The Difference Between Formal & Informal Corporate Culture

The way you organize your business determines not only what kind of work environment you have, but whom you can do business with and how you can grow. Many small businesses start as informal organization sole proprietorships and become more formal when they incorporate. But even a formal corporate structure incorporates informal groups between coworkers. Understanding the interplay between informal and formal parts of your company culture can help you manage employees and steer your company.

One prominent feature of a formal corporate culture is the communication chain. Employees report to specific superiors, who in turn pass information up to the owner or chief executive officer through a formal chain of communication. This communication flows in the opposite direction as well. Directives from the owner or CEO trickle down to managers, supervisors and employees.

While this style makes it clear who reports to whom, some negative communications never reach the top. Employees, supervisors and managers who want to protect their jobs sometimes are reluctant to pass along bad news such as poor sales figures, excessive product returns or mistakes in judgment such as a marketing campaign that doesn't work.

An informal business culture fosters informal communication styles. Employees pass along information spontaneously, through groups of friends or associates they feel comfortable with. Someone might stop by a desk to tell a fellow employee the latest company development, and that employee may call a friend in another department. This style adds a human touch to communication, but messages conveyed this way can be garbled or inaccurate and exclude groups of people who are not "in the loop."

Formal corporate cultures put everything in writing, especially policies, standards and corporate actions. Decisions follow a designated process, and trying to take shortcuts around this process can cause anger, confusion and rejection of the decision by employees, supervisors and managers. Written rules let employees know the universal standards by which they are evaluated. This appeals to people's sense of fairness.

An informal corporate culture changes the rules as the participants adapt to new ways of doing things, and this encourages innovation. For example, an employee may find a new way of doing things and immediately implement it. The owner or CEO can create an initiative and persuade the work force to adopt it, thus showing respect for employees by seeking their approval. Constantly changing rules and procedures, however, can cause frustration and the perception that some people get favorable treatment by bending the guidelines in their favor.

In a formal culture, the human resources department recruits and retains employees in accordance with company goals and objectives. Though individual departments may request new employees, hiring decisions depend on the guidance of the owner or CEO. Discipline and pay rates have formal parameters, and employees have little chance of changing HR decisions.

There are several key differences in formal vs informal hiring and firing. Informal organizational culture decision-making tends to be based on social relationships between employees and managers through the chain of command, as well as the perceptions of the person making the decisions. Without formal organization people may be hired based on a gut feeling rather than an identifiable company need which can impact work culture and employee morale. In addition, in informal cultures lacking proper hierarchical structure, discipline may come about as the result of emotion as much as any actual misbehavior or breaking of company policy on the part of an employee. Pay rates can go to favored individuals, rather than objectively qualified ones, policies like dress code can become flexible, project management can be influenced by interpersonal relationships, and more. Beware when lacking specific structure and formal organizational culture in HR or leadership.