coherence.
Development doesn’t just change one’s objective behavior. It changes one’s subjective experience and how one makes meaning. That is, it changes the depth of nebulosity one can navigate, and therefore the complexity of patterns one can navigate. For example, what looks like a personal attack to a Stage 3 looks like useful feedback to a Stage 5. This process is simultaneously emotionally taxing and rewarding. So it requires participation within conducive containers to provide appropriate curriculums and support.
The absence of sufficient development within a company’s leaders makes closing the interpretation gap hard. For example, consider a time when lots of people tried to consistently give you the same feedback, but it was only after a “come to Jesus” moment that you finally “got it”. That’s exactly the phenomenon we’re pointing to. Until your “come to Jesus” moment, you lacked the capacity to integrate this feedback due to your own systematic errors of meaning-making, and therefore the capacity for that leader’s organization to navigate the interpretation gap is fundamentally limited.
Why do the two views of culture fail?
The mechanistic view assumes that interpretation is uniform or predictable. Design the right incentives, get the right behavior. This is the systematic error of treating humans as input-output machines. The same incentive structure will be gamed differently depending on what people believe about the company’s actual priorities. Someone who interprets the company as fundamentally political will optimize the metrics differently than someone who interprets it as fundamentally meritocratic.
The mystical view correctly notices that interpretation matters but concludes that culture therefore can’t be shaped. Or that it’s tyrannical to attempt to do so. This is the systematic error of confusing nebulosity with intractability. Culture is tractable but not mechanical.
Moreover, both views miss the feedback loop, and that culture isn’t purely the constraints nor their interpretations. Rather, it’s the ongoing dynamic process between them.
What is the relationship between culture and profit?
Viewing the company’s culture as a feedback loop between constraints and their interpretations gives the space we need to clearly see the connection between culture and profit. Specifically, that they’re deeply interpenetrating and two sides of the same coin.
But first, let’s concretely articulate what a company is in a manner conducive to answering this question.
What is a company?
A company is an organization of people in a specific and evolving pattern of interaction, organized around creating some external value in the market.
Michael Porter‘s work on competition provides the concepts we need to crack this open. In his conception, a company’s value chain is the specific sequence of activities (e.g. design, production, marketing, delivery, support, etc) arising from employee interactions that transform the company’s inputs into valuable outputs that customers will pay for. A company can achieve competitive advantage (i.e. above-average profits within a market) by competing to be different, rather than competing to be “the best”. Specifically, by differentiating along its value chain to fundamentally think, do and be different from the competition, rather than playing the competition’s game marginally better. See this earlier post for a review of his work.
A company’s value chain is a pattern of activities within objective reality. But as discussed, a company also includes a coherence of shared interpretation and aligned subjective experience. A company’s employees develop common ways of making sense of events. Whether something counts as “success” or “failure”, or whether a given incident is salient towards value creation or simply background noise. These shared interpretations evolve in feedback together with the value chain. They co-create the company’s market outcomes.
Founders starting a company each bring their own developmental challenges to the mix. At conception, their systematic errors in meaning-making shape how the entire company interprets events. This gives way to the company’s aggregated psychology characterized by the systematic errors the company as a whole engages in.
How does a company’s aggregated psychology emerge?
Priya and Marcus are co-founding a B2B SaaS startup.
Marcus tends toward Stage 3 patterns so he interprets customer complaints as indictments of his worth. When a big client threatens to churn, he either freezes or over-accommodates because he’s unable to cleanly separate “our product needs work” from “I’m a failure”.
Priya tends towards Stage 4 patterns so she has a tendency to believe that her self-authored framework is the answer to everything even when it isn’t. Additionally, she has strong opinions about product direction and interprets pushback on her vision as an overall lack of understanding.
These developmental patterns interact and build upon each other within their company. Marcus tends to defer to Priya when he feels overwhelmed by criticism because he finds her certainty stabilizing. On the other hand, her rigidity goes unchecked because Marcus can’t push back without feeling like he’s attacking her personally. So customer feedback gets filtered through Priya’s framework. Additionally, investors and advisors internalize that raising concern about product direction creates tension with Priya and distress for Marcus. So their overall dynamic creates a norm where problems get minimized until they become crises.
This isn’t inevitable. Different patterns could emerge if Priya and Marcus worked on their developmental edges, perhaps in executive coaching, therapy or mutual support. Priya could learn to see her framework as one perspective among many. Marcus could learn to separate product feedback from self-worth. This would create space for earlier, calmer course-corrections.
Similarly, more people joining the company leads to the emergence of an aggregated psychology that’s a function of the developmental trajectories of each employee proportionate to how much power they wield within the company. All of these systematic errors either cover for each other, or compound on top of each other. Like individuals, companies develop aggregate patterns of systematic errors which grow more complex as more people join.
How does a company’s culture and value chain co-create profit?
The specific pattern of interactions between Priya and Marcus give rise to a specific value chain that produces profit. Their idiosyncratic preferences, values and tastes shape the space of possibility in terms of the constraints they might apply to their two-person company, and how they may each interpret these constraints. But on the whole, their goal is to organize and optimize their behavior so as to increase the profit generated by the company.
This increase in profitability in turn places reciprocal demands upon the company to complexify its operations. For example, perhaps there’s a lot more market demand than their infra or ops can currently handle. This combined with their currently limited resources as a two-person company forces them to make more sophisticated trade-offs within the value chain. The space of viable trade-offs is obscured by the company’s systematic errors (i.e. psychological development).
Nevertheless, these initial trade-offs allow them to cope with increased demand and start to differentiate their value chain. So profits continue to increase.
As profits increase, this overall feedback loop starts to spin:
Increased profits and demand leads to more employees getting hired to meet demand.
More employees leads to more constraints getting imposed by leadership to organize this growing headcount towards profit.
There’s an interpretation gap between these constraints and their interpretation.
Each employee’s interpretation is a function of their specific psychological development.
Their interpretation of the constraints causally influences the tactical and strategic decisions that they make to meet this increased demand. Such decisions get made concurrently across the company.
Such decisions imply that trade-offs get made within the value chain that are idiosyncratic to that company’s aggregate psychology. Some of these trade-offs are desirable whereas others aren’t.
Nevertheless, these trade-offs allow the company to meet increased demand and generate more profit.
Leaders then hire more employees, and the rest of the loop begins to spin.
The idiosyncratic trade-offs within the value chain are the joint point between a company’s culture and value chain. The company’s competitive advantage is therefore constrained by how developed the aggregate psychology of the company is. Certainly, there are many other factors that influence a company’s profitability. But the differentiation of a company’s value chain is inextricably linked to the company’s culture. Profit and culture may appear as competing considerations but they’re in some sense two sides of the same coin.
Founders who think culture is a luxury that they’ll attend to later are already shaping culture through their systematic errors. The question isn’t whether one’s deciding to shape culture or not. It’s whether one’s willing to do so consciously and skillfully.
Good culture develops its people
I’ve deliberately used the term “leader” rather than “manager” throughout this essay. In my model, if someone consistently does what you tell them you’re their leader within that context irrespective of whether they formally report to you. Formal authority is a constraint to backstop against fluid authority degenerating or stymieing value creation. Anyone within a company can grow their power and leadership.
As my executive coach says, leadership is the act of taking accountability for creating value with integrity.
A company has many more leaders than the executives. The aggregate capacity of all these leaders in closing their own interpretation gap determines the company’s overall ability to navigate the constraint/interpretation feedback loop. A company’s culture can either entrench people’s developmental limits or help them grow past them.
A culture that develops its people surfaces systematic errors at a pace people can metabolize rather than entrenching them. A good culture affords a feedback loop:
Developing people allows each of them to commit better systematic errors.
This improves their ability to close the interpretation gap.
This improves the chance that their interventions will be better integrated.
This improved integration affords more capacity to further develop its people, and so on.
Conclusion
Culture isn’t a nice-to-have you attend to once the business is stable. It’s the ongoing feedback loop between the constraints you impose and how those constraints get interpreted. Moreover, a company’s culture and value chain are interpenetrating. These loops are inevitable.
This doesn’t mean culture work is easy or that it guarantees results. But it does mean you can stop experiencing culture and performance as competing priorities demanding different resources. It’s as if they’re two sides of the same coin.
Future essays will explore how organizations can deliberately attune their culture toward development.
Acknowledgements
Brian Whetten, Prof John Vervaeke, Charlie Awbury, David Chapman for everything they’ve taught me.
Dan Hunt for helpful discussions, editing and generally co-creating these essays with me.
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