Saturday, March 3rd, 2018
the culture factor

The cover of the January-February 2018 issue of Harvard Business Review announces the theme of five pieces within it, “The Culture Factor.”Harvard Business Review | The authors are Boris Groysberg, Jeremiah Lee, Jesse Price, and J. Yo-Jud Cheng.

As befits HBR, the content is aimed at the leaders of organizations, to aid them in analyzing and shaping culture.  So, those of you in charge at asset management organizations or investment advisory firms or institutional asset owners can apply the information to your domains.  Where would you plot your culture within this simple framework?Spencer Stuart | Two of the authors are from Spencer Stuart, which developed the concept.


Is your assessment an accurate reflection of where the culture is today or is it more aspirational in nature?  Is the particular placement on the axes of flexibility versus stability and independence versus interdependence conducive to attaining your goals?

For this posting, however, I want to switch perspectives, to consider the question from the standpoint of a capital allocator trying to analyze an investment manager.  The workshops on due diligence and manager selection which I lead (the next one is coming up soontjb research | This website has details on the public workshops as well as those within organizations.) include a section in which we examine the issue of culture at asset management organizations, asking, among other questions, “What would you want it to look like?  Why?”

You know that no one is going to volunteer the opinion that their culture leaves something to be desired, even if it is, in fact, dysfunctional.  Therefore, the challenge is to find out what the culture actually is, how it compares to the ideal that has been marketed, and whether the ethos of the organization is such that you’d want to enter into a partnership with it.  Is that culture aligned with your interests?  Is it likely to produce the desired results?  Is it sustainable?

The two dimensions mapped in the framework deal with a) the nature of interactions among the people at the organization and b) its responsiveness to change.

The question of independence versus interdependence is one of the most important factors in understanding an asset management organization.  Historically, the culture of the industry has been one of independent actors, with “star” portfolio managers dominating the investment firmament and creating organizations in their own image.

While the team management of portfolios has become much more common in recent years, when you peel back the layers, a focus on individual results and incentives is still at the core of most firms.  Few organizations have spent much time trying to understand how to put teams together and how to evaluate them for long-term success.  When bonus time comes around, it’s primarily an outcome-based analysis of individual effort that drives the payoutresearch puzzle pieces | Here are some thoughts about rewarding process versus outcome. (with the “outcome” usually measured across a statistically-meaningless time frame).

On the dimension of flexibility versus stability, many asset managers are trapped in a paradigm defined by the constraints of asset class and style classifications, cement shoes created by marketing promises of a “consistent and repeatable” process,the research puzzle | This is an earlier posting about that. and the institutionalization of analytical methodologies.  Innovation is rare and “research and development” is a line on someone else’s income statement.  The organizations are generally resistant to change.the research puzzle | More about that here.

Therefore, asset managers usually appear in the lower-left quadrant of the grid (where you’ll find “results” among the two culture styles identified).  But does that orientation really make for aligned and sustainable organizations — or ones that are designed for the short-term performance derby that has proved so unsatisfactory over time?

Of the eight culture styles, two dominated as the most common characteristics of organizations from across different industries:  “results” and “caring.”  Notice that they appear opposite each other in the grid; according to the authors that means that they “are less likely to be found together [in an organization] and require more organizational energy to maintain simultaneously.”

Begging the questions:  Can a “caring” asset management organization still produce results that will be attractive to clients?  Should one apportion the “organizational energy” differently in them than in other kinds of firms?  If you could wave the proverbial magic wand, where would you want your managers to be on these dimensions?

These questions are far afield from the investment chatter that constitutes the vast majority of time spent by those doing manager research.  That’s good.  Evaluating the culture of an organization (and not just in regard to the simple HBR framework) is important because it doesn’t get much attention — and because it is incredibly important to understanding the probabilities of success.

As the authors indicated, culture is “anchored in unspoken behaviors, mindsets, and social patterns.”  Those charged with doing due diligence have their work cut out for them in trying to discern a firm’s culture.  It’s important to get leaders on the record as to what their cultural philosophy is and why it is what it is (many will stumble with the questions), and to plan interviews with members of the firm in a way that tests whether the philosophy is evident in how the firm operates.  That requires completely different lines of inquiry from the standard checklist for a due diligence visit.

Importantly, you need to think about the “two-way relationship between a company’s culture and its particular structure.”  Do they fit together appropriately?  Which drives the other?  Most asset management organizations are structured in one of a very few ways; there is not much appreciation for how the structural choices can belie the avowed culture of a firm.

Organizational design “can have a profound impact over time on how people think and behave within an organization.”  I would argue that it should be a key part of the analysis of a manager, yet it rarely is treated in anything other than a superficial way.

Culture matters.  Can you figure out what it really is?