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Culture and competitive advantage

Anyone involved in a team sport will tell you about the importance of team spirit and cohesion – whether on the pitch, the training field or in social circles after a game. It’s the intangible glue that binds together a group of talented athletes and makes them a grand final or a test match winning team. Some teams, no matter how talented, just don’t have it and don’t realise their full potential. Others realise their potential for a season, or two. The true challenge is to maintain that culture for a sustained period, season after season.

The corporate environment is no different. Talk to a CEO or a senior executive and often in short order you will be talking about the firm's culture – the values, behaviours and beliefs that pervade the entire organisation. In a good company, culture drives the businesses strategy. It guides the way employees work together. And ultimately, culture shapes the type of experience a firm delivers to its employees and clients. But what makes a strong culture and how does a firm cultivate and maintain it? It depends in part on the type of business. In my view, the best investment cultures are built on collaboration, humility, and mutual respect. There should be no stars — only teams, equality and a healthy exchange of ideas.

A strong culture matters a lot — particularly for an investment firm, where people and judgment are the greatest assets. In fact, research has shown powerful links between culture and success in asset management firms. Studies done by Focus Consulting Group (in 2009, 2010 and 2013) showed improved decision-making along with attracting and retaining talent are the most tangible benefits of a positive culture.

Culture drives the way teams interact and collaborate to make investment decisions, which impacts how well a strategy performs, how the firm does as a whole and how sustainable the performance is.

Great minds don't necessarily think alike

A collaborative culture doesn't mean everyone has to think the same way. In fact, diverse views usually lead to better decisions because they allow multiple perspectives and different analytics to get to a better outcome. In order to benefit from those diverse views, however, you need to build teams thoughtfully and create an environment that supports idea exchange and challenge. Cultural, gender and multi-disciplinary diversity on a team can enhance cognitive diversity through different experiences and thought processes.

Using teams makes sense for complex tasks like investing, particularly as businesses become more global and supply chains become more complex.

The way you share different views matters as much as the willingness to allow them. You need to actively work against ‘group-think’. Encouraging team members to offer different views helps a team sift through increasingly large amounts of industry information, filter out the noise and focus on good research. By debating the information together rather than acting on it alone, you can minimise individual biases. Ultimately what you get is an environment of constructive challenge aimed at providing better results for clients.

As part of the fabric of a view-sharing environment, you need common cultural values. It's tough to debate investment ideas thoughtfully unless you have a common understanding of the end goal. In fact, research on team building shows that common cultural values form the bedrock for cognitive diversity that leads to differentiated performance (Mauboussin and Callahan, 2014).

Walk the talk

An investment firm's beliefs and philosophies should be ingrained in its behaviour. For example, if you believe that a longer-term investment horizon results in greater opportunity for differentiated performance, your culture must support it. You must reward longer-term performance, tolerate short-term underperformance and follow both an investment process and team orientation that supports these objectives. It's not easy to create this kind of culture and maintain it over time. You need strong buy-in from senior leadership as well as institutional supports.

Increasing globalisation and complexity calls for collaboration and teamwork, not just around the globe but also across capital structures. Consider an equity analyst who can look at company valuations, macroeconomic factors and the competitive environment but typically wouldn't have a lot of debt experience. Now combine that view with a fixed-income perspective that looks at more complex credit issues central to the company's capital structure, such as its financing facilities and debt covenants, and it provides a much more powerful perspective on a company's intrinsic value.

A culture of risk management should be embedded in the investment process and not appended or seen as an overlay. In practice, this means a portfolio manager thinks about risk as part of his or her research and security analysis, rather than as a portfolio constraint he or she sometimes encounters.

Don't set and forget

It's not enough to bring in talented people as any sports captain knows. If you want a collaborative culture to work, you need employees to live and breathe it so it's part of the fabric of the firm.

Keeping employees connected to the firm's culture helps them stay invested in the firm and its objectives. It also reduces staff turnover, which is critical to limiting disruption to portfolio management and reducing hiring and training costs for the firm. You must consistently align incentives with your investment and business objectives and keep performance measures transparent, from both a quantitative and qualitative perspective. The end goal is to create a meritocracy.

Positive cultures are the result of everyone on the team living the core values and acting from this standpoint. Those core values define how employees behave and how the firm does business. The leadership teams of investment firms need to set a visible example and, in this sense, they should be both carriers and cultivators of their culture.

Culture isn't a skill or a talent. Competitors can't recreate culture the way they can mimic an investment or business strategy. Firms and teams own their culture, and it’s up to the entire organisation to work hard at that culture to keep it alive.


Marian Poirier is? Head of Australia at MFS Investment Management.


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