Recent revelations of misconduct from the royal commission highlight the need for investors to garner greater insights into the corporate culture of organisations in which they invest, writes Contango Asset Management’s Marty Switzer.
Great companies tend to have great cultures. And that tends to be great for investors.
Factors relating to the quality of people and the relationships among them – the corporate culture – are roughly twice as important as the numbers.
However, culture is difficult to measure given its qualitative rather than quantitative nature. It is for this reason that culture often gets overlooked in the investment process.
Similar companies with identical business models can have vastly disparate performance. The difference is culture.
The world’s best global equities managers use an investment process based on the belief that corporate culture is one of, if not the, biggest influence on a company’s ability to grow its competitive advantage.
For instance, any organisation can have the greatest products, a robust brand and reputation, effective policies and processes and a long history of trading – but if the culture is poor it is much less likely to succeed when compared with a business that has a healthy culture.
Despite those good products, you might find that many customers have complained about slow delivery, or poor service, or rude employees. These are all indicators of the health of a company’s culture.
In contrast, companies with great service and employees that go the extra mile rarely have complaints made against them. And if their customers are not making complaints, then customers will return to those better businesses, leading of course to better business results. It’s that simple.
How do you assess the health of an organisation’s corporate culture?
Our investment partner WCM Investment Management’s process is based on the belief that corporate culture is the biggest influence on a company's ability to grow its competitive advantage.
WCM co-chief executives and portfolio managers Kurt Winrich and Paul Black say their assessment techniques include face-to-face meetings with management, employees and even former employees; turnover rates, net promoter scores (NPS), online reviews and more.
They cite how visiting a business’ operations allows the gathering of often highly insightful details to evaluate its culture. The only way to get to insights about competitive advantage and culture is to talk to the people who actually know about the business – employees, formers, customers, vendors, competitors.
This can be a little hard to do if you are not an analyst or portfolio manager, but you can ask friends and colleagues if they have ever dealt with the company. Otherwise, look at online reviews.
Another useful fact to ask for is net promoter score. NPS offers a useful overall customer satisfaction rating which can be reflective of culture, particularly for businesses with a significant proportion of customer-facing staff.
Kurt and Paul suggest that when looking at culture it is also important to view:
How can you determine this? Two questions they ask that work well at ferreting out information about both alignment and strength are:
What is sacred at your company?
What is taboo at your company?
Consistency of answers across multiple interviewees tells you something about the strength of the culture.
The answers themselves can be evaluated against the business strategy, the competitive advantage, to assess the strength and alignment of your target investment’s corporate culture.
Marty Switzer is CEO of Contango Asset Management.
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