Corporate executive Louis Gerstner once said, “In the end, an organization is nothing more than the collective capacity of its people to create value.”
From the perspective of a company leader, that makes sense: a strong culture drives better decisions and—based on a large body of research—better outcomes over time. Employees who are more satisfied are better motivated and more likely to stick with a firm over time. Independent studies indicate that these results translate directly into higher productivity, lower turnover and greater customer loyalty.
So, even though culture may seem intangible, it can make the difference between success and failure, and cultivating human capital is essential for building a business with staying power. But how can investors gauge the strength of corporate culture?
Culture Is A Long-Term Proposition
For one thing, investors have to adjust their lens, because culture exists on a different time scale from the familiar parts of the investment world. Culture is measured in years—not quarterly results or the news cycle. Company reports don’t say much about culture, and it’s hard to distinguish cultural effects from day-to-day stock fluctuations caused by financial disclosures and the news cycle.
But establishing a strong culture from day one can help ensure sustainable success. It’s the connective tissue that enables firms to consistently deliver and adapt to rapidly changing industries, weather the tough times with stability and maintain forward vision. And good leaders look closely at how all of a company’s systems interact.
By evaluating culture as an integral part of fundamental company research, and by engaging with management regularly, investors can gain better insight into promising businesses before their potential is reflected in stock valuations—and can spot potential cultural stumbling blocks.
Engagement Is The Key To Cultural Assessments
The only way to make those assessments is to get up close and personal by engaging with company leadership. Firms rarely report on culture—and, even if they do, it doesn’t mean culture is strong or effective. Active managers must build an information mosaic and evaluate the evidence from several perspectives, including articulation, consistency, alignment and influence.
Cracking The Culture Code: Asking The Tough Questions
Company cultures are diverse, so there’s no one-size-fits-all approach for making these cultural assessments—and it takes a lot of legwork to determine if a culture is set up for success. That’s a big reason why we maintain an inventory of questions in our ESIGHT engagement and collaboration platform to kickstart cultural engagement.
The questions range from how a firm defines culture to how much it invests yearly in talent and whether employees are satisfied or dissatisfied. Here are a few examples of questions, taken from a longer list, that we ask management teams about their cultures:
1) How do you define your company’s culture, and what have you done recently to enhance it? What challenges are you facing?
Investors need to assess whether a company has a strong sense of culture, and if its leaders and people can define and articulate it consistently. Culture shouldn’t stand still, either: look for ongoing efforts to strengthen it. These could take the form of implementing or upgrading rewards and recognition programs or an initiative to bolster work-life balance. Opening new channels for employee feedback—both formal and informal—is also encouraging.
Company leaders should be attuned to cultural challenges, too. These may include disengaged or unhappy workers, excessive employee turnover and inconsistent or one-directional communication among the rank and file. If evidence of these issues surfaces during company engagement, and if management isn’t talking to the investor about it, it’s a red flag.