Large companies tend to have large cultures. And that tends to be great for investors.
Factors related to the quality of people and the relationships between them – the corporate culture – are about 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 is often overlooked in the investment process.
Similar companies with identical business models can have very disparate performance. The difference is cultural.
The best global equity managers in the world use an investment process based on the belief that company culture is one of the biggest, if not the biggest influence on a company’s ability to develop its competitive advantage. .
For example, any organization can have the best products, a strong brand and reputation, effective policies and processes, and a long history of business – but if the culture is poor, it is much less likely to be successful. compared to a company that has a good culture.
Despite these good products, you might find that many customers have complained about slow delivery, poor service, or rude employees. These are all indicators of the health of a company’s culture.
In contrast, companies with excellent service and employees who go the extra mile rarely have complaints against them. And if their customers don’t complain, then customers will go back to these better companies, of course leading to better business results. It is that simple.
How do you rate the health of an organization’s corporate culture?
The process of our investment partner WCM Investment Management is based on the belief that corporate culture is the greatest influence on a company’s ability to develop its competitive advantage.
WCM’s co-CEOs 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 rate, net promoter scores (NPS), online reviews and more.
They cite how visiting a company’s operations can gather details that are often very insightful to assess its culture. The only way to gain insight into competitive advantage and culture is to talk to people who actually know the business – employees, alumni, customers, suppliers, competitors.
This can be a bit difficult to do if you are not an analyst or portfolio manager, but you can ask your friends and colleagues if they have done business with the company before. Otherwise, look at the reviews online.
Another useful fact to ask is the promoter’s net score. NPS offers a useful overall customer satisfaction score that can reflect the culture, especially for companies with a high proportion of customer-facing staff.
Kurt and Paul suggest that when looking at culture, it’s also important to consider:
- its alignment with the company’s strategy,
- its strength: depth and breadth within the organization, and
- its adaptability: willingness and ability to change, up to disrupting one’s own activity in order to survive and grow.
How can you determine this? Two questions they ask that work well for finding information about alignment and strength are:
What is sacred in your business?
What is taboo in your business?
The consistency of responses across multiple respondents tells you something about the strength of culture.
The responses themselves can be evaluated against business strategy, competitive advantage, to assess the strength and alignment of the corporate culture of your target investment.
Marty Switzer is CEO of Contango Asset Management.