Institutional memory is the collective knowledge, facts, ideas, experiences and know-how of a group of people. It can be found in corporations, government organizations, professional groups, religious groups, sports teams, academia and in entire cultures. In every business there is a group or an individual that knows where everything is stored. From paper clips to new invoicing forms, this group or person holds the knowledge that keeps the business running smoothly. If this person is lost, that information is lost.
Institutional memory is a good way to instill a group's ideology or work methods. You build a team (or as Seth Godin calls it, a "Tribe") by teaching new members of the team your traditions, jargon and work processes. Members of the group can identify one another based solely on their knowledge of this information and can therefore ostracize those who do not belong. This is a common practice in the military. The training methods used force the new recruit to undergo a personality change to adapt to their new environment. This is a total change including a new language, new ways of getting things done and so forth.
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On the flip side, institutional memory can be indoctrinated to the point that it becomes impossible to challenge when something is found that contradicts it. When institutional memory becomes intractable and unable to adjust to new circumstances, it actually becomes a hindrance to your business. You cannot usually solve new problems using old methods.
Institutional memory is the collected knowledge of all the members of any team. It helps to instill team spirit and to foster team unity. Institutional memory must be transmitted, usually verbally, to new members of the team if they are ever going to be accepted into the group. Beware when it becomes inflexible and does not adapt to changing situations. The key is to harness institutional memory and derive all the benefits without incurring any of the penalties.
Source: Wikipedia: Institutional Memory