Monday, May 14th, 2018
compounding knowledge

Some thirty-five years ago, I wrote a project report for an entrepreneurship class, dealing with the proposed creation (by me) of Idea Consultants, Inc.  Its purpose was “to provide organizations with advice on dealing with ideas and issues,” within the conceptual framework of “idea management.”

The concept of idea management is still out there, but it’s much more common to hear about the broader notion of “knowledge management” (which yields fifty times more Google search results).  And, while knowledge management isn’t a hot topic among investment organizations, it should be.  Thus this posting.

The best place to start investigating the concepts is a paperSSRN | “Knowledge Management in Asset Management” is the somewhat redundant title, although appropriately so. from Eduard van Gelderen and Ashby Monk.  They argued that “a skillful asset manager maintains and creates superior knowledge and knows how to apply that knowledge effectively.”

Yet, if you ask the leader of an organization about his plans, expectations, and frameworks for the management of knowledge (as I have), you may get a blank stare or a non-answer, although a few can speak thoughtfully to the question.  For their part, the authors concluded that “the findings of our research painted a picture of an asset management industry largely indifferent to knowledge management.”

That’s an important disconnect.  It stems from an overall lack of focus within the industry on organizational design (and the potential benefits of a differential approach), despite the fact that “it's in the context of the organization's design that knowledge ultimately drives performance.”  Benign markets and a bountiful business model for the industry have led to a lack of innovation and an aversion to rethinking the status quo.

Even those managers who have produced results in the past are resistant to change — despite ample evidence that edges get worn away and for one reason or another superior knowledge today may “become obsolete over time.”  Complacency is dangerous and, as one of the report’s section headings announced, “Asset Management IS Knowledge Management.”

However, a similar construct can be more broadly applied.  Knowledge management should be at the heart of investment organizations of all kinds.

Samuel Kunz and Arun Muralidhar have produced two reports that concern the application of knowledge management by large asset owners.  OneSSRN | The subtitle is “How to Commit to Investment Beliefs Through Knowledge Management.” stressed that asset owners must “dare to be different” and that the ability to do so (and to judge how boldly to do so) is enhanced by effective knowledge management.  It emphasized the need to identify the unique circumstances, time horizon, and boundary conditions for a given investment actor in order to apply that knowledge appropriately.

The second pieceSSRN | It explains and diagrams a framework of data > rules > model > narrative. discussed the application of the techniques of crowdsourcing and “InvestTech” to change the asset allocation process of UC Investments.SSRN | That’s the investment office of the University of California system. The organization “sits at the crossroads,” since data flows to it from a wide variety of investment actors — and from its partners within the Silicon Valley ecosystem.  Others don’t have the same advantages, but each should adopt a knowledge management system that recognizes its own unique attributes and possibilities.  Abdicating that opportunity (responsibility?) is foolish.

A manifestoSSRN | Called “The Technological Investor: Deeper Innovation through Reorientation.” from Ashby Monk (this time with Dane Rook as co-author) argued that asset owners need to rethink their approach to technology, that currently “technological innovation is not prioritized as it should be and organizational mindsets about technology are not aligned with Investors' overall goals” (italics from the authors).  Within their organizations (and in their assessments of asset management firms and other entities upon which they rely), that deficit in technological capabilities impedes the prudent management of long-term investment funds.  Furthermore, asset owners are missing opportunities to cooperate with each other, leaving the benefits of technology to external managers and vendors, to which they pay a pretty penny.

There are many important aspects of the implementation of a knowledge management system that are beyond the scope of this posting, including the sourcing of data, the assessment of its quality, and the rating of it in terms of its reliability and importance for decision making.  But the blocking and tackling will be all for naught without organizational commitment, typified by an emphasis on “culture, communication, and cooperation,” identified by Monk and Rook as being essential for success.

Which brings me to another article, not specifically about knowledge management, which features my favorite title for a piece of academic research, “A Stupidity-Based Theory of Organizations.”Wiley Online | The authors are Mats Alvesson and André Spicer.  In it, the authors questioned “the assumption in [organization theory] that sophisticated thinking and use of advanced knowledge is a core characteristic of many contemporary organizations,” offering instead a theory of “functional stupidity.”  Briefly, such an approach “entails a refusal to use intellectual resources outside a narrow and ‘safe’ terrain.”

Why would organizations do that?  There are benefits:  “By cultivating functional stupidity, organizations are able to avoid the costs associated with broader critical thinking.  By refraining from asking difficult and probing questions, they are able to create a sense of purposefulness and certainty around the organizations' activities, despite the questionable basis of many of them.”  However, leaders interested in exercising control and reinforcing established narratives in that way do not foster sustainable organizations in the long run, even though they can look like all-stars for a time.  Corporate history (including that of investment management firms) is littered with examples of superficial success that masked an organizational silence on lurking, important questions.

At the end of a recent review for his book club,The Investor’s Field Guide | You can sign up to get on the distribution list or see some of Patrick’s compilations here. Patrick O’Shaughnessy said this about The Knowledge-Creating Company by Ikujiro Nonaka:  “What stood out most to me while reading this is how much ego and learning/knowledge are at odds with one another.”

I have had the opportunity to get inside asset management, asset owner, consultant, investment advisory, and research organizations.  Sometimes I’m working on their behalf as a consultant and in other cases I am there doing due diligence.  I’m always trying to understand the culture of an organization.the research puzzle | My last posting was on that topic too.

Usually you don’t have to spend much time on site to get a sense of where an organization is on a spectrum that ranges from “defensive” in orientation on one end to “learning” on the other.   I couldn’t get that framework out of my head as I dug deeper and deeper into the topic of knowledge management.

Compounding knowledge within an organization should be the shared goal of all involved, since it is the foundation of sustainable performance.  The opportunities are there.  Seize them.