Culture plays a significant role in the decisions of investment managers when assessing the value of listed companies, according to recent research, which found that 94 per cent of investors assert that culture is an important consideration in their investment decisions.
The research found that when it comes buying decisions, 33 per cent of investment managers consider culture to a “great extent” while 47 per cent said culture is “somewhat” of an influencing factor.
On the sell side, 29 per cent of investment managers said culture impacts decision to a “great extent” while 52 per cent said it is “somewhat” of a consideration.
“The financial community as a whole is much more in tune with the link between culture and financial performance than many executives,” said Jerome Parisse-Brassens, regional director Asia Pacific for global culture organisation Walking the Talk, which conducted the research in conjunction with Stamford Associates in the UK.
“Many investors have understood the link for a while and been trying to value corporate culture when assessing stocks.”
How investment managers understand culture
However, Parisse-Brassens said the difficulty they are facing is how to measure culture and how aligned an organisation’s cultural traits are with its strategy.
“What really struck us is that many analysts understood that a culture does not have to be good or bad, but that what really matters is whether it is fit-for-purpose or not – in other words, whether it enables the organisation to achieve its goals or not,” he said.
“Having said that, there are still a number of investors and analysts that do not clearly understand this link.
“Similarly to executives, they perceive the importance of culture but have not fully connected it with commercial results. It is very clear to us that the investment community as a whole is really starting to ‘get culture’ and that they are onto it.”
“What really matters is whether it is fit-for-purpose or not – in other words, whether it enables the organisation to achieve its goals or not”
Parisse-Brassens said that evaluating culture will become more commonplace in the future, and recommended executives get ahead of the curve on culture whilst professional investors build their cultural assessment approach.
For the investment industry, the first challenge is to understand what culture is, to align themselves on a clear definition shared and understood by everyone.
“The definition we like to use at Walking the Talk is ‘The patterns of behaviour that are encouraged, discouraged, or tolerated, by people and systems, over time.’
“The other challenge is that most of the information analysts are given is from ‘the talk’, not from ‘the walk’: it is what companies want them to know and hear, but does not always reflect reality,” he said.
“Analysts therefore need to become more sophisticated (and some already are) in how they assess culture and gather information about it. Interviews with current and ex-employees can be quite telling, for example.”
This leads to the third challenge which investment managers need to address, which is the fact that much of their focus and source of information is from executives, according to Parisse-Brassens, who said this is not enough and should not be taken at face value.
What cultural traits do investors look for?
The research report, Culture Counts: to what extent does culture influence the views of investors within the investment community? took in the views of investment managers (52 per cent of which were portfolio managers and 19 per cent of which were buy side analysts) from the US (49 per cent), UK (30 per cent) and other countries including Australia (4 per cent).
It found that transparency, honesty, openness, simplicity, integrity and customer focus were considered the six most attractive cultural traits in organisations.
The six most risky cultural traits from an investment perspective were complacency, aggression, overconfidence, dishonesty and bureaucracy.
“Leaders cast a long shadow and their behaviour sends a strong message to staff about what is valued”
“One link that the entire investment community clearly understands is the link between executive behaviour and culture,” said Parisse-Brassens.
“Analysts focus on the behaviours of the executive and assess whether they can be trusted to operate consistently with the stated values.
“Leaders cast a long shadow and their behaviour sends a strong message to staff about what is valued.”
Executives therefore need to pay particular attention to what they do – and not just what they say, according to Parisse-Brassens.
The executive culture link
“In the market today we find two types of executives: those who fully understand the direct link between the culture of their organisation and its financial performance, and those who feel culture is important but do not see the impact it can have on the bottom line,” said Parisse-Brassens.
There is also a third group of executives who perceive culture as a “nice to have” but not essential, he said.
“In the first group, you find executives who have witnessed how culture can create or add value, either in their own organisations or in another one in their industry,” said Parisse-Brassens.
“You also find those who naturally get it and see culture and leadership as critical foundations for success.”
“When it comes to decision time, they will often prioritise initiatives such as cost savings and/or increase in sales force over culture”
The executives know that how people behave directly impact results; for example, how increasing customer centricity in mindsets and behaviours is directly linked to an increase in NPS and revenue/profit.
“A great number of executives, however, perceive that culture is important, but they cannot fully articulate how it affects the bottom line,” he said.
“They know it impacts the feeling of the organisation, the engagement, how easy or difficult it is to implement things, but the link to financial performance is not clear.
“As a result, when it comes to decision time, they will often prioritise initiatives such as cost savings and/or increase in sales force over culture.”
Avoiding the culture pitfalls
There are two challenges for executives in ensuring the culture of their organisation enables success, said Parisse-Brassens: the first of which is to ensure that the culture they are putting in place is what the organisation needs, as opposed to what feels good.
What often happens is that senior leaders try to “fill the gaps” in how people behave (for example, start collaborating when there is a culture of silos) but he said those gaps may not be right ones to focus on.
“The culture needs to be grounded in the business imperatives for which culture is going to be a critical enabler,” said Parisse-Brassens.
“This is about a culture that is fit-for-purpose.”
The other challenge is the “shadow of the leader” and he said executives and senior leaders must make sure the messages they are sending through their own behaviour reinforce the desired cultural traits.
“Any misalignment between what they say and what they do creates mistrust and destroys value in culture and ultimately in financial performance.”
HR’s role in culture building and change
HR practitioners need to understand that culture is already impacting the value of their organisation in the eyes of the investment community – more so than their executives and board realise, according to Parisse-Brassens.
“They need to be in a position to influence the development of culture management capability within the organisation, with the executives but also with the organisation at large,” he said.
Cultural traits and culture communication should be a strategic focus, as it influences market perceptions, he added.
“I strongly believe that HR needs to articulate for the organisation what is culture, to clearly demonstrate the link with financial performance and market perception, to facilitate assessment of culture and development of desired culture, and to coach executives and senior leaders in relation to managing culture,” said Parisse-Brassens, who affirmed that the research reinforces and enhances the strategic role that HR can play as a contributor to shareholder value.
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