To what extent does culture play a role in investor decisions?
If you are reading this post we can assume you think culture is important. But investment in culture lags behind some of the other key contributors to performance: Brand, people, technology, process. So perhaps culture’s impact on performance is not universally believed. Executives have to focus first and foremost on those elements which will deliver the best return to their shareholders. There is a community of investment professionals who spend their lives considering company valuations and whose opinion holds considerable sway on share price.
What does the investment community think about culture? To what extent to they take culture into consideration when they value a stock? And how do they go about assessing culture? We wanted answers to these questions because we knew our clients would want those answers. Every executive wants to please the analysts.
Culture matters in company valuations.
We undertook a piece of research, together with Stamford Associates, a leading independent investment advisory firm, with 1000 investment professionals from all over the world. You can see our report here. The bottom line is: they think about culture a lot. More, I think, than the executives I know realise. For 75% of respondents it is an important factor in their valuations. 60% have had a personal experience of an investment they were involved in being positively or adversely impacted by culture. Over 80% of buy and sell decisions are influenced by culture.
“If you ask our CEO, what are the variables that you want to have the clearest insight into, it would be management quality and company culture. Everything else you can pick up from the industry analysis.”
Culture impacts both reputational risk and the ability to execute strategy
Many recognised that culture and engagement are not the same thing, and that engagement survey results do not describe the culture.
Given the high profile reputational challenges that have been attributed to culture, it is perhaps not surprising that investors see the link between culture and reputational risk. BP has just this month finally capped its liabilities for the Deep Horizon oil spill at $18bn.
What did impress us though was the extent to which our respondents were checking culture to determine whether the company would be able to implement its strategy. Many organisations do not yet make this link clearly enough in our experience.
The factors that they are looking for line up with the ones executives are aiming for in the culture work we see.
Because they see culture is important, investment professionals know they need to be able to assess it, and that is difficult for them.
“I think sensing a change in the culture and seeing it in time vs in hindsight is probably the most difficult thing to do.”
Analysts intend to get better at assessing culture.
Analysts in the US have advanced the furthest in their efforts to assess culture and anticipate its future impact on performance. Other geographies are likely to catch up. Their sources are primarily their personal experience of the organisation and its leaders. Employee surveys ranked quite low as source of data. The more important an investment professional sees culture, the more sources of data they use. We were impressed with the sophistication some investment management firms are showing in their understanding of culture and how best to assess it from their position outside the organisation. Many are comparing what they see happening (what we call the “walk”) with what executives tell them (the “talk”). A number are talking to employees and ex-employees. They are searching for symbols of what actually goes on day-to-day.
“If the CEO is taking economy flights everywhere, then presumably everybody else is taking economy and you tell me that the company has a cost-cutting culture, I go, ‘yep, I believe it.’ ”
What does this all this mean for leaders?
The investment community has cottoned on the importance of culture. They are further down this path than many executives realise. This means it is going to get harder to hide a poor culture from investors. It also means that the companies with a good culture story should get better at telling that story to their investors. Companies need to be able to demonstrate that they are actively working on their culture, that they understand its shortcomings and are managing them. Investors are making the link between the stated strategy and the culture that will be required to execute it. Companies need to be making that same link, and investing appropriately.
Executives need support from those of us who work extensively with culture to get better at telling the culture story, and to be able to demonstrate good metrics, good culture plans and good control. It is no longer acceptable for an executive to tell the world, as Stuart Gulliver from HSBC did last month that he or she cannot be expected to know how people deep inside their organisation are behaving. Rupert & James Murdoch had similar words to say about the phone hacking behaviours of their employees at News of the World. Can you imagine a CEO saying that he cannot be expected to know where all the costs have gone, or why the technology has failed, or why products are damaging a customer’s health? They never would. That some CEOs still make comments like this suggests that they have not yet understood that culture management is as much a part of their job as cost management, people management and brand management. That means that culture management is becoming the job of every leader.
Responsibility and Opportunity
What excites us about the findings from this research is that it suggests that the investment community is going to increasingly put pressure on corporations to take hold of their culture and manage it with the same rigor they would other elements of their business. Which is great news for those of us who are passionate about culture, internal advocates and consultants alike. And puts more responsibility on us.
I have spent my career as a culture consultant. When I started out organisations were just starting to define their values for the first time, thinking that this would be enough. The business community has come a long way on the culture front since then. But this research has opened up a whole new set of opportunities for leaders to differentiate themselves through culture, and for us to help them do so. Bring it on!!!
How can we help every leader to become better at managing their culture so that they establish high standards of behaviour?
How can we help them understand the pressure points of their business where, if performance pressure becomes intense, those standards might slip with disastrous consequences?
How can we help them become better at making the link between strategy and the behaviours required to pull it off?
And how can we improve the ways behaviour and culture are measured, and make these more transparent to the investment community?
I look forward to your comments and continuing this conversation.