A cultural advantage
“I believe a management team is focused first and foremost on figuring out a way to consistently provide great value for its customers can be a durable competitive advantage”, [1] wrote John Huber of Saber Capital in a recent presentation to Google.
In a world where “the balance of power is shifting toward consumers and away from companies” (Jeff Bezos), the value of culture is becoming increasingly apparent. Today I want to explore three questions on culture: What do we mean by culture? How does culture create value? How can we identify strong culture?
What do we mean by culture?
We’re looking for two things. (1) general employee satisfaction, (2) specific cultural characteristics that can add or subtract value from the company. Some favourable examples include:
- An entrepreneurial firm needs to have a culture that fosters innovation and removes red tape – otherwise growth would be stifled. Alphabet is a great example of this whereby they invest in “moonshots”. Their annual report explicitly states “We continue to look toward the future and continue to invest for the long-term. As we said in the original founders’ letter, we will not shy away from high-risk, high-reward projects that we believe in because they are the key to our long-term success”[2].
- A mature or growing firm can benefit by investing for the future on a long time horizon. Amazon’s customer focus and Tencent’s User centricity stand out here.
- A mature company can be focussed on cost control to help drive the bottom line. This needs to be driven from top management to permeate the culture.
There are also some red flags for cultures:
- A party culture can create reputational risk for the firm (and we’ve seen no shortage of press about lax compliance in firms lately).
- A relaxed culture can create project delays and budget over-runs.
- A strongly hierarchical culture creates key-man risk.
How does culture create real value?
There is a surmounting amount of research suggesting that culture, particularly proliferated from senior management, can add real value to a company. In particular, honesty appears critical, “when employees perceive top managers as trustworthy and ethical, firm’s performance is stronger.”[3]
Research by Harvard Business School professors James L Heskett and John Kotter found companies with “performance-enhancing cultures” had average revenue growth four times higher than firms with poor culture.[4] Similarly, Dr. A. Chamberlian find that a portfolio of Fortune’s “Best Companies to Work For” outperformed the S&P 500 by 84.2 per cent, whereas the portfolio of Glassdoor’s “Best Places to Work” outperformed the market by 115.6 per cent.[5]
How can we identify strong cultures?
Unlike numbers such as revenue growth, culture is a little trickier to measure. Certainly, talking to management and asking about their culture, as well as visiting offices or sites can yield some clues[6]. But there is an increasing amount of data available on this. Net Promoter Scores have become an industry standard measure for company culture and is regarded as a lead indicator for staff retention and reduced absentee-ism. Websites such as glassdoor.com also offer insights to company morale. Furthermore, as “soft” metrics such as culture are being increasingly recognised for the value they create, there has been a growing amount of ESG work with some analysts even coming up with their own ranking systems.
Good culture lowers employee churn, decreases absenteeism, promotes strong work ethic and aligns shareholder and employee interest. But indubitably, the numbers speak for themselves.
[1] Source: http://sabercapitalmgt.com/wp-content/uploads/2018/02/Saber-Capital-Talk-at-Google.pdf
[2] FY17 report https://abc.xyz/investor/pdf/20171231_alphabet_10K.pdf
[3] L. Guiso, P Sapienza, L Zingales, The Value of Corporate Culture, 2013, MIT. Source: http://economics.mit.edu/files/9721
[4] Source http://www.afr.com/personal-finance/shares/how-to-invest-look-for-companies-with-a-positive-culture-20161106-gsj5tm
[5][5] Source: https://www.glassdoor.com/research/studies/does-company-culture-pay-off-analyzing-stock-performance-of-best-places-to-work-companies/
[6] Source: http://www.afr.com/personal-finance/shares/how-to-invest-look-for-companies-with-a-positive-culture-20161106-gsj5tm
This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.
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Amandaq
:
Super good!
Lisa Fedorenko
:
Thank you!
dddQQQ
:
)))) good post
Lisa Fedorenko
:
Thank you!
John
:
One of the best ways to assess culture is to do some business with them and see how the staff react. Is it obvious that there are inefficiencies as they do their job and staff actually mention these but are fatalistic about them , are staff talking negatively about the business, do they obviously seem to hate being there? is there a discrepancy between the company image and what is happening face to face. Do staff seem to be intent on selling you things you don’t want (thinking of the banks here).
If so there is cultural problem.
Lisa Fedorenko
:
Certainly direct interaction with the staff can give you a good sense of the culture.
John
:
Yep, it always amuses me when bank staff try to direct me to financial advisors and I remind them that based on recent history the banks are about as trustworthy as a crocodile. The silently nod in resignation – no arguments to the contrary.