Fund selectors have a tough job. And they have mastered it well, assessing investment philosophy, process, past performance and price in arriving at their recommendation list. But there is a new kid on the block, one with impressive predictive power, that can no longer be ignored. Workplace culture has a powerful impact on how well an investment management firm operates and hence the long term returns it can generate. It is the missing metric, overlooked because it was considered too difficult to assess. But that is changing. To maintain their competitive edge, an assessment of fund manager culture should be on every smart fund selector’s checklist.
NVIDIA currently scores a 96% GPTW approval rating compared with just 54% for a typical UK-based company, but its employees started hailing it as a great place to work long before the share price took off, a bellwether of the success that was to come. Now buy-side analysts are waking up to the existence of a culture premium and are increasingly looking to identify and invest in those companies that can evidence great culture. Fund managers are launching ‘culture funds’, investing only in companies which meet their great culture criteria. It is time for fund selectors to follow suit.
The business case for creating a great culture is compelling. A positive culture has a positive influence on both return and risk, conferring bottom-line value in two independent ways. Productivity, retention and innovation all increase because employees are motivated to go the extra mile, creating upside benefits. And a great culture brings psychological safety, resulting in more effective risk management: with less resource misdirected towards the costly and painful management of disgruntled employees and eye-wateringly expensive, reputation-damaging lawsuits, downside losses reduce. And these can be very significant. Winning by not losing.
The benefits of a great workplace culture are not only tangible, but they are quantifiable with an impressive – and ever-growing – body of academic data and anecdotal examples. Employees value a better culture more than they value higher remuneration, so companies with great cultures don’t have to pay over-the-odds to keep their people. And employees who are happy and motivated take fewer sick days and are less inclined to leave, with research from GPTWq demonstrating that the top 100 workplaces generate twice the revenue per employee of comparative firms, with employees exhibiting 70% more willingness to give extra at work. It is no surprise that these productivity benefits translate into superior long-term share price performance, with the 100 best companies to work for outperforming the Russell 1000 by 3.36% from the period 1998 to 2023.
If this is true of individual companies, it is also true of the investment management firms that analyse them. From the complicit sexual harassment of Odey Asset Management to the impossible-to-challenge star manager culture of Woodford Asset Management, we have seen the extremes of poor culture in the investment management industry. But the ripples of poor culture are often less dramatic than these headline grabbers, and far more insidious. Undermining the investment process by eating away at challenge, risk-taking and effective decision-making. Causing high turnover in investment teams, resulting in disruption and loss of knowledge. People are a compounding asset; losing them through poor people management takes a heavy toll on business outcomes.
So how do selectors identify great culture and incorporate it into their screening of investment management firms when making their fund selection decisions? There are two sides to this coin, and the first is about avoiding the bad apples. In his book ‘The Dark Pattern’, Business Ethics Professor Guido Pallazzo, explores the behavioural traits of high-profile corporate failures, identifying nine cultural red flags that they all had in common, from Boeing to Volkwswagen to Theranos, Uber and FTX. Armed with these, it is much easier to spot a potential disaster and avoid it, whether you are a business leader, an equity analyst or a fund selector.
The second side of the coin is about identifying the good and that too is possible although, as Annabel Gillard, Strategic Adviser on Ethics and Organisational Culture, explains in her paper ‘Is Organisational Culture the Next Frontier in Investment’, it is more accurate to say that culture can be weighed rather than measured.
This, perhaps, fits less well within the traditional wheelhouse of fund selectors, requiring a qualitative, nuanced approach coupled with an understanding of people. There is no one-size-fits-all checklist. Whilst quantitative metrics, such as an increase in staff turnover or whistleblowing, are useful, they need to be considered in context: an uptick in whistleblowing, for example, might actually indicate an improvement in culture because people now feel safe enough to report past misdemeanours.
A combination of signals is best, assessed in perspective and with interpretation: these might seek to capture areas such as openness to challenge, psychological safety, organisational priorities, staff satisfaction, purpose, human capital management and organisational values.
So, we can see that a great workplace culture is both a material risk reducer and a competitive advantage, with both marking a company out for future success. But there is more. Fund selectors who prioritise funds from investment houses with healthy cultures are not just capturing the culture premium for their clients.
There is an important side benefit too: by making it clear that they are selecting for great culture, they will be applying commercial pressure to those organisations who need to change their ways, benefitting society more generally by helping to create cultures that people actually want to work in.
Jenny Segal is a workplace culture expert and author, specialising in the intersection of organisational culture, employee motivation, and business performance.
