I came to see in my time at IBM that culture isn't just one aspect of the game, it is the game.
~ Lou Gerstner
Culture matters — and it really matters in investment management firms. Culture is key because it plays a pivotal role in how organizations make decisions to achieve their business objectives. Given the nature of investment firms, the way in which teams interact and collaborate to make investment decisions can be material to the performance of a strategy and the firm as a whole.
Culture in organizations is usually defined as “the values and behaviors that differentiate one firm from another.” Values and beliefs are somewhat hidden and more difficult to shift,1 while behaviors are more visible and easier to shift. The interplay between these two factors — values and behaviors — largely determines the culture of an organization.
A number of studies have shown that culture is at the heart of competitive advantage today. Among them is research on culture and performance conducted by Kotter & Heskitt.2 The authors conclude, based on studying the largest 9 or 10 firms in 22 different US industries over an 11-year time period, that firms with strong cultures outperformed — by a large margin — those that did not exhibit this characteristic. Over an 11-year period, firms with strong performance cultures increased revenues by an average of 682% versus 166% for the firms that measured lower on cultural attributes. Furthermore, such firms grew their stock prices by 901% versus 74% and improved their net incomes by 756% versus 1%.3 They also make the point that strong culture needs to be matched with an appropriate strategy for the performance benefits to be realized, and it also needs to be adaptive given the pace of change in the world. Culture is a unique ingredient in the recipe for competitive advantage: While business strategy can be mimicked by competitors,culture is very difficult to recreate.
Culture is particularly important in asset management firms whose principal assets are its people and the judgments they make. In the investment arena, the facts do not unambiguously lead to one conclusion or another; one must make judgments based, in part, on “unquantifiable” factors. The underpinnings of this decision-making process are meaning- fully influenced by a firm's culture.
Research on the links between culture and success in asset management firms have been conducted by Focus Consulting Group.4 Based on these studies, Jim Ware and his coauthors conclude that improved decision-making along with attracting and retaining talent are the most tangible benefits of a positive culture and that “long term, sustainable success is built on strong culture.”5 The sustainability of performance is a key factor given asset owners' diminished appetite for risk (volatility) in the aftermath of the 2008 global financial crisis and their longer investment time horizons in light of demographic trends.
In investment firms, culture has an impact on investment results as well as how well firms perform from a business perspective. In view of this, we examine the role of culture in both the investment and business domains in this paper, encompassing 6 aspects, 3 in each of these two areas. The 3 aspects of the investment process reviewed are: investment time horizon, the approach to analysis and risk management. Business decisions are examined along the following 3 dimensions: talent management, business strategy and capacity management. Together, these form the pillars of our thesis, i.e. , a strong culture in investment management firms is a requirement for sustainable alpha-generation.