Investors traditionally seek to understand companies’ financial results, earnings and business metrics before investing.
However, over the past half-century, intangible factors have become a far more important factor in measuring and driving a company’s market value.
Most of the stock market value of an organisation today is derived from assets that are not on the balance sheet, says Ocean Tomo, a US-based research and rating firm. It estimates that approximately 84% of the market value of the US S&P 500 equity index is in “intangibles” – assets not captured on the balance sheet.
That leaves only 16% of the market value of a company to be “tangible”. This portion includes traditional earnings, ratios, estimates, cash, receivables, plant, property, equipment and inventory.
Intangible assets are not physical in nature and include intellectual property – items such as patents, trademarks, copyrights, business methodologies, human capital, reputation, brand recognition and customer relationships.
Corporate culture is a key intangible factor. It is often described as the “DNA of the organisation” and shapes interactions with internal and external stakeholders.
Corporate culture is as important to a company’s health and future as any financial indicator. WCM Investment Management, a California-based fund manager with a unique corporate culture-focused investment approach, argue that culture is one of the most important predictors of long-term performance and viability.
WCM has settled on a simple definition: culture is the set of shared values and norms that guide behaviour within an organisation. In other words, culture isn’t just a set of aspirational values — it’s how people behave and make decisions in a company.
The revelations of misconduct from the royal commission highlight the need for investors to garner greater insights into the corporate culture of the organisations in which they invest.
Unhappy banking clients affected by the fees-for-no-service scandal joined disgruntled shareholders and have seen their shares fall in value by more than 20% over the past five years in some cases. In contrast, companies that are famous for their focus on culture, such as Netflix among others, have seen their share price rise more than 450% over the same period. While not a like-for-like comparison these are not isolated examples.
An increasing number of investors want to know what the CEO of an organisation has learned from other great leaders, what the firm’s core values are and how they are integrated throughout the organisation.
Companies with a workplace culture that is aligned to their competitive advantage consistently deliver superior investment returns. Engaged employees keep customers happy and generally deliver consistently on business objectives. This can translate to more innovative products, higher sales, lower costs from staff turnover and lower financial volatility.
When you have nearly identical businesses in the same industry there can still be big differences in business performance – due to differing corporate cultures. In the financial services sector, when a company culture is poor, this can lead to issues which can affect the customer experience and the company’s long-term financial performance.
Great companies tend to have great cultures, and that tends to be great for investors. It is that simple.
Marty Switzer is CEO of Contango Asset Management.
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